SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee Required) For the fiscal year ended December 31, 2005
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No Fee Required) For the transition period from ___________ to
___________
Commission File No. 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 Identification)
incorporation or organization)
86 Morris Avenue
Summit, New Jersey 07901
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(Address of principal executive offices) (Zip Code)
(908) 673-9000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes X No
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes No X
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
12b-2 of the Act).
Yes No X
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The aggregate market value of voting stock held by non-affiliates of the
registrant on June 30, 2005, the last business day of the registrant's most
recently completed second quarter, was $6,826,916,901 based on the last reported
sale price of the registrant's Common Stock on the NASDAQ National Market on
that date. There were 344,969,790 shares of Common Stock outstanding as of March
3, 2006, reflecting the two-for-one Common Stock split effective February 17,
2006.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2005. The proxy statement is incorporated herein by reference into the following
parts of the Form 10K:
Part III, Item 10, Directors and Executive Officers of the Registrant;
Part III, Item 11, Executive Compensation;
Part III, Item 12, Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters;
Part III, Item 13, Certain Relationships and Related Transactions;
Part III, Item 14, Principal Accountant Fees and Services.
CELGENE CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Item No. Page
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Part I
1. Business 1
1a. Risk Factors 17
1b. Unresolved Staff Comments 29
2. Properties 29
3. Legal Proceedings 30
4. Submission of Matters to a Vote of
Security Holders 30
Part II
5. Market for Registrant's Common Equity
and Related Stockholder Matters 30
6. Selected Consolidated Financial Data 31
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 33
7a. Quantitative and Qualitative Disclosures About Market Risk 48
8. Financial Statements and Supplementary Data 49
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 50
9a. Controls and Procedures 50
9b. Other Information 54
Part III
10. Directors and Executive Officers of the
Registrant 54
11. Executive Compensation 54
12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters 54
13. Certain Relationships and Related
Transactions 54
14. Principal Accountant Fees and Services 54
Part IV
15. Exhibits and Financial Statement Schedules 54
Signatures 61
PART I
ITEM 1. BUSINESS
We are a multinational integrated biopharmaceutical company, incorporated in
1986 as a Delaware corporation. We are 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,
total revenues have steadily grown 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 advanced our
broad portfolio of drug candidates in our product pipeline, including a pipeline
of IMiDs(R) compounds, which are a class of compounds proprietary to us and
having certain immunomodulatory and other biologically important properties.
We had total revenue of $536.9 million and net income of $63.7 million for the
year ended December 31, 2005. We had an accumulated deficit of $170.8 million at
December 31, 2005 and have since our inception in 1986 financed our working
capital requirements primarily through product sales, private and public sales
of our debt and equity securities, income earned on the investment of the
proceeds from the sale of such securities and revenues from research contracts
and license payments.
On December 27, 2005, the U.S. Food and Drug Administration, or the FDA,
approved REVLIMID(R) (lenalidomide), our most clinically advanced IMiDs(R)
compound, for the treatment of patients with transfusion-dependent anemia due to
low-or intermediate-1- risk myelodysplastic syndromes, or MDS, associated with a
deletion 5q cytogenetic abnormality with or without additional cytogenetic
abnormalities. REVLIMID(R) will be distributed through contracted pharmacies
under the RevAssist(sm) program, which is a proprietary risk-management
distribution program tailored specifically to help ensure the safe use of
REVLIMID(R). We believe that REVLIMID(R) has significant commercial sales
potential as a result of the clinical data presented at major medical meetings
and the clinical findings reported in major peer-reviewed medical publications.
We are executing our REVLIMID(R) launch strategy in the United States by
leveraging our U.S. hematological-oncology sales force.
We are dedicated to innovative research and development designed to bring new
therapies to market. We are involved in research in several scientific areas
that may deliver proprietary next-generation therapies, such as cellular
signaling biology, immunomodulation and placental stem cell research. The drugs
we develop are designed to treat life-threatening diseases or chronic
debilitating conditions where patients are poorly served by current therapies.
Building on our growing knowledge of the biology underlying hematological and
solid tumor cancers, we are investing in a range of innovative therapeutic
programs that are investigating ways to attack the disease source through
multiple mechanisms of action and intracellular pathways.
ACQUISITIONS
On August 31, 2000, we acquired Signal Pharmaceuticals, Inc., now Celgene
Research San Diego, a privately held San Diego-based biopharmaceutical company
focused on the discovery and development of drugs that regulate genes and
proteins associated with diseases. Celgene Research San Diego now operates as a
wholly owned subsidiary of Celgene Corporation.
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On December 31, 2002, we acquired Anthrogenesis Corp., now Celgene Cellular
Therapeutics, a privately held New Jersey-based biotherapeutics company and cord
blood banking business, which is developing the technology for the recovery of
stem cells from human placental tissues following the completion of full-term,
successful pregnancies. Celgene Cellular Therapeutics, or CCT, now operates as a
wholly owned subsidiary of Celgene Corporation.
On October 21, 2004, we acquired all of the outstanding shares of Penn T
Limited, the UK-based supplier of THALOMID(R). This acquisition expanded our
corporate capabilities and enabled us to control manufacturing for THALOMID(R)
worldwide. Through manufacturing contracts acquired in this purchase, we also
increased our participation in the potential growth of THALOMID(R) revenues in
key international markets. Penn T Limited, or Penn T, now operates as Celgene
U.K. Manufacturing II, or CUK II.
COMMERCIAL STAGE PROGRAMS
Our commercial programs include pharmaceutical sales of REVLIMID(R),
THALOMID(R), and ALKERAN(R) and sales of FOCALIN(TM) to Novartis Pharma AG, or
Novartis; a licensing agreement with Novartis which entitles us to royalties on
FOCALIN XR(TM) and the entire RITALIN(R) family of drugs; a licensing and
product supply agreement with Pharmion Corporation for its sales of thalidomide;
and sales of bio-therapeutic products and services through our Cellular
Therapeutics subsidiary.
REVLIMID(R) (LENALIDOMIDE): REVLIMID(R) is an oral immunomodulatory drug
recently granted approval by the FDA for the treatment of patients with
transfusion-dependent anemia due to low- or intermediate-1-risk myelodysplastic
syndromes associated with a deletion 5q cytogenetic abnormality with or without
additional cytogenetic abnormalities, or MDS, with the 5q chromosomal deletion.
REVLIMID(R) is being distributed through contracted pharmacies under the
RevAssist(sm) program, which is a proprietary risk-management distribution
program tailored specifically for REVLIMID(R). The FDA based its decision to
grant marketing approval on data from the open label Phase II trial (MDS-003)
that evaluated REVLIMID(R) in transfusion-dependent patients with
myelodysplastic syndromes with deletion 5q chromosomal abnormality.
We have filed a Supplemental New Drug Application, or sNDA, with the FDA seeking
approval to market REVLIMID(R) as a treatment for relapsed or refractory
multiple myeloma. The FDA has granted this sNDA Priority Review designation and
has set a Prescription Drug User Fee Act, or PDUFA date of June 30, 2006. Other
efforts directed toward gaining additional regulatory approval of REVLIMID(R)
include the acceptance of our Marketing Authorization Application, or MAA, on
October 26, 2005 by the European Medicines Agency, or EMEA, for the treatment of
patients with MDS with the 5q chromosomal deletion and plans to submit an MAA to
the EMEA as a treatment in relapsed or refractory multiple myeloma based on
clinical data from two Phase III Special Protocol Assessment, or SPA, trials
(MM-009 and MM-010), in the first quarter of 2006. We also submitted an MAA for
REVLIMID(R) to the Swiss Intercantonal Medicines Control Office seeking approval
to market REVLIMID(R) as a treatment for patients with MDS with the 5q
chromosomal deletion. Plans are being developed to submit REVLIMID(R) for
regulatory approval in other international markets.
REVLIMID(R) continues to be investigated in clinical trials as a potential
treatment for blood cancers that affect more than 700,000 patients worldwide.
The most advanced clinical studies evaluating REVLIMID(R) are Phase III trials -
in the United States (MM-009) and in Europe (MM-010) for previously treated
multiple myeloma patients, and Phase III trials in Europe (MDS-004) in MDS.
There are more than 50 clinical trials currently evaluating REVLIMID(R) either
alone or in combination with one or more other therapies in the treatment of a
broad range of debilitating diseases, including multiple myeloma,
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myelodysplastic syndromes, chronic lymphocytic leukemia, non-Hodgkin's lymphoma,
amyloidosis, myeloid fibrosis and other cancers. The Southwest Oncology Group,
the Eastern Cooperative Oncology Group and the Cancer and Leukemia Group B,
three of the largest adult cancer clinical trial organizations in the world, are
evaluating REVLIMID(R) for large clinical studies in randomized controlled Phase
III trials designed to evaluate the safety and efficacy of REVLIMID(R) in
multiple myeloma.
THALOMID(R) (THALIDOMIDE): THALOMID(R), which had net product sales totaling
$387.8 million, $308.6 million and $223.7 million for the years ended December
31, 2005, 2004 and 2003, respectively, was approved by the FDA in July 1998 for
the treatment of acute cutaneous manifestations of moderate to severe erythema
nodosum leprosum, or ENL, an inflammatory complication of leprosy. Although
leprosy is relatively rare in the United States, the disease afflicts millions
worldwide. ENL occurs in about 30% of leprosy patients and is characterized by
skin lesions, acute inflammation, fever and anorexia. While approved for the
treatment of ENL, THALOMID(R) is widely prescribed off-label for treating
multiple myeloma and other cancers. The FDA is currently reviewing our sNDA for
THALOMID(R) in multiple myeloma and has set a Prescription Drug User Fee Act, or
PDUFA, date of May 25, 2006.
Working with the FDA, we developed S.T.E.P.S.(R), or "SYSTEM FOR THALIDOMIDE
EDUCATION AND PRESCRIBING SAFETY," which is a proprietary strategic
comprehensive education and risk-management distribution program with the
objective of providing for the safe and appropriate use of THALOMID(R).
On January 9, 2006, we announced that an external Independent Data Monitoring
Committee, or IDMC, analysis of a Phase III pivotal trial (MM-003), which is a
multi-centered, randomized, placebo-controlled Phase III study comparing
thalidomide plus dexamethasone versus dexamethasone alone as induction therapy
for previously untreated multiple myeloma, determined that the trial met the
pre-established efficacy-stopping rule for the primary endpoint of time to
disease progression. The IDMC found a statistically significant improvement in
time to disease progression in patients receiving thalidomide plus dexamethasone
versus patients receiving dexamethasone alone. As a result of these findings,
the trials were unblinded to give patients currently not on THALOMID(R) the
opportunity to add THALOMID(R) to their dexamethasone regimen. Multiple myeloma
is an incurable disease, and it is the second most common blood cancer,
affecting approximately 50,000 people in the United States. About 14,000 new
cases of multiple myeloma are diagnosed each year and there are an estimated
12,000 deaths per year in the United States.
ALKERAN(R): In March 2003, we entered into a supply and distribution agreement
with GlaxoSmithKline, or GSK, to distribute, promote and sell ALKERAN(R)
(melphalan) in all dosage forms in the United States under the Celgene label.
ALKERAN(R) is approved by the FDA for the palliative treatment of multiple
myeloma and of carcinoma of the ovary. ALKERAN(R) use in combination with other
therapies for the treatment of hematological diseases continues to grow, driven
by clinical data reported at major medical conferences around the world. Under
the terms of the agreement, we purchase ALKERAN(R) tablets and ALKERAN(R) for
injection from GSK and distribute the products in the United States under the
Celgene label. The agreement has been extended through March 31, 2009.
RITALIN(R) FAMILY OF DRUGS: We developed FOCALIN(TM), which is formulated by
isolating the active d-isomer of methylphenidate using advanced single-isomer
chemistry technology. Isomers are any of two or more chemical substances that
are composed of the same elements in the same proportions but can differ in
properties because of differences in the arrangement of atoms. FOCALIN(TM)
provides favorable
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tolerability and dosing flexibility at half the dose of RITALIN(R). In April
2000, we licensed to Novartis the worldwide rights (excluding Canada) to
FOCALIN(TM) and FOCALIN XR(TM), the extended release version, in exchange for
milestone payments, a FOCALIN(TM) product supply agreement (whereby we supply
FOCALIN(TM) exclusively to Novartis) and royalties on FOCALIN XR(TM) and the
entire RITALIN(R) family of drugs including RITALIN(R), RITALIN LA(R) and
RITALIN SR(R). We have retained the exclusive commercial rights to FOCALIN(TM)
and FOCALIN XR(TM) for oncology-related disorders, such as chronic fatigue
associated with chemotherapy. On November 15, 2001, FOCALIN(TM) was approved by
the FDA for the treatment of attention deficit hyperactivity disorder, or ADHD,
in children and adolescents. On May 27, 2005, FOCALIN XR(TM) was approved by the
FDA for the treatment of ADHD in adults, adolescents and children.
PRECLINICAL-AND CLINICAL-STAGE PIPELINE:
Our preclinical and clinical-stage pipeline of new drug candidates, in addition
to our cell therapies, is highlighted by multiple classes of small molecule,
orally administered therapeutic agents designed to selectively regulate
disease-associated genes and proteins. The drug candidates in our pipeline are
at various stages of preclinical and clinical development. Successful results in
preclinical or Phase I/II clinical studies may not be an accurate predictor of
the ultimate safety or effectiveness of a drug candidate.
o PHASE I CLINICAL TRIALS
If the FDA allows a request to initiate clinical investigations of a
new drug candidate to become effective, Phase I human clinical trials
can begin. These tests usually involve between 20 and 80 healthy
volunteers or patients. The tests study a drug's safety profile, and
may include preliminary determination of a drug candidate's safe dosage
range. The Phase I clinical studies also determine how a drug is
absorbed, distributed, metabolized and excreted by the body, and the
duration of its action.
o PHASE II CLINICAL TRIALS
In Phase II clinical trials, controlled studies are conducted on a
limited number of patients with the targeted disease. An initial
evaluation of the drug's effectiveness on patients is performed and
additional information on the drug's safety and dosage range is
obtained.
o PHASE III CLINICAL TRIALS
This phase typically includes controlled multi-center trials and
involves a larger target patient population to ensure that study
results are statistically significant. During the Phase III clinical
trials, physicians monitor patients to determine efficacy and to gather
further information on safety.
IMiDs(R): IMiDs(R) compounds are proprietary novel small molecule, orally
available compounds that modulate the immune system and other biologically
important targets through multiple mechanisms of action. We have advanced four
IMiDs(R) compounds into development: REVLIMID(R) (CC-5013), CC-4047 and CC-11006
are being evaluated in human clinical trials and CC-10015 is advancing toward
potential clinical testing.
Our IMiDs(R) compounds are covered by an extensive and comprehensive
intellectual property estate of U.S. and foreign-issued patents and pending
patent applications including composition-of-matter, use and other patents and
patent applications.
CC-4047: is one of the most potent IMiDs(R) compounds that we are developing. We
are planning Phase II trials to determine CC-4047 potential safety and efficacy
as an orally available treatment for sickle cell
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anemia, myelofibrosis and prostate cancer. CC-4047 and REVLIMID(R) have
different activity profiles which may lead to their evaluation in different
diseases or stages of disease.
CC-11006: is a molecule we have identified as a potential treatment for
hematological malignances and chronic inflammatory diseases, many of which have
unmet medical needs. CC-11006 entered Phase I human clinical trials in 2004.
Following the completion of additional preclinical and Phase I trials, we will
evaluate our development options.
ANTI-INFLAMMATORY: Our anti-inflammatory program potentially provides an oral
approach for treating chronic inflammatory diseases. CC-10004 - our lead
investigational drug in this class of anti-inflammatory compounds - a novel
orally available small molecule - that inhibits the production of multiple
proinflammatory mediators including PDE-4, TNF-alpha, interleukin-2,
interferon-gamma, leukotrienes, and nitric oxide synthase. CC-10004 is being
studied in Phase II proof of principle clinical trials for chronic inflammatory
diseases. Based on promising results from our psoriasis proof-of-principle
studies, Celgene is advancing the clinical development of CC-10004 in moderate
to severe plaque-type psoriasis. Early stage studies in healthy human volunteers
found CC-10004 to be safe and well tolerated with good bioavailability and
pharmacokenetics.
BENZOPYRANS: CC-8490, our lead investigational compound in this category, is in
Phase I clinical trials for glioblastoma, a form of brain cancer. Based on
findings from this study, we will evaluate whether to advance a second compound,
CC-113, which has broad anti-tumor activity and which is currently in
pre-clinical development.
KINASE INHIBITORS: At Celgene Research San Diego, we have multiple target and
drug discovery projects underway in the field of kinase inhibition. Kinases are
molecules used by cells to regulate gene expression and protein production. Our
kinase inhibitor platform includes inhibitors of the c-Jun N-terminal kinase, or
JNK, pathway and inhibitors of the NFkB pathway. Both pathways have been
associated with the regulation of a number of important disease indications. In
the case of JNK, CC-401 our lead JNK inhibitor, successfully completed a Phase I
trial in healthy volunteers. We are currently evaluating the clinical potential
of CC-401 in acute myelogenous leukemia, a blood cancer, in a phase II clinical
trial. Two other JNK compounds, CC-359 and CC-930 are in pre-clinical
development advancing toward clinical testing.
LIGASE INHIBITORS: In addition, at Celgene Research San Diego, we are conducting
extensive discovery research in the field of ligases, intracellular protein
complexes that control the function and degradation of a wide variety of
proteins within cells. We are identifying drug targets and compounds that
regulate ligase pathways with the goal of controlling cellular proliferation and
survival. Such compounds have the potential to be an important new class of
anti-cancer and anti-inflammatory therpeutics.
STEM CELLS AND BIOMATERIALS: Stem cell based therapies offer the potential to
provide disease-modifying outcomes for serious diseases which today lack
adequate therapy. At CCT, we are researching stem cells derived from the human
placenta and umbilical cord. Our studies of placental stem cells over the past
two years have uncovered biological activities with therapeutic promise. In
December 2004, we filed an investigational new drug application, or IND, with
the FDA for our initial stem cell trial in sickle cell anemia. In sickle cell
anemia, our research has shown that our IMiDs(R) compounds can interact with
stem cells and modulate them in such a way that they differentiate into
erythrocytes, or red blood cells. We have also discovered a method of expanding
the stem cell population in cord blood, to help generate the increased number
and type of stem cells that may be necessary for treating patients with cancer
and other indications in the future.
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CCT has developed proprietary methods for producing placental biomaterials for
organ and tissue repair that include products such as BIOVANCE(TM). In addition,
CCT has developed proprietary technology for collecting, processing and storing
placental stem cells with potentially broad therapeutic applications in cancer,
autoimmune, cardiovascular, neurological and other diseases.
CELGENE PRODUCT OVERVIEW
The commercial status of REVLIMID(R), THALOMID(R), ALKERAN(R), Ritalin(R) /
FOCALIN(TM) and the target disease indications and the development of our
leading drug candidates are outlined in the following table:
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DISEASE
PRODUCT INDICATION COLLABORATOR STATUS
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THALOMID(R) ENL Marketed.
Multiple Myeloma sNDA pending. Phase III trials
ongoing.
ALKERAN(R) Multiple Myeloma & Ovarian GlaxoSmithKline Marketed.
Cancer
RITALIN(R) /
FOCALIN(TM)
Focalin(TM) ADHD Novartis Marketed.
Cancer Fatigue Phase II trials completed.
Focalin XR(TM) ADHD Novartis Marketed.
Ritalin LA(R) ADHD Novartis Marketed.
IMiDs COMPOUNDS:
REVLIMID(R) Myelodysplastic Marketed in del 5q MDS.
Syndromes Phase III trial in del 5q MDS
on-going.
Phase II trials in non-del 5q MDS
planned.
Multiple Myeloma sNDA pending.
Phase II completed and Pivotal
Phase III SPA trials ongoing.
Southwest Oncology Group
("SWOG") Major Phase III trial.
Eastern Cooperative
Oncology Group ("ECOG") Major Phase III trial.
Cancer & Leukemia Group B
("CALGB") Major Phase III trial.
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DISEASE
PRODUCT INDICATION COLLABORATOR STATUS
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REVLIMID(R) Chronic Lymphocytic Leukemia Phase II trials ongoing and
Phase III planned.
Non-Hodgkins Lymphoma Phase II trials ongoing and
Phase III planned.
Solid Tumor Cancers Phase I/II trials ongoing and
expanded. Additional trials
planned.
Cutaneous T Cell Lymphoma Phase II trials ongoing and
Phase III planned.
Amyloidosis Phase II trials ongoing and
Phase III planned.
CC-4047 Prostate Cancer Phase II trials ongoing.
Myelofibrosis Phase II trial planned.
Sickle Cell Anemia Phase I/II trial planned.
CC-11006 Hematological Malignances Pre-clinical studies and Phase I
and Inflammatory Diseases trial ongoing.
CC-10015 Inflammatory Diseases Pre-clinical studies ongoing.
ANTI-INFLAMMATORY:
CC-10004 Psoriasis Additional Phase II trial
planned.
CC-11050 Inflammatory Diseases Preclinical studies ongoing.
BENZOPYRANS:
CC-8490 Cancer National Cancer Phase I/II trial ongoing.
Institute ("NCI")
CC-113 Cancer Preclinical studies ongoing.
KINASE INHIBITORS:
JNK 401 Acute Myelogenous Leukemia Phase II trials ongoing.
JNK 359 Ischemia / Reperfusion Preclinical studies ongoing.
JNK 930 Fibrotic Diseases Preclinical studies ongoing.
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DISEASE
PRODUCT INDICATION COLLABORATOR STATUS
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LIGASE INHIBITORS:
E2 Ligase Inhibitors Cancer Preclinical Studies ongoing.
STEM CELL AND TISSUE
PRODUCTS:
Lifebank USA(TM) Stem Cell Banking Marketed.
Cord Blood Cells Sickle Cell Anemia Phase I trials initiating.
BIOVANCE(TM) Wound Covering Regulatory strategy being
finalized.
Stem Cell Transplants(R) Cancer Transplant units available through
national registry.
=========================================================================================================================
PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to our business. It is our
policy to seek patent protection for our inventions, and also to rely upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
We own or have exclusively licensed more than 128 U.S. patents and 100
additional U.S. patent applications. Our U.S. patents include patents for a
method of delivering a teratogenic drug to a patient while preventing fetal
exposure as well as patents for delivering drugs to patients while restricting
access to the drug to those for whom the drug is contra-indicated. We also have
patent applications pending which are directed to these inventions, and are
seeking worldwide protection. While we have a policy to seek worldwide patent
protection for our inventions, we have foreign patent rights corresponding to
most but not all of our U.S. patents. Further, although THALOMID(R) is approved
for use associated with ENL, we do not have patent protection relating to the
use of THALOMID(R) to treat ENL.
Our research at Celgene Research San Diego has led us to seek patent protection
for molecular targets and drug discovery technologies, as well as therapeutic
and diagnostic products and processes. More specifically, proprietary technology
has been developed for use in molecular target discovery, the identification of
regulatory pathways in cells, assay design and the discovery and development of
pharmaceutical product candidates. As of December 2005, included in those
inventions described above, our San Diego subsidiary owned, in whole or in part,
over 32 issued U.S. patents and approximately 47 U.S. patent applications. An
increasing percentage of our San Diego subsidiary's recent patent applications
have been related to potential product candidates or compounds. It also holds
licenses to U.S. patents and U.S. patent applications, some of which are
licensed exclusively or sub-licensed to third parties in connection with
sponsored or collaborative research relationships.
CCT, our cellular therapeutics subsidiary (legally known as Anthrogenesis
Corp.), seeks patent protection for the collection, processing and uses of
mammalian placental tissue and placental stem cells, as well as cells and
biomaterials derived from the placenta. As of December 2005, CCT owned, in whole
or in part, more than 28 U.S. patent applications including pending provisional
applications, and holds licenses to
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U.S. patents and U.S. patent applications, including certain patents and patent
applications related to cord blood collection and storage.
In August 2001, we entered into an agreement, termed the New Thalidomide
Agreement, with EntreMed, Inc., Children's Medical Center Corporation, or CMCC,
and Bioventure Investments, KFT relating to patents and patent applications
owned by CMCC, which agreement superceded several agreements already in place
between CMCC, EntreMed and us. Pursuant to the New Thalidomide Agreement, CMCC
directly granted to us an exclusive worldwide, royalty-bearing license under the
relevant patents and patent applications relating to thalidomide. Several U.S.
patents have been issued to CMCC in this patent family and certain of these
patents expire in 2014. Corresponding foreign patent applications and additional
U.S. patent applications are still pending.
In addition to the New Thalidomide Agreement, we entered into an agreement,
entitled the New Analog Agreement, with CMCC and EntreMed in December 2002,
pursuant to which we have been granted an exclusive worldwide, royalty-bearing
license to certain CMCC patents and patent applications relating to thalidomide
analogs, or the New Analog Agreement. The New Analog Agreement was executed in
connection with the settlement of certain pending litigation by and among us,
EntreMed and the U.S. Patent and Trademark Office relating to the allowance of
certain CMCC patent applications covering thalidomide analogs. These patent
applications had been licensed exclusively to EntreMed in the field of
thalidomide analogs. In conjunction with the settlement of these suits, we
acquired equity securities in EntreMed, and EntreMed terminated its license
agreements with CMCC relating to thalidomide analogs. In turn, under the New
Analog Agreement, CMCC exclusively licensed to Celgene these patents and patent
applications, which relate to analogs, metabolites, precursors and hydrolysis
products of thalidomide, and stereoisomers thereof. Under the New Analog
Agreement, we are obligated to comply with certain milestones and royalties,
including those for REVLIMID(R) approval and sales.
The New Analog Agreement grants us control over the prosecution and maintenance
of the licensed thalidomide analog patent rights. The New Analog Agreement also
grants us an option to inventions in the field of thalidomide analogs that may
be developed at CMCC in the laboratory of Dr. Robert D'Amato, pursuant to the
terms and conditions of a separate Sponsored Research Agreement negotiated
between CMCC and us.
Under an agreement with The Rockefeller University, pursuant to which we have
made a lump sum payment and issued stock options to The Rockefeller University
and certain inventors, we have obtained certain exclusive rights and licenses to
manufacture, have manufactured, use, offer for sale and sell products that are
based on compounds which were identified in research carried out by The
Rockefeller University and us that have activity associated with TNF(alpha). In
particular, The Rockefeller University identified a method of using thalidomide
and certain thalidomide-like compounds to treat certain symptoms associated with
abnormal concentrations of TNF(alpha), including those manifested in septic
shock, cachexia and HIV infection. In 1995, The Rockefeller University was
issued a U.S. patent which claims such methods. This U.S. patent expires in 2012
and is included in the patent rights exclusively licensed to us under the
agreement with The Rockefeller University. The Rockefeller University did not
seek corresponding patents in any other country.
Our success will depend, in part, on our ability to obtain and enforce patents,
protect trade secrets, obtain licenses to technology owned by third parties
where necessary and conduct our business without infringing the proprietary
rights of others. The patent positions of pharmaceutical and biotechnology
firms, including ours, can be uncertain and involve complex legal and factual
questions. In addition, the coverage sought in a patent application can be
significantly reduced before the patent is issued. Consequently, we do not know
whether any of our owned or licensed pending patent applications will result in
the issuance of patents or, if any patents are issued, whether they will be
dominated by third-
9
party patent rights, whether they will provide significant proprietary
protection or commercial advantage or whether they will be circumvented or
infringed upon by others.
Consequently, we do not know whether any of our owned or licensed pending patent
applications, which have not already been allowed, will result in the issuance
of patents or, if any patents are issued, whether they will be dominated by
third-party patent rights, whether they will provide significant proprietary
protection or commercial advantage or whether they will be circumvented or
infringed by others. Finally, we cannot guarantee that our patents or pending
applications will not be involved in, or be defeated as a result of, any
interference proceedings before the U.S. Patent and Trademark Office.
With respect to patents and patent applications we have licensed-in, there can
be no assurance that additional patents will be issued to any of the third
parties from whom we have licensed patent rights, either with respect to
thalidomide or thalidomide analogs, or that, if any new patents are issued, such
patents will not be dominated by third-party patent rights or provide us with
significant proprietary protection or commercial advantage. Moreover, there can
be no assurance that any of the existing licensed patents will provide us with
proprietary protection or commercial advantage. Nor can we guarantee that these
licensed patents will not be either infringed, invalidated or circumvented by
others, or that the relevant agreements will not be terminated. Any termination
of the licenses granted to Celgene by CMCC could have a material adverse effect
on our business, financial condition and results of operations.
Since patent applications filed in the United States on or before November 28,
2000 are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, we cannot be certain that we, or our licensors, were the first to
make the inventions covered by each of the issued patents or pending patent
applications or that we, or our licensors, were the first to file patent
applications for such inventions. In the event a third party has also filed a
patent for any of our inventions, we, or our licensors, may have to participate
in interference proceedings before the U.S. Patent and Trademark Office to
determine priority of invention, which could result in the loss of a U.S. patent
or loss of any opportunity to secure U.S. patent protection for the invention.
Even if the eventual outcome is favorable to us, such interference proceedings
could result in substantial cost to us.
We are aware of U.S. patents that have been issued to third parties claiming
subject matter relating to the NFeB pathway, which could overlap with technology
claimed in some of our owned or licensed NFeB patents or patent applications. We
believe that one or more interference proceedings have been initiated by the
U.S. Patent and Trademark Office to determine priority of invention for this
subject matter. While we cannot predict the outcome of any such proceedings, in
the event we do not prevail, we believe that we can use alternative methods for
our NFeB drug discovery program for which we have issued U.S. patents that are
not claimed by the subject matter of the third-party patents. We are also aware
of third-party U.S patents that relate to the use of certain TNF(alpha)
inhibitors to treat inflammation or conditions such as asthma.
We may in the future have to prove that we are not infringing patents or we may
be required to obtain licenses to such patents. However, we do not know whether
such licenses will be available on commercially reasonable terms, or at all.
Prosecution of patent applications and litigation to establish the validity and
scope of patents, to assert patent infringement claims against others and to
defend against patent infringement claims by others can be expensive and
time-consuming. There can be no assurance that, in the event that claims of any
of our owned or licensed patents are challenged by one or more third parties,
any court or patent authority ruling on such challenge will determine that such
patent claims are valid and enforceable. An adverse outcome in such litigation
could cause us to lose exclusivity relating to the subject matter delineated by
such patent claims and may have a material adverse effect on our
10
business. If a third party is found to have rights covering products or
processes used by us, we could be forced to cease using the products or
processes covered by the disputed rights, subject to significant liabilities to
such third party and/or be required to license technologies from such third
party. Also, different countries have different procedures for obtaining
patents, and patents issued by different countries provide different degrees of
protection against the use of a patented invention by others. There can be no
assurance, therefore, that the issuance to us in one country of a patent
covering an invention will be followed by the issuance in other countries of
patents covering the same invention or that any judicial interpretation of the
validity, enforceability or scope of the claims in a patent issued in one
country will be similar to the judicial interpretation given to a corresponding
patent issued in another country. Competitors may choose to file oppositions to
patent applications, which have been deemed allowable by foreign patent
examiners. Furthermore, even if our owned or licensed patents are determined to
be valid and enforceable, there can be no assurance that competitors will not be
able to design around such patents and compete with us using the resulting
alternative technology. Additionally, for these same reasons, we cannot be sure
that patents of a broader scope than ours may be issued and thereby create
freedom to operate issues. If this occurs we may need to reevaluate pursuing
such technology, which is dominated by others' patent rights, or alternatively,
seek a license to practice our own invention, whether or not patented.
We also rely upon unpatented, proprietary and trade secret technology that we
seek to protect, in part, by confidentiality agreements with our collaborative
partners, employees, consultants, outside scientific collaborators, sponsored
researchers and other advisors. There can be no assurance that these agreements
provide meaningful protection or that they will not be breached, that we would
have adequate remedies for any such breach or that our trade secrets,
proprietary know-how and technological advances will not otherwise become known
to others. In addition, there can be no assurance that, despite precautions
taken by us, others have not and will not obtain access to our proprietary
technology or that such technology will not be found to be non-proprietary or
not a trade secret.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the manufacture and marketing of pharmaceuticals and
in our ongoing research and development activities. Most, if not all, of our
therapeutic products require regulatory approval by governmental agencies prior
to commercialization. In particular, human therapeutic products are subject to
rigorous preclinical testing and clinical trials and other pre-marketing
approval requirements by the FDA and regulatory authorities in other countries.
In the United States, various federal and in some cases state statutes and
regulations also govern or impact upon the manufacturing, testing for safety and
effectiveness, labeling, storage, record-keeping and marketing of such products.
The lengthy process of seeking required approvals, and the continuing need for
compliance with applicable statutes and regulations, require the expenditure of
substantial resources. Regulatory approval, when and if obtained, may be limited
in scope which may significantly limit the indicated uses for which a product
may be marketed. Further, approved drugs, as well as their manufacturers, are
subject to ongoing review and discovery of previously unknown problems with such
products or the manufacturing or quality control procedures used in their
production may result in restrictions on their manufacture, sale or use or in
their withdrawal from the market. Any failure by us, our suppliers of
manufactured drug product, collaborators or licensees to obtain or maintain, or
any delay in obtaining, regulatory approvals could adversely affect the
marketing of our products and our ability to receive product revenue, license
revenue or profit sharing payments.
The activities required before a pharmaceutical may be marketed in the United
States begin with preclinical testing not involving human subjects. Preclinical
tests include laboratory evaluation of a product candidate's chemistry and its
biological activities and the conduct of animal studies to assess the
11
potential safety and efficacy of a product candidate and its formulations. The
results of these studies must be submitted to the FDA as part of an
investigational new drug application, or IND, which must be reviewed by the FDA
primarily for safety considerations before proposed clinical trials in humans
can begin.
Typically, clinical trials involve a three-phase process. In Phase I, clinical
trials are generally conducted with a small number of individuals, usually
healthy human volunteers, to determine the early safety and tolerability profile
and the pattern of drug distribution and metabolism within the body. If the
Phase I trials are satisfactory, Phase II clinical trials are conducted with
groups of patients in order to determine preliminary efficacy, dosing regimes
and expanded evidence of safety. In Phase III, large-scale, multi-center,
adequately powered and typically placebo-controlled comparative clinical trials
are conducted with patients in an effort to provide enough data for the
statistical proof of efficacy and safety required by the FDA and others for
marketing approval. In some limited circumstances, Phase III clinical trials may
be modified to allow the evaluation of safety and efficacy based upon (i)
comparisons with approved drugs, (ii) comparison with the historical progression
of the disease in untreated patients, or (iii) the use of surrogate markers,
together with a commitment for post-approval studies. In some cases, as a
condition for New Drug Application, or NDA, approval, further studies (Phase IV)
are required to provide additional information concerning the drug. The FDA
requires monitoring of all aspects of clinical trials, and reports of all
adverse events must be made to the agency before drug approval. After drug
approval, the Company has ongoing reporting obligations concerning adverse
reactions associated with the drug, including expedited reports for serious and
unexpected adverse events. Additionally, we may have limited control over
studies conducted with our proprietary compounds if such studies are performed
by others, (e.g., cooperative groups and the like).
The results of the preclinical testing and clinical trials are submitted to the
FDA as part of an NDA for evaluation to determine if the product is sufficiently
safe and effective for approval to commence commercial sales. In responding to
an NDA, the FDA may grant marketing approval, request additional information or
deny the application if it determines that the application does not satisfy its
regulatory approval criteria. When an NDA is approved, the NDA holder must a)
employ a system for obtaining reports of experience and side effects associated
with the drug and make appropriate submissions to the FDA and b) timely advise
the FDA if any marketed drug fails to adhere to specifications established by
the NDA internal manufacturing procedures.
Pursuant to the Orphan Drug Act, a sponsor may request that the FDA designate a
drug intended to treat a "rare disease or condition" as an "orphan drug." A rare
disease or condition is defined as one which affects less than 200,000 people in
the United States, or which affects more than 200,000 people, but for which the
cost of developing and making available the drug is not expected to be recovered
from sales of the drug in the United States. Upon the approval of the first NDA
for a drug designated as an orphan drug for a specified indication, the sponsor
of that NDA is entitled to exclusive marketing rights in the United States for
such drug for that indication for seven years unless the sponsor cannot assure
the availability of sufficient quantities of the drug to meet the needs of
persons with the disease. This period of exclusivity is concurrent with any
patent exclusivity that relates to the drug. Orphan drugs may also be eligible
for federal income tax credits for costs associated with the drug's development.
Possible amendment of the Orphan Drug Act by the U.S. Congress and possible
reinterpretation by the FDA has been discussed by regulators and legislators.
FDA regulations reflecting certain definitions, limitations and procedures for
orphan drugs initially went into effect in January 1993 and were amended in
certain respects in 1998. Therefore, there is no assurance as to the precise
scope of protection that may be afforded by orphan drug status in the future or
that the current level of exclusivity and tax credits will remain in effect.
Moreover, even if we have an orphan drug designation for a particular use of a
drug, there can be no assurance that another company also holding orphan drug
designation will not receive approval prior to us for the same indication. If
that were to happen, our applications for that indication could not be approved
until the
12
competing company's seven-year period of exclusivity expired. Even if we are the
first to obtain approval for the orphan drug indication, there are certain
circumstances under which a competing product may be approved for the same
indication during our seven-year period of exclusivity. First, particularly in
the case of large molecule drugs, a question can be raised whether the competing
product is really the "same drug" as that which was approved. In addition, even
in cases in which two products appear to be the same drug, the agency may
approve the second product based on a showing of clinical superiority compared
to the first product.
Among the conditions for NDA approval is the requirement that the prospective
manufacturer's quality control and manufacturing procedures continually conform
with the FDA's current Good Manufacturing Practice, or cGMP (cGMP are
regulations established by the FDA that govern the manufacture, processing,
packing, storage and testing of drugs intended for human use). In complying with
cGMP, manufacturers must devote extensive time, money and effort in the area of
production and quality control and quality assurance to maintain full technical
compliance. Manufacturing facilities and company records are subject to periodic
inspections by the FDA to ensure compliance. If a manufacturing facility is not
in substantial compliance with these requirements, regulatory enforcement action
may be taken by the FDA, which may include seeking an injunction against
shipment of products from the facility and recall of products previously shipped
from the facility.
Failure to comply with applicable FDA regulatory requirements can result in
enforcement actions such as warning letters, recalls or adverse publicity issued
by the FDA or in legal actions such as seizures, injunctions, fines based on the
equitable remedy of disgorgement, restitution and criminal prosecution.
Approval procedures similar to those in the United States must be undertaken in
virtually every other country comprising the market for our products before any
such product can be commercialized in those countries. The approval procedure
and the time required for approval vary from country to country and may involve
additional testing. There can be no assurance that approvals will be granted on
a timely basis or at all. In addition, regulatory approval of drug pricing is
required in most countries other than the United States. There can be no
assurance that the resulting pricing of our drugs would be sufficient to
generate an acceptable return to us.
COMPETITION
The pharmaceutical and biotechnology industries in which we compete are each
highly competitive. Our competitors include major pharmaceutical and
biotechnology companies, many of which have considerably greater financial,
scientific, technical and marketing resources than us. We also experience
competition in the development of our products and processes from universities
and other research institutions and, in some instances, compete with others in
acquiring technology from such sources.
Competition in the pharmaceutical industry, and specifically in the oncology and
immune-inflammatory areas being addressed by us, is particularly intense.
Numerous pharmaceutical, biotechnology and generic companies have extensive
anti-cancer and anti-inflammatory drug discovery, development and commercial
resources. Bristol-Myers Squibb Co., Amgen Inc., Genentech, Inc., Sanofi-Aventis
SA., Novartis AG, AstraZeneca PLC., Eli Lilly and Company, F. Hoffmann-LaRoche
Ltd, Millennium Pharmaceuticals, Inc., SuperGen, Inc., Vertex Pharmaceuticals
Inc., Biogen Idec Inc., Merck and Co., Inc. and Pfizer Inc. are among some of
the companies researching and developing new compounds in the oncology and
immunology fields.
The pharmaceutical and biotechnology industries have undergone, and are expected
to continue to undergo, rapid and significant technological change. Also,
consolidation and competition are expected to intensify as technical advances in
each field are achieved and become more widely known. In order to
13
compete effectively, we will be required to continually upgrade and expand our
scientific expertise and technology, identify and retain capable personnel and
pursue scientifically feasible and commercially viable opportunities.
Our competition will be determined in part by the indications and geographic
markets for which our products are developed and ultimately approved by
regulatory authorities. An important factor in competition will be the timing of
market introduction of our or our competitors' products. Accordingly, the
relative speed with which we can develop products, complete clinical trials and
approval processes and supply commercial quantities of products to the market
are expected to be important competitive factors. Competition among products
approved for sale will be based, among other things, on product efficacy,
safety, convenience, reliability, availability, price, third-party reimbursement
and patent and non-patent exclusivity.
SIGNIFICANT ALLIANCES
From time to time we enter into strategic alliances with third parties whereby
we either grant rights to certain of our compounds in exchange for rights to
receive payments, or acquire rights to compounds owned by other pharmaceutical
or biotechnology companies in exchange for obligations to make payments to the
partnering companies in the form of upfront payments, milestone payments
contingent upon the achievement of pre-determined criteria and/or research and
development funding. Under these arrangements, one of the parties may also
purchase product and pay royalties on product sales. The following are our most
significant alliances:
NOVARTIS: In April 2000, we entered into an agreement with Novartis in
which we granted to Novartis an exclusive worldwide license (excluding
Canada) to further develop and market FOCALIN(TM) (d-methylphenidate, or d-
MPH) and FOCALIN XR(TM), the long-acting drug formulation. We have retained
the exclusive commercial rights to FOCALIN(TM) and FOCALIN XR(TM) for
oncology-related disorders, such as chronic fatigue associated with
chemotherapy. We also granted Novartis rights to all of our related
intellectual property and patents, including new formulations of the
currently marketed RITALIN(R). Under the agreement, we have received
upfront and regulatory achievement milestone payments totaling $55.0
million and are entitled to additional payments upon attainment of certain
other milestone events. We also sell FOCALIN(TM) to Novartis as well as
receive royalties on all of Novartis' FOCALIN XR(TM) and RITALIN(R) family
of ADHD-related products. The research portion of the agreement terminated
in June 2003.
PHARMION: In November 2001, we licensed to Pharmion Corporation exclusive
rights relating to the development and commercial use of our intellectual
property covering thalidomide and S.T.E.P.S(R). Under the terms of the
agreement, as amended in December 2004, we receive a royalty of 8% of
Pharmion's net thalidomide sales in countries where Pharmion has received
regulatory approval and a S.T.E.P.S(R) license fee of 8% in all other
licensed territories. Separately in December 2004, following our
acquisition of Penn T Limited, our wholly-owned subsidiary Celgene UK
Manufacturing II Limited, or CUK II, entered into an amended thalidomide
supply agreement with Pharmion whereby in exchange for a reduction in
Pharmion's purchase price of thalidomide to 15.5% of its net sales of
thalidomide, we received a one-time payment of $77.0 million. Pursuant to
another December 2004 agreement, we also received a one-time payment of
$3.0 million in return for granting license rights to Pharmion to develop
and market thalidomide in additional territories and eliminating certain of
our license termination rights. Under the agreements, as amended, the
territory licensed to Pharmion is for all countries other than the United
States, Canada, Mexico, Japan and all provinces of China other than Hong
Kong. The agreements with Pharmion terminate upon the ten-year anniversary
following receipt of the first regulatory approval for thalidomide in the
United Kingdom.
14
To support the further clinical development of thalidomide, Pharmion has
also provided research funding under various agreements of approximately
$10.7 million through December 31, 2005 and is required to fund an
additional $2.7 million in each of 2006 and 2007.
On December 31, 2005, we held 1,939,600 shares of Pharmion common stock
received in connection with the conversion of a five-year Senior
Convertible Promissory Note purchased in April 2003 under a Securities
Purchase Agreement with Pharmion and the exercise of warrants received in
connection with the November 2001 thalidomide license and April 2003
Securities Purchase Agreement.
GLAXOSMITHKLINE: In March 2003, we entered into a supply and distribution
agreement with GSK to distribute, promote and sell ALKERAN(R) (melphalan),
a therapy approved by the FDA for the palliative treatment of multiple
myeloma and carcinoma of the ovary. Under the terms of the agreement, we
purchase ALKERAN(R) tablets and ALKERAN(R) for infusion from GSK and
distribute the products in the United States under the Celgene label. The
agreement requires us to purchase certain minimum quantities each year
under a take-or-pay arrangement. The agreement has been extended through
March 31, 2009. On December 31, 2005, the remaining minimum purchase
requirements under the agreement totaled $102.0 million, consisting of
$13.7 million from the initial agreement and the following subsequent
extensions:
o April 1, 2006 - December 31, 2006 $21,000,000
o January 1, 2007 - December 31, 2007 $29,050,000
o January 1, 2008 - December 31, 2008 $30,525,000
o January 1, 2009 - March 31, 2009 $ 7,725,000
MANUFACTURING
Currently, we do not manufacture any of our products on a commercial scale. We
have contracted with third-party manufacturers to supply the raw materials and
finished products to meet our needs and, while a site has been purchased in
Neuchatel, Switzerland, where we are constructing a drug product manufacturing
facility, we intend to continue to utilize outside manufacturers as needed to
produce certain of our products on a commercial scale. Our third-party
manufacturers meet the FDA's current Good Manufacturing Practices, or cGMP
regulations and guidelines. cGMP regulations requires that all manufacturers of
pharmaceuticals for sale in or from the United States achieve and maintain
compliance with regulations governing the manufacturing, processing, packaging,
storing and testing of drugs intended for human use.
The active pharmaceutical ingredient, or API, for THALOMID(R) is manufactured by
Eagle Picher Pharmaceutical Services, a Division of Eagle-Picher Incorporated,
which has filed to reorganize under Chapter 11 of the Bankruptcy Code. We
currently have adequate supplies of API for THALOMID(R) on hand to support our
projected long-term requirements and do not believe that the Eagle-Picher
Chapter 11 bankruptcy filing will result in any supply disruptions for the
foreseeable future. In addition, a second supplier is currently being qualified.
We rely on two drug product manufacturers, Penn Pharmaceuticals Services Limited
and Institute of Drug Technology Australia Limited for the formulation and
encapsulation of the finished dosage form of THALOMID(R) capsules, and on one
contract packager, Sharp Corporation, for the packaging of the final product.
The API for REVLIMID(R) is manufactured by Evotec OAI, Ltd. We have contracted
with OSG Norwich Pharmaceuticals and Penn Pharmaceuticals Services Ltd. for the
manufacture of REVLIMID(R) finished product.
15
The API for FOCALIN(TM) is currently obtained from two suppliers, Johnson
Matthey Inc. and Seigfried USA, Inc., and we rely on a single manufacturer,
Mikart, Inc., for the tableting and packaging of FOCALIN(TM) finished product.
We obtain the API for FOCALIN XR(TM) from Johnson Matthey Inc., on behalf of
Novartis for the manufacture of FOCALIN XR(TM) finished product.
INTERNATIONAL OPERATIONS
We have established our international headquarters in Neuchatel, Switzerland
where, among other things, we are constructing a facility to perform
formulation, encapsulation, packaging, warehousing and distribution of future
products. We are also in the process of establishing our international
regulatory, clinical and commercial infrastructure, which includes the hiring of
our management team for international operations and establishing legal entities
beginning in Europe and throughout the world.
We also have a strategic alliance with Pharmion Corporation to expand the
THALOMID(R) franchise in all countries other than the United States, Canada,
Mexico, Japan and all provinces of China other than Hong Kong. The strategic
partnership combines Pharmion's global development and marketing expertise and
our intellectual property. The alliance is designed to accelerate the
establishment of THALOMID(R) as an important therapy in the international
markets. To date, Pharmion has received regulatory approval in Australia, New
Zealand, Turkey and Israel to market and distribute Thalidomide for the
treatment of multiple myeloma after the failure of standard therapies, as well
as for the treatment of complications of leprosy. In October 2004, we acquired
Penn T Limited, a worldwide supplier of THALOMID(R). Through manufacturing
agreements entered into with a third party in connection with this acquisition,
we are able to control manufacturing for THALOMID(R) worldwide and we also
increased our participation in the potential sales growth of THALOMID(R) in key
international markets.
SALES AND COMMERCIALIZATION
We have a 234-person (including CCT) U.S. pharmaceutical commercial
organization. These individuals have considerable experience in the
pharmaceutical industry, and many have experience with oncological and
immunological products. We expect to expand our sales and commercialization
group to support products we develop to treat oncological and immunological
diseases. We intend to market and sell the products we develop for indications
with accessible patient populations. For drugs with indications involving larger
patient populations, we may partner with other pharmaceutical companies. In
addition, we are positioned to accelerate the expansion of these sales and
marketing resources as appropriate to take advantage of product in-licensing and
product acquisition opportunities.
EMPLOYEES
As of February 1, 2006, we had 944 full-time employees, 531 of who were engaged
primarily in research and development activities, 234 (including CCT) who were
engaged in sales and commercialization activities and the remainder of who were
engaged in executive and general and administrative activities. We also maintain
consulting arrangements with a number of researchers at various universities and
other research institutions in Europe and the United States.
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this annual report
are forward-looking statements concerning our business, financial condition,
results of operations, economic performance and financial condition.
Forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and within the meaning of Section 21E of the Securities Exchange Act
of 1934 are included, for example, in the discussions about:
16
o our strategy;
o new product discovery, development or product introduction;
o product manufacturing
o product sales, royalties and contract revenues;
o expenses and net income;
o our credit risk management;
o our liquidity;
o our asset/liability risk management; and
o our operational and legal risks.
These and other forward-looking statements involve risks and uncertainties.
Actual results may differ materially from those expressed or implied in those
statements. Factors that could cause such differences include, but are not
limited to, those discussed under "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
ITEM 1A. RISK FACTORS
ALTHOUGH WE ARE CURRENTLY PROFITABLE, WE HAVE A HISTORY OF OPERATING LOSSES AND
AN ACCUMULATED DEFICIT.
For the years ended December 31, 2005, 2004 and 2003, we posted net income of
$63.7 million, $52.8 million and $25.7 million, respectively. Prior to 2003, we
had sustained losses in each year since our incorporation in 1986. In addition,
we had an accumulated deficit of $170.8 million at December 31, 2005 compared
with $234.4 million at December 31, 2004. We expect to make substantial
expenditures to further develop and commercialize our products. We also expect
that our rate of spending will accelerate as the result of increased clinical
trial costs and expenses associated with regulatory approval and
commercialization of products now in development and products discovered,
licensed or acquired by us in the future.
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.
We have historically experienced, and expect to continue for the foreseeable
future to experience, significant fluctuations in our quarterly operating
results. These fluctuations are due to a number of factors, many of which are
outside our control, and may result in volatility of our stock price. Future
operating results will depend on many factors, including:
o demand for our products;
o regulatory approvals for our products;
o the timing and level of research and development and sales and
marketing, including product launch costs;
17
o the timing and level of reimbursement from third-party payors for our
products;
o the timing of the introduction and market acceptance of new products
by us or competing companies;
o the development or expansion of business infrastructure in new
clinical and geographic markets;
o the acquisition of new products and companies;
o tax rates in the jurisdictions in which we operate;
o the timing and recognition of certain research and development
milestones and license fees; and
o our ability to control our costs.
IF WE ARE UNSUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR PRODUCTS, OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY
ADVERSELY AFFECTED WHICH COULD HAVE A NEGATIVE IMPACT ON THE VALUE OF OUR
SECURITIES.
Many of our products and processes are in the early or mid-stages of research
and development and will require the commitment of substantial financial
resources, extensive research, development, preclinical testing, clinical
trials, manufacturing scale-up and regulatory approval prior to being ready for
sale. With the exception of REVLIMID(R), THALOMID(R), ALKERAN(R), FOCALIN(TM)
and FOCALIN XR(TM) (the extended release version), all of our other product
candidates will require further development, clinical testing and regulatory
approvals before initial commercial marketing in the United States and
internationally. Moreover, REVLIMID(R) requires further preclinical and clinical
testing as a condition of approval and all of our commercially available
products will require further development, clinical testing and regulatory
approvals as we seek approvals in new indications and geographic markets. If it
becomes too expensive to sustain our present commitment of resources on a
long-term basis, we will be unable to continue certain necessary research and
development activities. Furthermore, we cannot be certain that our clinical
testing will render satisfactory results, or that we will receive required
regulatory approvals for our new products or new indications. If any of our
products, even if developed and approved, cannot be successfully commercialized,
our business, financial condition, results of operations and liquidity could be
materially adversely affected which could have a negative impact on the value of
our common stock or debt securities obligations.
DURING THE NEXT SEVERAL YEARS, WE WILL BE VERY DEPENDENT ON THE COMMERCIAL
SUCCESS OF REVLIMID(R), THALOMID(R), ALKERAN(R), FOCALIN(TM), AND FOCALIN
XR(TM).
At our present and anticipated level of operations, we may not be able to
maintain profitability without continued growth in our revenues. The growth of
our business during the next several years will be largely dependent on the
commercial success of REVLIMID(R) and our other products. REVLIMID(R) was
approved by the FDA on December 27, 2005 for the treatment of certain
myelodysplastic syndromes, or MDS, associated with a deletion 5q cytogenetic
abnormality. REVLIMID(R) will be distributed through contracted pharmacies under
the RevAssist(sm) program, which is a proprietary risk-management distribution
program tailored specifically to help ensure the safe use of REVLIMID(R). We do
not have long-term data on the use of the product and cannot predict whether
REVLIMID(R) will gain widespread acceptance, which will mostly depend on the
acceptance of regulators, physicians, patients and other key opinion leaders as
a relatively safe and effective drug that has certain advantages as compared to
existing
18
or future therapies. In addition, some of our products compete with one another
as therapies designed to treat cancer. For example, market acceptance of
REVLIMID(R) may result to the detriment of THALOMID(R) and ALKERAN(R). We are
also seeking to market REVLIMID(R) in Europe as well as for other indications in
the United States. A delay in gaining the requisite regulatory approvals could
negatively impact our growth plans and the value of our common stock or debt
securities obligations.
THALOMID(R) is currently approved as a therapy for the treatment of ENL.
However, the market for the use of THALOMID(R) in patients suffering from ENL is
relatively small and we are dependent on revenues generated from its off-label
use in treating multiple myeloma and other forms of cancer. We have filed an
sNDA with the FDA seeking to market THALOMID(R) as a treatment in multiple
myeloma and are awaiting FDA action. If THALOMID(R) does not receive market
approval, its off-label use in treating multiple myeloma and other forms of
cancer may diminish over time. In addition, if adverse experiences are reported
in connection with the use of THALOMID(R) by patients, this could undermine
physician and patient comfort with the product, could limit the commercial
success of the product and could even impact the acceptance of our other
products, including REVLIMID(R). Also, we are dependent upon sales of
ALKERAN(R), which we license from GSK, and royalties based on Novartis' sales of
FOCALIN XR(TM), which we cannot directly impact.
Our revenues and profits would be negatively impacted if generic versions of any
of these products were to be approved and launched.
WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS.
We may be subject to a variety of product liability or other claims based on
allegations that the use of our technology or products has resulted in adverse
effects, whether by participants in our clinical trials, by patients using our
products or by other persons exposed to our products. Thalidomide, when used by
pregnant women, has resulted in serious birth defects. Therefore, necessary and
strict precautions must be taken by physicians prescribing the drug and
pharmacies dispensing the drug to women with childbearing potential. These
precautions may not be observed in all cases or, if observed, may not be
effective. Use of thalidomide has also been associated, in a limited number of
cases, with other side effects, including nerve damage. Although we have product
liability insurance that we believe is sufficient, we may be unable to maintain
existing coverage or obtain additional coverage on commercially reasonable terms
if required, or our coverage may be inadequate to protect us in the event of a
multitude of claims being asserted against us. Our obligation to defend against
or pay any product liability or other claim may be expensive and divert the
efforts of our management and technical personnel.
IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, DEMAND FOR OUR PRODUCTS WILL
DETERIORATE OR NOT MATERIALIZE AT ALL.
It is necessary that our and our distribution partners' products, including
REVLIMID(R), THALOMID(R), ALKERAN(R), FOCALIN(TM) and FOCALIN XR(TM), and the
RITALIN(R) family of drugs achieve and maintain market acceptance. A number of
factors can render the degree of market acceptance of our products uncertain,
including the products' efficacy, safety and advantages, if any, over competing
products, as well as the reimbursement policies of third-party payors, such as
government and private insurance plans. In particular, thalidomide, when used by
pregnant women, has resulted in serious birth defects, and the negative history
associated with thalidomide and birth defects may decrease the market acceptance
of THALOMID(R). In addition, the products that we are attempting to develop
through our Celgene Cellular Therapeutics subsidiary may represent substantial
departures from established treatment methods and will compete with a number of
traditional drugs and therapies which are now, or may be in the future,
manufactured and marketed by major pharmaceutical and biopharmaceutical
companies. Furthermore, public attitudes may be influenced by claims that stem
cell therapy is unsafe, and stem cell therapy may not gain the acceptance of the
public
19
or the medical community. If our products are not accepted by the market, demand
for our products will deteriorate or not materialize at all.
WE HAVE NO COMMERCIAL MANUFACTURING FACILITIES AND IF THE THIRD-PARTY
MANUFACTURERS UPON WHOM WE RELY FAIL TO PRODUCE ON A TIMELY BASIS THE RAW
MATERIALS OR FINISHED PRODUCTS IN THE VOLUMES THAT WE REQUIRE OR FAIL TO MEET
QUALITY STANDARDS AND MAINTAIN NECESSARY LICENSURE FROM REGULATORY AUTHORITIES,
WE MAY BE UNABLE TO MEET DEMAND FOR OUR PRODUCTS, POTENTIALLY RESULTING IN LOST
REVENUES.
We do not currently manufacture any of our products on a commercial scale and
have contracted with third-party manufacturers to supply the raw materials and
finished products to meet our needs. Although a site has been purchased in
Neuchatel, Switzerland, and we are constructing a drug product manufacturing
facility, we cannot utilize this facility to manufacture our marketed products
until we obtain necessary FDA clearance. Additionally, we intend to continue to
utilize outside manufacturers as needed to produce certain of our products on a
commercial scale.
The active pharmaceutical ingredient, or API, for THALOMID(R) is manufactured by
Eagle Picher Pharmaceutical Services, a Division of Eagle-Picher Incorporated,
which has filed to reorganize under Chapter 11 of the Bankruptcy Code. We
currently have adequate supplies of API for THALOMID(R) on hand to support our
projected long-term requirements and do not believe that the Eagle-Picher
Chapter 11 bankruptcy filing will result in any supply disruptions for the
foreseeable future. In addition, a second supplier is currently being qualified.
We rely on two drug product manufacturers, Penn Pharmaceuticals Services Limited
and Institute of Drug Technology Australia Limited for the formulation and
encapsulation of the finished dosage form of THALOMID(R) capsules, and on one
contract packager, Sharp Corporation, for the packaging of the final product.
The API for FOCALIN(TM) is currently obtained from two suppliers, Johnson
Matthey Inc. and Seigfried USA, Inc., and we rely on a single manufacturer,
Mikart, Inc., for the tableting and packaging of FOCALIN(TM) finished product.
We obtain the API for FOCALIN XR(TM) from Johnson Matthey Inc., on behalf of
Novartis for the manufacture of FOCALIN XR(TM) finished product.
We have entered into an agreement with Evotec OAI Limited for the supply of
REVLIMID(R) API, and have contracted with OSG Norwich Pharmaceuticals and Penn
Pharmaceuticals Services Limited for the manufacture of REVLIMID(R) finished
product.
In all the countries where we sell our products, governmental regulations exist
to define standards for manufacturing, packaging and labeling and storing. All
of our suppliers of raw materials and contract manufacturers must comply with
these regulations. Failure to do so could result in supply interruptions. In the
United States, the FDA requires that all suppliers of pharmaceutical bulk
material and all manufacturers of pharmaceuticals for sale in or from the United
States achieve and maintain compliance with the FDA's current Good Manufacturing
Practices (cGMP) regulations and guidelines. Failure of our third-party
manufacturers to comply with applicable regulations could result in sanctions
being imposed on them or us, including fines, injunctions, civil penalties,
disgorgement, suspension or withdrawal of approvals, license revocation,
seizures or recalls of products, operating restrictions and criminal
prosecutions, any of which could significantly and adversely affect supplies of
our products. In addition, before any product batch produced by our
manufacturers can be shipped, it must conform to release specifications
pre-approved by regulators for the content of the pharmaceutical product. If the
operations of one or more of our manufacturers were to become unavailable for
any reason, any required FDA review and approval of the operations of an
alternative supplier could cause a delay in the manufacture of our products. If
our outside manufacturers do not meet our requirements for quality, quantity or
timeliness, or do not achieve and maintain compliance with all applicable
regulations, demand for our products or our ability to continue supplying such
products could substantially decline.
20
WE HAVE LIMITED MARKETING AND DISTRIBUTION CAPABILITIES.
Although we have a 234-person (including CCT) U.S. pharmaceutical commercial
organization to support our products, we may be required to seek one or more
corporate partners to provide marketing services with respect to certain of our
products. Any delay in securing these resources could substantially delay or
curtail the marketing of these products. We have contracted with Ivers Lee
Corporation, d/b/a Sharp, a specialty distributor, to distribute THALOMID(R) and
REVLIMID(R). If Sharp does not perform its obligations, our ability to
distribute THALOMID(R) and REVLIMID(R) may be severely restricted.
WE RECEIVE SIGNIFICANT REVENUES FROM COLLABORATIONS AND MAY BE DEPENDENT ON
COLLABORATIONS AND LICENSES WITH THIRD PARTIES.
Our ability to fully commercialize our preclinical and clinical-stage pipeline,
if developed, may depend to some extent upon our entering into collaborations
with other pharmaceutical and biopharmaceutical companies with the requisite
experience and financial and other resources to obtain regulatory approvals and
to manufacture and market such products. Our collaborations and licenses include
an exclusive license (excluding Canada) to Novartis for the development and
commercialization of FOCALIN(TM) and FOCALIN XR(TM); an agreement with Pharmion
Corporation to expand the THALOMID(R) franchise internationally; and an
agreement with GSK enabling us to distribute, promote and sell ALKERAN(R). Our
present and future arrangements may be jeopardized if any or all of the
following occur:
o we are not able to enter into additional joint ventures or other
arrangements on acceptable terms, if at all;
o our joint ventures or other arrangements do not result in a compatible
working relationship;
o our partners change their business priorities, fail to perform as
agreed upon or experience financial difficulties that disrupt
necessary business operations;
o our joint ventures or other arrangements do not lead to the successful
development and commercialization of any products;
o we are unable to obtain or maintain proprietary rights or licenses to
technology or products developed in connection with our joint ventures
or other arrangements; or
o we are unable to preserve the confidentiality of any proprietary
rights or information developed in connection with our joint ventures
or other arrangements.
WE MAY CONTINUE TO MAKE STRATEGIC ACQUISITIONS OF OTHER COMPANIES BUSINESSES OR
PRODUCTS AND THESE ACQUISITIONS INTRODUCE SIGNIFICANT RISKS AND UNCERTAINTIES,
INCLUDING RISKS RELATED TO INTEGRATING THE ACQUIRED BUSINESSES AND PRODUCTS AND
TO ACHIEVING BENEFITS FROM THE ACQUISITIONS.
To take advantage of external growth opportunities, we have made, and may
continue to make, strategic acquisitions that involve significant risks and
uncertainties. These risks and uncertainties include: (1) the difficulty in
integrating newly-acquired businesses and operations in an efficient and
effective manner; (2) the challenges in achieving strategic objectives, cost
savings and other benefits from acquisitions; (3) the risk that the technologies
acquired do not evolve as anticipated; (4) contracts, agreements, assets and
liabilities are not as represented; (5) the potential loss of key employees of
the acquired businesses; (6) the risk of diverting the attention of senior
management from our other operations; (7) the risks of
21
entering new markets in which we have limited experience; (8) difficulties in
expanding information technology systems and other business processes to
accommodate the acquired businesses; (9) future impairments of goodwill and
other intangibles of an acquired business; and, (10) the impact that possible
in-process research and development charges may have on future earnings.
Many acquisition candidates in the biopharmaceuticals industry carry high price
to earnings valuations. As a result, acquiring a business that has a high
valuation may be dilutive to our earnings, especially when the acquired business
has little or no revenue.
Key employees of acquired businesses may receive substantial value in connection
with a transaction in the form of change-in-control agreements, acceleration of
stock options and the lifting of restrictions on other equity-based compensation
rights. To retain such employees and integrate the acquired business, we may
offer additional, sometimes costly, retention incentives.
THE HAZARDOUS MATERIALS WE USE IN OUR RESEARCH, DEVELOPMENT AND OTHER BUSINESS
OPERATIONS COULD RESULT IN SIGNIFICANT LIABILITIES WHICH COULD EXCEED OUR
INSURANCE COVERAGE AND FINANCIAL RESOURCES.
We use certain hazardous materials in our research, development and general
business activities. While we believe we are currently in substantial compliance
with the federal, state and local laws and regulations governing the use of
these materials, we cannot be certain that accidental injury or contamination
will not occur. Any such accident or contamination could result in substantial
liabilities that could exceed our insurance coverage and financial resources.
Additionally, the cost of compliance with environmental and safety laws and
regulations may increase in the future, requiring us to expend more financial
resources either in compliance or in purchasing supplemental insurance coverage.
THE PHARMACEUTICAL INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION WHICH
PRESENTS NUMEROUS RISKS TO US.
The discovery, preclinical development, clinical trials, manufacturing,
marketing and labeling of pharmaceuticals and biologics are all subject to
extensive regulation by numerous governmental authorities and agencies in the
United States and other countries. If we or our contractors and collaborators
are delayed in receiving, or are unable to obtain at all, necessary governmental
approvals, we will be unable to effectively market our products.
The testing, marketing and manufacturing of our products require regulatory
approval, including approval from the FDA and, in some cases, from the U.S.
Environmental Protection Agency, or the EPA, or governmental authorities outside
of the United States that perform roles similar to those of the FDA and EPA.
Certain of our pharmaceutical products, such as FOCALIN(TM), fall under the
Controlled Substances Act of 1970 that requires authorization by the U.S. Drug
Enforcement Agency, or DEA, of the U.S. Department of Justice in order to handle
and distribute these products. The regulatory approval process presents several
risks to us:
o In general, preclinical tests and clinical trials can take many years,
and require the expenditure of substantial resources, and the data
obtained from these tests and trials can be susceptible to varying
interpretation that could delay, limit or prevent regulatory approval;
o Delays or rejections may be encountered during any stage of the
regulatory process based upon the failure of the clinical or other
data to demonstrate compliance with, or upon the failure of the
product to meet, a regulatory agency's requirements for safety,
efficacy and quality or, in the case of a product seeking an orphan
drug indication, because another designee received approval first;
22
o Requirements for approval may become more stringent due to changes in
regulatory agency policy, or the adoption of new regulations or
legislation;
o The scope of any regulatory approval, when obtained, may significantly
limit the indicated uses for which a product may be marketed and
reimbursed and may impose significant limitations in the nature of
warnings, precautions and contra-indications that could materially
affect the sales and profitability of the drug;
o Pricing and reimbursement controls;
o Approved drugs, as well as their manufacturers, are subject to
continuing and ongoing review, and discovery of previously unknown
problems with these products or the failure to adhere to manufacturing
or quality control requirements may result in restrictions on their
manufacture, sale or use or in their withdrawal from the market;
o Regulatory authorities and agencies may promulgate additional
regulations restricting the sale of our existing and proposed
products;
o Once a product receives marketing approval, we may not market that
product for broader or different applications, and the FDA may not
grant us approval with respect to separate product applications that
represent extensions of our basic technology. In addition, the FDA may
withdraw or modify existing approvals in a significant manner or
promulgate additional regulations restricting the sale of our present
or proposed products;
o Products, such as REVLIMID(R), that are subject to accelerated
approval can be subject to an expedited withdrawal if the
post-marketing study commitments are not completed with due diligence,
the post-marketing restrictions are not adhered to or are shown to be
inadequate to assure the safe use of the drug, or evidence
demonstrates that the drug is not shown to be safe and effective under
its conditions of use. Additionally, promotional materials for such
drugs are subject to enhanced surveillance, including pre-approval
review of all promotional materials used within 120 days following
marketing approval and a requirement for the submissions 30 days prior
to initial dissemination of all promotional materials disseminated
after 120 days following marketing approval.
o Our labeling and promotional activities relating to our products are
regulated by the FDA and state regulatory agencies and, in some
circumstances, by the DEA, and are subject to associated risks. If we
fail to comply with FDA regulations prohibiting promotion of off-label
uses and the promotion of products for which marketing clearance has
not been obtained, the FDA, or the Office of the Inspector General of
the Department of Health and Human Services or the state Attorneys
General could bring an enforcement action against us that could
inhibit our marketing capabilities as well as result in significant
penalties.
The FDA's Center for Biologics Evaluation and Research currently regulates under
21 CFR Parts 1270 and 1271 human tissue intended for transplantation that is
recovered, processed, stored or distributed by methods that do not change tissue
function or characteristics and that is not currently regulated as a human drug,
biological product or medical device. Certain stem cell activities fall within
this category. Part 1270 requires tissue establishments to screen and test
donors, to prepare and follow written procedures for the prevention of the
spread of communicable disease and to maintain records. It also provides for
inspection by the FDA of tissue establishments. Part 1271 requires human cells,
tissue and
23
cellular and tissue-based product establishments (HCT/Ps) to register with the
agency and list their HCT/Ps.
Currently, we are required to be, and are, licensed to operate in New York and
New Jersey, two of the states in which we currently collect placentas and
umbilical cord blood for our allogeneic and private stem cell banking
businesses. If other states adopt similar licensing requirements, we would need
to obtain such licenses to continue operating. If we are delayed in receiving,
or are unable to obtain at all, necessary licenses, we will be unable to provide
services in those states and this would impact negatively on our revenues.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND OUR PRODUCTS MAY BE
SUBJECT TO GENERIC COMPETITION.
Our success depends, in part, on our ability to obtain and enforce patents,
protect trade secrets, obtain licenses to technology owned by third parties and
to conduct our business without infringing upon the proprietary rights of
others. The patent positions of pharmaceutical and biopharmaceutical firms,
including ours, can be uncertain and involve complex legal and factual
questions.
Under the current U.S. patent laws, patent applications in the United States are
maintained in secrecy from four to eighteen months, and publication of
discoveries in the scientific and patent literature often lag behind actual
discoveries. Thus, we may discover sometime in the future that we, or the third
parties from whom we have licensed patents or patent applications, were not the
first to make and/or file the inventions covered by the patents and patent
applications in which we have or seek rights. In the event that a third party
has also filed a patent application for any of the inventions claimed in our
patents or patent applications, or those we have licensed-in, we could become
involved in an interference proceeding declared by the U.S. Patent and Trademark
Office to determine priority of invention or an opposition proceeding in other
places such as Europe. Such an interference or opposition could result in the
loss of an issued U.S. or foreign patent, respectively, or loss of any
opportunity to secure U.S. patent protection for that invention. Even if the
eventual outcome is favorable to us, such proceedings could result in
substantial cost and delay to us and limit the scope of the claimed subject
matter.
In addition, the coverage sought in a patent application may not be obtained or
may be significantly reduced before the patent is issued. Consequently, if our
pending applications, or pending application that we have licensed-in from third
parties, do not result in the issuance of patents or if any patents that are
issued do not provide significant proprietary protection or commercial
advantage, our ability to sustain the necessary level of intellectual property
rights upon which our success depends may be restricted.
Moreover, different countries have different procedures for obtaining patents,
and patents issued in different countries provide different degrees of
protection against the use of a patented invention by others. Therefore, if the
issuance to us or our licensors, in a given country, of a patent covering an
invention is not followed by the issuance in other countries of patents covering
the same invention, or if any judicial interpretation of the validity,
enforceability or scope of the claims in a patent issued in one country is not
similar to the interpretation given to the corresponding patent issued in
another country, our ability to protect our intellectual property in other
countries may be limited.
Furthermore, even if our patents, or those we have licensed-in, are issued, our
competitors may still challenge the scope, validity or enforceability of such
patents in court, requiring us to engage in complex, lengthy and costly
litigation. Alternatively, our competitors may be able to design around such
patents and compete with us using the resulting alternative technology. If any
of our issued or licensed patents are infringed, we may not be successful in
enforcing our or our licensor's intellectual property rights or
24
defending the validity or enforceability of our issued patents and subsequently
not be able to develop or market applicable product exclusively.
FDA regulatory exclusivity for thalidomide has expired so that generic drug
companies can file an abbreviated new drug application, or ANDA, to seek
approval to market thalidomide in the United States. However, such an ANDA filer
will need to challenge the validity or enforceability of our United States
patents relating to our S.T.E.P.S.(R) program or to demonstrate that they do not
use an infringing risk management program. We cannot predict whether an ANDA
challenge to our patents will be made, nor can we predict whether our
S.T.E.P.S.(R) patents can be circumscribed or invalidated or otherwise rendered
unenforceable. However, if such an ANDA was filed and approved by the FDA, and
the generic company was successful in challenging our patents listed in the
Orange Book for THALOMID(R), the generic company would be permitted to sell a
generic thalidomide product.
Further, we rely upon unpatented proprietary and trade secret technology that we
try to protect, in part, by confidentiality agreements with our collaborative
partners, employees, consultants, outside scientific collaborators, sponsored
researchers and other advisors. If these agreements are breached, we may not
have adequate remedies for any such breach. Despite precautions taken by us,
others may obtain access to or independently develop our proprietary technology
or such technology may be found to be non-proprietary or not a trade secret.
Our right to practice the inventions claimed in certain patents that relate to
THALOMID(R) arises under licenses granted to us by others, including The
Rockefeller University and Children's Medical Center Corporation, or CMCC. In
addition to these patents, which relate to thalidomide, we have also licensed
from CMCC certain patents relating to thalidomide analogs. In December 2002, we
entered into an exclusive license agreement with CMCC and EntreMed Inc. pursuant
to which CMCC exclusively licensed to us certain patents and patent applications
that relate to analogs, metabolites, precursors and hydrolysis products of
thalidomide, and all stereoisomers thereof. Our license under the December 2002
agreement is worldwide and royalty-bearing, and we have complete control over
the prosecution of the licensed thalidomide analog patent rights. Under this
December 2002 agreement, we are obligated to comply with certain milestones for
a REVLIMID(R) approval and royalties with respect to sales of REVLIMID(R). The
December 2002 agreement also grants us an option for a certain time period to
inventions in the field of thalidomide analogs that may be developed at CMCC in
the laboratory of Dr. Robert D'Amato, pursuant to the terms and conditions of a
separate Sponsored Research Agreement negotiated between CMCC and us.
Further, while we believe these confidentiality agreements and license
agreements to be valid and enforceable, our rights under these agreements may
not continue or disputes concerning these agreements may arise. If any of the
foregoing should occur, we may be unable to rely upon our unpatented proprietary
and trade secret technology, or we may be unable to use the third-party
proprietary technology we have licensed-in, either of which may prevent or
hamper us from successfully pursuing our business.
On August 19, 2004, we, together with our exclusive licensee Novartis, filed an
infringement action in the United States District Court of New Jersey against
Teva Pharmaceuticals USA, Inc., in response to notices of Paragraph IV
certifications made by Teva in connection with the filing of an ANDA for
FOCALIN(TM). The notification letters contend that United States Patent Nos.
5,908,850, or '850 patent, and 6,355,656, or '656 patent, were invalid. The '656
patent is currently the subject of reexamination proceedings in the United
States Patent and Trademark Office. After the suit was filed, Novartis listed
another patent, United States Patent No. 6,528,530, or '530 patent, in the
Orange Book in association with the FOCALIN(TM) NDA. Neither the '656 patent nor
the '530 patent is part of the patent infringement action against Teva. This
case does not involve an ANDA for RITALIN LA(R) or FOCALIN XR(TM) as such an
ANDA has not been filed. Recently, Teva amended its answer to contend that the
'850 patent was not
25
infringed by the filing of its ANDA, and that the '850 patent is not enforceable
due to an allegation of inequitable conduct. Fact discovery expired on February
28, 2006. No trial date has been set. If successful, Teva will be permitted to
sell a generic version of FOCALIN(TM), which could significantly reduce our
sales of FOCALIN(TM) to Novartis.
It is also possible that third-party patent applications and patents could issue
with claims that broadly cover certain aspects of our business or of the subject
matter claimed in the patents or patent applications owned or optioned by us or
licensed to us, which may limit our ability to conduct our business or to
practice under our patents, and may impede our efforts to obtain meaningful
patent protection of our own. If patents are issued to third parties that
contain competitive or conflicting claims, we may be legally prohibited from
pursuing research, development or commercialization of potential products or be
required to obtain licenses to these patents or to develop or obtain alternative
technology. We may be legally prohibited from using patented technology, may not
be able to obtain any license to the patents and technologies of third parties
on acceptable terms, if at all, or may not be able to obtain or develop
alternative technologies. Consequently, if we cannot successfully defend against
any patent infringement suit that may be brought against us by a third-party, we
may lose the ability to continue to conduct our business as we presently do, or
to practice certain subject matter delineated by patent claims that we have
exclusive rights to, whether by ownership or by license, and that may have a
material adverse effect on our business.
We rely upon trademarks and service marks to protect our rights to the
intellectual property used in our business. On October 29, 2003, we filed a
lawsuit against Centocor, Inc. to prevent Centocor's use of the term "I.M.I.D.s"
in connection with Centocor's products, which use, we believe, is likely to
cause confusion with our IMiDs(R) registered trademark for compounds (including
REVLIMID(TM)) developed or being developed by us to treat cancer and
inflammatory diseases. If we are not successful in this suit, it may be
necessary for us to adopt a different trademark for that class of compounds and
thereby lose the value we believe we have built in the "IMiDs(R)" mark.
On January 15, 2004, an opposition proceeding was brought by Celltech R&D Ltd.
against granted European Patent 0728143 which we have licensed from the
University of California relating to JNK 1 and JNK 2 polypeptides. This
proceeding is directed solely to our claims for JNK 2 and not JNK 1. An oral
hearing occurred in October of 2005 in which the European Patent Office advised
us of its intent to revoke certain of our claims. We await a written decision.
The written decision may be appealed. We do have other JNK 1 and JNK European
patent application claims pending.
THE PHARMACEUTICAL AND BIOTECH INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO
RAPID AND SIGNIFICANT TECHNOLOGICAL CHANGE.
The pharmaceutical industry in which we operate is highly competitive and
subject to rapid and significant technological change. Our present and potential
competitors include major pharmaceutical and biotechnology companies, as well as
specialty pharmaceutical firms, including but not limited to:
o Amgen, which potentially competes with our TNF(alpha) and kinase
inhibitors;
o Novartis, which potentially competes with our IMiDs(R) compounds and
kinase programs;
o Bristol Myers Squibb Co., which potentially competes in clinical
trials with our IMiDs(R) compounds and TNF(alpha) inhibitors;
26
o Genentech, Inc., which potentially competes in clinical trials with
our IMiDs(R) compounds and TNF(alpha) inhibitors;
o AstraZeneca plc, which potentially competes in clinical trials with
our IMiDs(R) compounds and TNF(alpha) inhibitors;
o Millennium Pharmaceuticals Inc., which potentially competes in
clinical trials with our IMiDs(R) compounds as well as with
THALOMID(R);
o Vertex Pharmaceuticals Inc. and Pfizer Inc., which potentially compete
in clinical trials with our kinase inhibitors; and
o Biogen IDEC Inc. and Genzyme Corporation, both of which are generally
developing drugs that address the oncology and immunology markets.
Many of these companies have considerably greater financial, technical and
marketing resources than we. We also experience competition from universities
and other research institutions, and in some instances, we compete with others
in acquiring technology from these sources. The pharmaceutical industry has
undergone, and is expected to continue to undergo, rapid and significant
technological change, and we expect competition to intensify as technical
advances in the field are made and become more widely known. The development of
products or processes by our competitors with significant advantages over those
that we are seeking to develop could cause the marketability of our products to
stagnate or decline.
SALES OF OUR PRODUCTS ARE DEPENDENT ON THIRD-PARTY REIMBURSEMENT.
Sales of our products will depend, in part, on the extent to which the costs of
our products will be paid by health maintenance, managed care, pharmacy benefit
and similar health care management organizations, or reimbursed by government
health administration authorities, private health coverage insurers and other
third-party payors. These health care management organizations and third-party
payors are increasingly challenging the prices charged for medical products and
services. Additionally, the containment of health care costs has become a
priority of federal and state governments, and the prices of drugs have been a
focus in this effort. If these organizations and third-party payors do not
consider our products to be cost-effective or competitive with other available
therapies, they may not reimburse providers or consumers of our products or, if
they do, the level of reimbursement may not be sufficient to allow us to sell
our products on a profitable basis.
WE HAVE GROWN RAPIDLY, AND IF WE FAIL TO ADEQUATELY MANAGE THAT GROWTH OUR
BUSINESS COULD BE ADVERSELY IMPACTED.
We have an aggressive growth plan that has included substantial and increasing
investments in research and development, sales and marketing, and facilities. We
plan to continue to grow and our plan has a number of risks, some of which we
cannot control. For example:
o we will need to generate higher revenues to cover a higher level of
operating expenses, and our ability to do so may depend on factors
that we do not control;
o we will need to assimilate new staff members;
o we will need to manage complexities associated with a larger and
faster growing multinational organization; and
27
o we will need to accurately anticipate demand for the products we
manufacture and maintain adequate manufacturing capacity, and our
ability to do so may depend on factors that we do not control.
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY MAKE IT
DIFFICULT FOR YOU TO SELL THE COMMON STOCK WHEN YOU WANT OR AT PRICES YOU FIND
ATTRACTIVE.
There has been significant volatility in the market prices for publicly traded
shares of biopharmaceutical companies, including ours. We expect that the market
price of our common stock will continue to fluctuate. After adjusting prices to
reflect our two-for-one stock split effected on February 17, 2006, the intra-day
price of our common stock fluctuated from a high of $32.68 per share to a low of
$12.35 per share in 2005. On December 31, 2005, our common stock closed at a
split-adjusted price of $32.40 per share. The price of our common stock may not
remain at or exceed current levels. The following key factors may have an
adverse impact on the market price of our common stock:
o results of our clinical trials or adverse events associated with our
marketed products;
o announcements of technical or product developments by our competitors;
o market conditions for pharmaceutical and biotechnology stocks;
o market conditions generally;
o governmental regulation;
o health care legislation;
o public announcements regarding medical advances in the treatment of
the disease states that we are targeting;
o patent or proprietary rights developments;
o changes in pricing and third-party reimbursement policies for our
products; or
o fluctuations in our operating results.
In addition, the stock market in general and the biotechnology sector in
particular has experienced extreme volatility that has often been unrelated to
the operating performance of a particular company. These broad market
fluctuations may adversely affect the market price of our common stock.
THE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE COULD
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Future sales of substantial amounts of our common stock or debt or other
securities convertible into common stock could adversely affect the market price
of our common stock. As of December 31, 2005, after adjusting prices to reflect
our two-for-one stock split effected on February 17, 2006, there were
outstanding stock options and warrants for 50,999,074 shares of common stock, of
which 49,865,160 were currently exercisable at an exercise price range between
$0.04 per share and $35.67 per share, with a weighted average exercise price of
$13.95 per share. In addition, in June 2003, we issued $400.0 million
28
of unsecured convertible notes that are currently convertible into 33,022,360
shares of our common stock at the conversion price of $12.1125. The conversion
of some or all of these notes will dilute the ownership interest of existing
stockholders.
OUR SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BY-LAW PROVISIONS MAY DETER
A THIRD-PARTY FROM ACQUIRING US AND MAY IMPEDE THE STOCKHOLDERS' ABILITY TO
REMOVE AND REPLACE OUR MANAGEMENT OR BOARD OF DIRECTORS.
Our board of directors has adopted a shareholder rights plan, the purpose of
which is to protect stockholders against unsolicited attempts to acquire control
of us that do not offer a fair price to all of our stockholders. The rights plan
may have the effect of dissuading a potential acquirer from making an offer for
our common stock at a price that represents a premium to the then current
trading price.
Our board of directors has the authority to issue, at any time, without further
stockholder approval, up to 5,000,000 shares of preferred stock, and to
determine the price, rights, privileges and preferences of those shares. An
issuance of preferred stock could discourage a third-party from acquiring a
majority of our outstanding voting stock. Additionally, our board of directors
has adopted certain amendments to our by-laws intended to strengthen the board's
position in the event of a hostile takeover attempt. These provisions could
impede the stockholders' ability to remove and replace our management and/or
board of directors.
Furthermore, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law, which may also dissuade a
potential acquirer of our common stock.
BEGINNING IN JANUARY 2006, WE WILL BE REQUIRED TO EXPENSE THE FAIR VALUE OF
STOCK OPTIONS GRANTED UNDER OUR STOCK INCENTIVE PLANS AND OUR NET INCOME AND
EARNINGS PER SHARE WILL BE SIGNIFICANTLY REDUCED AS A RESULT.
In December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment," or
SFAS 123R. SFAS 123R requires compensation cost relating to share-based payment
transactions be recognized in financial statements based on the fair value of
the equity or liability instruments issued. SFAS 123R covers a wide range of
share-based compensation arrangements including stock options, restricted stock
plans, performance-based awards, stock appreciation rights, and employee stock
purchase plans. SFAS 123R replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS No. 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees. However, SFAS No. 123 permitted entities to
continue to apply the guidance in APB Opinion No. 25, as long as the footnotes
to financial statements disclosed what net income would have been had the
preferable fair-value-based method been used. We will be required to adopt the
provisions of SFAS No. 123R in the first quarter of fiscal year 2006. Management
is currently evaluating the requirements of SFAS No. 123R. The adoption of SFAS
No. 123R is expected to have a material effect on our consolidated financial
statements. See Note 1, Nature of Business and Summary of Significant Accounting
Policies, to the Consolidated Financial Statements included elsewhere in this
Annual Report for the pro forma impact on net income and net income per share
from calculating stock-based compensation cost under the fair value method of
SFAS No. 123. However, the calculation of compensation cost for share-based
payment transactions after the effective date of SFAS No. 123R may be different
from the calculation of compensation cost under SFAS No. 123.
In December 2005, in recognition of the significance of the REVLIMID(R)
regulatory approval, the Board of Directors approved a resolution to grant the
2006 annual stock option awards in 2005 pursuant to the 1998 Stock Incentive
Plan, or the 1998 Plan, and the 1998 Non-Employee Directors' Incentive Plan. All
stock options awarded pursuant to the 1998 Plan were granted fully vested, with
half issued at an exercise price, or strike price, of $34.05 per option and the
other half issued at a strike price of $35.67 per option, which was at a premium
to the closing price of $32.43, adjusted for the February 17, 2006 two-for-one
stock split, of our common stock on the Nasdaq National Market on the grant date
of December 29, 2005. The Board's decision to grant these options was in
recognition of the REVLIMID(R) regulatory approval and in response to a review
of our long-term incentive compensation programs in light of changes in market
practices and recently issued changes in accounting rules resulting from the
issuance of FASB No. 123R, which we are required to adopt effective the first
quarter of 2006. Management believes that granting these options prior to the
adoption of FASB No. 123R will result in our not being required to recognize
cumulative compensation expense of approximately $70.8 million for the four-year
period ending December 31, 2009.
AVAILABLE INFORMATION
Our current reports on Form 8-K, quarterly reports on Form 10-Q and annual
reports on Form 10-K are electronically filed with or furnished to the
Securities and Exchange Commission, or SEC, and all such reports and amendments
to such reports filed have been and will be made available, free of charge,
through our website (http://www.celgene.com) as soon as reasonably practicable
after such filing. Such reports will remain available on our website for at
least twelve months. The contents of our website are not incorporated by
reference into this annual report. The public may read and copy any materials
filed by us with the SEC at the SEC's Public Reference Room at 100 F Street, NW,
Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
In November 2004, we purchased approximately 45 acres of land and several
buildings located in Summit, New Jersey, at a cost of $25.0 million. The
purchase of this site enables us to consolidate our New Jersey locations into
one corporate headquarters and provide the space needed to accommodate future
expansion. In September 2005, we purchased a site in Neuchatel, Switzerland, for
a U.S. dollar equivalency of approximately $3.2 million where we are currently
constructing a drug product manufacturing facility, which is scheduled for
completion during 2006. We also occupy the following facilities under lease
arrangements that have remaining lease terms greater than one-year.
29
o 73,500-square feet of laboratory and office space in Warren, New
Jersey. The two leases for this facility have terms ending in May 2007
and July 2010, respectively, and each have two five-year renewal
options. Annual rent for these facilities is approximately $0.8
million.
o 78,202-square feet of laboratory and office space in San Diego,
California. The lease for this facility has a term ending in August
2012 with one five-year renewal option. Annual rent for this facility
is approximately $2.0 million and is subject to specified annual
rental increases.
o 20,234-square feet of office and laboratory space in Cedar Knolls, New
Jersey. The leases for this facility have terms ending between
September 2007 and April 2009 with renewal options ranging from either
one or two additional five-year terms. Annual rent for this facility
is approximately $0.3 million and is subject to specified annual
rental increases.
o 11,000-square feet of office and laboratory space in Baton Rouge,
Louisiana. The lease for this facility has a term ending in May 2008
with one three-year renewal option. Annual rent for this facility is
approximately $0.1 million.
Under these lease arrangements, we also are required to reimburse the lessors
for real estate taxes, insurance, utilities, maintenance and other operating
costs. All leases are with unaffiliated parties.
ITEM 3. LEGAL PROCEEDINGS
We are not engaged in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ National Market under the symbol
"CELG." The following table sets forth, for the periods indicated, the
split-adjusted intra-day high and low prices per share of common stock on the
NASDAQ National Market:
-------------------------------------------------------------------------
HIGH LOW
-------------------------------
2005
Fourth Quarter $32.68 $22.59
Third Quarter 29.41 19.77
Second Quarter 21.62 16.60
First Quarter 17.62 12.35
2004
Fourth Quarter $16.29 $12.87
Third Quarter 15.05 11.66
Second Quarter 15.15 11.25
First Quarter 12.23 9.37
-------------------------------------------------------------------------
30
The last reported sales price per share of common stock on the NASDAQ National
Market on March 3, 2006 was $40.11. As of January 17, 2006, there were
approximately 47,965 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate paying any cash dividends on our common stock in
the foreseeable future.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes the equity compensation plans under which our
common stock may be issued as of December 31, 2005:
-----------------------------------------------------------------------------------------------------------------
NUMBER OF WEIGHTED- NUMBER OF SECURITIES
SECURITIES AVERAGE EXERCISE REMAINING AVAILABLE FOR
TO BE ISSUED UPON PRICE OF FUTURE ISSUANCE UNDER
EXERCISE OF OUTSTANDING EQUITY COMPENSATION PLANS,
OUTSTANDING OPTIONS, OPTIONS, EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a)
(a) (b) (c)
-----------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
security holders 47,835,010 $13.91 2,547,992
Equity compensation plans not approved
by security holders 3,164,064 $ 9.11 --
-----------------------------------------------------------------------
Total 50,999,074 $13.61 2,547,992
=================================================================================================================
The Anthrogenesis Corporation Qualified Employee Incentive Stock Option Plan has
not been approved by our stockholders. As a result of the acquisition of
Anthrogenesis on December 31, 2002, we acquired the Anthrogenesis Qualified
Employee Incentive Stock Option Plan, or the Qualified Plan, and the
Non-Qualified Recruiting and Retention Stock Option Plan, or the Non-Qualified
Plan. No future awards will be granted under the Non-Qualified Plan. The
Qualified Plan authorizes the award of incentive stock options, which are stock
options that qualify for special federal income tax treatment. The exercise
price of any stock option granted under the Qualified Plan may not be less than
the fair market value of the common stock on the date of grant. In general,
options granted under the Qualified Plan vest evenly over a four-year period and
expire ten years from the date of grant, subject to earlier expiration in case
of termination of employment. The vesting period is subject to certain
acceleration provisions if a change in control occurs. No award will be granted
under the Qualified Plan on or after December 31, 2008.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data should be read in conjunction
with our Consolidated Financial Statements and the related Notes thereto,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other financial information included elsewhere in this Annual
Report. The data set forth below with respect to our Consolidated Statement of
Operations for the year ended December 31, 2005, 2004 and 2003 and the
Consolidated Balance Sheet data as of December 31, 2005 and 2004 are derived
from our Consolidated Financial Statements
31
which are included elsewhere in this Annual Report and are qualified by
reference to such Consolidated Financial Statements and related Notes thereto.
The data set forth below with respect to our Consolidated Statements of
Operations for the years ended December 31, 2002 and 2001 and the Consolidated
Balance Sheets data as of December 31, 2003, 2002 and 2001 are derived from our
Consolidated Financial Statements, which are not included elsewhere in this
Annual Report. Our historical results are not necessarily indicative of future
results of operations.
------------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
IN THOUSANDS, EXCEPT PER SHARE DATA 2005 2004 2003 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenue $ 536,941 $ 377,502 $ 271,475 $ 135,746 $ 114,243
Costs and operating expenses 453,357 334,774 274,124 250,367 139,186
Other income, net 7,551 20,443 28,310 23,031 20,807
Equity in losses of associated company 6,923 -- -- -- --
Income tax provision (benefit) 20,556 10,415 718 (98) (1,232)
---------------------------------------------------------------------
Income (loss) from continuing
Operations 63,656 52,756 24,943 (91,492) (2,904)
Discontinued operations:
Gain on sale of chiral assets -- -- 750 1,000 992
---------------------------------------------------------------------
Net income (loss) applicable to common
stockholders $ 63,656 $ 52,756 $ 25,693 $ (90,492) $ (1,912)
====================================================================
Income (loss) from continuing operations
per common share(1):
Basic $ 0.19 $ 0.16 $ 0.08 $ (0.30) $ (0.01)
Diluted $ 0.18 $ 0.15 $ 0.07 $ (0.30) $ (0.01)
Discontinued operations per common share(1):
Basic $ -- $ -- $ 0.01 $ -- $ --
$ -- $ -- $ 0.01 $ -- $ --
Net income (loss) applicable to common
stockholders(1):
Basic $ 0.19 $ 0.16 $ 0.08 $ (0.29) $ (0.01)
Diluted $ 0.18 $ 0.15 $ 0.08 $ (0.29) $ (0.01)
Weighted average number of shares of
common stock outstanding (1):
Basic 335,512 327,738 323,548 309,348 300,432
Diluted 390,585 345,710 341,592 309,348 300,432
------------------------------------------------------------------------------------------------------------------------------------
(1) Amounts have been adjusted for the two-for-one stock splits effected in
February 2006 and October 2004.
32
------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
IN THOUSANDS 2005 2004 2003 2002 2001
------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS DATA
Cash, cash equivalents, and marketable
securities $ 724,260 $ 748,537 $ 666,967 $ 261,182 $ 310,041
Total assets 1,246,637 1,107,293 813,026 336,795 353,982
Long-term obligations under capital
leases and equipment notes payable 2 4 16 40 46
Convertible notes 399,984 400,000 400,000 -- 11,714
Accumulated deficit (170,754) (234,410) (287,166) (312,859) (222,367)
Stockholders' equity 635,775 477,444 331,744 281,814 310,425
------------------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
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. Our lead
products are: REVLIMID(R), which gained recent FDA approval in MDS patients with
the 5q chromosomal deletion and is under review by the FDA for multiple myeloma
and THALOMID(R) (thalidomide), which is currently marketed for the treatment of
erythema nodosum leprosum, or ENL, and under review by the FDA for the treatment
of multiple myeloma. Over the past several years, THALOMID(R) net sales have
grown steadily driven mainly by its off-label use 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 advanced our
broad portfolio of drug candidates in our product pipeline, including a pipeline
of IMiDs(R) compounds, which are a class of compounds proprietary to us and
having certain immunomodulatory and other biologically important properties. We
believe that the sales growth of THALOMID(R), the growth potential for
REVLIMID(R), the depth of our product pipeline, near-term regulatory activities
and clinical data reported at major medical conferences provide the catalyst for
future growth.
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
1A of this Annual Report on Form 10-K. Some of the more salient factors that we
are focused on are: the ability of REVLIMID(R) to successfully penetrate
relevant markets; competitive risks; and our ability to advance clinical and
regulatory programs.
THE ABILITY OF REVLIMID(R) TO SUCCESSFULLY PENETRATE RELEVANT MARKETS:
REVLIMID(R) was approved by the FDA on December 27, 2005 for the treatment of
certain myelodysplastic syndromes, or MDS, associated with a deletion 5q
cytogenetic abnormality and we have begun to execute our product launch
strategies, which includes among other things: registering physicians in the
RevAssist(sm) program, which is a proprietary risk-management distribution
program tailored specifically to help ensure the safe use of
33
REVLIMID(R); sponsoring numerous medical education programs designed to educate
physicians on MDS; and, partnering with contracted pharmacies to ensure safe and
rapid distribution of REVLIMID(R). In addition, we have implemented an expanded
access program to provide patients with relapsed or refractory multiple myeloma
free access to REVLIMID(R) while the FDA reviews our sNDA for that indication.
We do not, however, have long-term data on the use of the product and cannot
predict whether REVLIMID(R) will gain widespread acceptance, which will mostly
depend on the acceptance of regulators, physicians, patients and opinion
leaders. The success of REVLIMID(R) will also depend, in part, on prescription
drug coverage by government health agencies, commercial and employer health
plans, and other third-party payers. As an oral targeted cancer agent,
REVLIMID(R) qualifies as a Medicare Part D drug. Each Part D plan will review
REVLIMID(R) for addition to their formulary. As with all new products introduced
into the market, there may be some lag time before being reviewed on each plan's
formulary. We are encouraged that during this formulary review process, patients
have been given access to REVLIMID(R) and there have been no reported denials
for coverage.
COMPETITIVE RISKS: The landscape for the treatment of multiple myeloma and other
cancer and immune-inflammatory related diseases is highly competitive. While
competition could reduce THALOMID(R) sales and limit REVLIMID(R) launch
expectations, we do not believe that competing products will eliminate
REVLIMID(R) and THALOMID(R) use entirely. In addition, generic competition could
reduce THALOMID(R) sales. However, we own intellectual property which includes,
for example, U.S. patents covering our S.T.E.P.S.(R) distribution program for
the safer delivery of thalidomide, which all patients receiving thalidomide in
the United States must follow. 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, we expect
REVLIMID(R), which is now available commercially, to at least partially replace
THALOMID(R) sales.
ABILITY TO ADVANCE CLINICAL AND REGULATORY PROGRAMS: A major objective of our
on-going clinical trials programs is to broaden our knowledge about the full
potential of REVLIMID(R) and to continue to evaluate the drug in a broad range
of indications including lymphocytic leukemia, Non-Hodgkin's Lymphoma,
Amyloidosis and myelofibrosis. The significant near-term regulatory catalysts
that we are focused on include: the FDA's decision regarding our sNDA for
THALOMID(R) in multiple myeloma (a Prescription Drug User Fee Act, or PDUFA,
date of May 25, 2006 has been set); the FDA's decision regarding our sNDA for
REVLIMID(R) in relapsed or refractory multiple myeloma; and from an
international perspective, the European Medicines Agency, or EMEA, decision
regarding our Marketing Authorization Application, or MAA, for REVLIMID(R) in
MDS with the 5q chromosomal deletion.
COMPANY BACKGROUND
In 1986, we were spun off from Celanese Corporation and in July 1987 we
completed an initial public offering. Initially, our operations involved
research and development of chemical and biotreatment processes for the chemical
and pharmaceutical industries. Between 1990 and 1998, our revenues were derived
primarily from the development and supply of chirally pure intermediates to
pharmaceutical companies for use in new drug development. By 1998, sales of
chirally pure intermediates became a less integral part of our strategic focus
and, in January 1998 we sold the chiral intermediates business to Cambrex
Corporation.
In July 1998, we received approval from the FDA to market THALOMID(R) for use in
ENL, a complication of the treatment of leprosy, and in September 1998 we
commenced sales of THALOMID(R) in the United States. Since then, sales of
THALOMID(R) have grown significantly each year. In 2003, 2004 and 2005 we
recorded net THALOMID(R) sales of $223.7 million, $308.6 million and $387.8
million, respectively.
34
In April 2000, we signed a licensing and development agreement with Novartis
Pharma AG in which we granted to Novartis a license for FOCALIN(TM), our
chirally pure version of RITALIN(R). The agreement provided for significant
upfront and milestone payments to us based on the achievement of various stages
in the regulatory approval process. It also provided for us to receive royalties
on the entire family of RITALIN(R) products. Pursuant to the agreement we
retained the rights to FOCALIN(TM) and FOCALIN XR(TM) in oncology indications.
In August 2000, we acquired Signal Pharmaceuticals, Inc., now Celgene Research
San Diego, a privately held biopharmaceutical company focused on the discovery
and development of drugs that regulate genes associated with disease. In
November 2001, we licensed to Pharmion Corporation exclusive rights relating to
the development and commercial use of our intellectual property covering
thalidomide and S.T.E.P.S(R) in all countries outside of North America, Japan,
China, Taiwan and Korea (see our references below to the December 2004 amendment
with respect to these territories). In December 2002, we acquired Anthrogenesis
Corp., a privately held biotherapeutics company developing processes for the
recovery of stem cells from human placental tissue following the completion of a
successful full-term pregnancy for use in stem cell transplantation,
regenerative medicine and biomaterials for organ and wound repair.
In March 2003, we entered into a supply and distribution agreement with
GlaxoSmithKline, or GSK, to distribute, promote and sell ALKERAN(R), or
melphalan, a therapy approved by the FDA for the palliative treatment of
multiple myeloma and carcinoma of the ovary. The agreement requires that we
purchase ALKERAN(R) from GSK and distribute the products in the United States
under the Celgene label. The agreement has been extended through March 31, 2009.
In October 2004, we acquired Penn T Limited, or Penn T, a worldwide supplier of
THALOMID(R). Through manufacturing agreements entered into with a third party in
connection with this acquisition, we are able to control manufacturing for
THALOMID(R) worldwide and we also increase our participation in the potential
sales growth of THALOMID(R) in key international markets. In December 2004,
following our acquisition of Penn T, we amended the thalidomide supply agreement
with Pharmion and granted them license rights in additional territories. As
amended, the territory licensed to Pharmion is for all countries other than the
United States, Canada, Mexico, Japan and all provinces of China other than Hong
Kong.
On December 27, 2005, the FDA approved REVLIMID(R) for the treatment of patients
with transfusion-dependent anemia due to low- or intermediate-1-risk
myelodysplastic syndromes associated with a deletion 5q cytogenetic abnormality
with or without additional cytogenetic abnormalities.
Until 2003, we had sustained losses in each year since our incorporation in
1986. For the years ended December 31, 2003, 2004 and 2005 we posted net income
of $25.7 million, $52.8 million and $63.7 million, respectively, and at December
31, 2005 we had an accumulated deficit of $170.8 million. We expect to make
substantial additional expenditures to further develop and commercialize our
products. We expect that our rate of spending will accelerate as a result of
increases in clinical trial costs, expenses associated with regulatory approval
and expenses related to commercialization of products currently in development.
However, we anticipate these expenditures to be more than offset by increased
product sales, royalties, revenues from various research collaborations and
license agreements with other pharmaceutical and biopharmaceutical companies,
and investment income.
35
STOCK SPLIT
On December 27, 2005, we announced that the Board of Directors approved a
two-for-one stock split payable in the form of a 100 percent stock dividend.
Stockholders received one additional share for every share they owned as of the
close of business on February 17, 2006. The additional shares were distributed
on February 24, 2006. As a result, our authorized shares increased from
280,000,000 to 580,000,000 and shares outstanding increased from 172,057,726
shares to 344,115,452 shares as of the close of business on February 24, 2006.
All share and per share amounts in the consolidated financial statements have
been restated to reflect the two-for-one stock split effective February 17,
2006.
RESULTS OF OPERATIONS -
FISCAL YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
TOTAL REVENUE: Total revenue and related percentages for the years ended
December 31, 2005, 2004 and 2003, were as follows:
--------------------------------------------------------------------------------
% CHANGE
------------------
2004 2003
TO TO
(IN THOUSANDS $) 2005 2004 2003 2005 2004
--------------------------------------------------------------------------------
Net product sales:
THALOMID(R) $387,816 $308,577 $223,686 25.7% 38.0%
FOCALIN(TM) 4,210 4,177 2,383 0.8% 75.3%
ALKERAN(R) 49,748 16,956 17,827 193.4% (4.9%)
REVLIMID(R) 2,862 -- -- N/A
Other 989 861 557 14.9% 54.6%
------------------------------
Total net product sales $445,625 $330,571 $244,453 34.8% 35.2%
Collaborative agreements
and other revenue 41,334 20,012 15,174 106.5% 31.9%
Royalty revenue 49,982 26,919 11,848 85.7% 127.2%
------------------------------
Total revenue $536,941 $377,502 $271,475 42.2% 39.1%
================================================================================
NET PRODUCT SALES:
2005 COMPARED TO 2004: THALOMID(R) net sales were higher in 2005, as compared to
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 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 2005 were
sales of $8.7 million from our U.K. subsidiary, CUK II, to Pharmion Corporation.
Focalin(TM) net sales, which are dependent on the timing of orders from Novartis
for their commercial distribution, were essentially flat when compared to the
prior year period. ALKERAN(R) net sales were higher in 2005, as compared to
2004, due to price increases implemented during 2005 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) for
injection and consequently more consistent end-market buying patterns.
REVLIMID(R) was approved by the FDA on December 27, 2005 and the first
commercial sales were recorded relating to initial stocking at certain
36
contracted pharmacies that were registered under the RevAssist(TM) program.
Other net product sales consist of sales of dehydrated human amniotic membrane
for use in ophthalmic applications, which are generated through our Celgene
Cellular Therapeutics division.
2004 COMPARED TO 2003: THALOMID(R) net sales were higher in 2004, as compared to
2003, primarily due to price increases implemented in the second half of 2003
and in the first nine months of 2004. The total number of prescriptions, which
increased 9.4% from the prior year period, was offset by lower average daily
doses. FOCALIN(TM) net sales were higher in 2004, as compared to 2003, due to
the timing of shipments to Novartis for their commercial distribution.
ALKERAN(R) net sales were lower in 2004, as compared to 2003, due to supply
disruptions earlier in the year, which lead to inconsistent supplies of
ALKERAN(R) IV and consequently inconsistent end-market buying patterns. Other
net product sales consist of sales of dehydrated human amniotic membrane for use
in ophthalmic applications, which are generated through our Celgene Cellular
Therapeutics division.
GROSS TO NET SALES ACCRUALS: We record gross to net sales accruals for sales
returns, sales discounts, Medicaid rebates and distributor charge-backs and
services. Allowance for sales returns are based on the actual returns history
for consumed lots and the trend experience for lots where product is still being
returned. Sales discounts accruals are based on payment terms extended to
customers. Medicaid rebate accruals are based on historical payment data and
estimates of future Medicaid beneficiary utilization. Distributor charge-back
accruals are based on the differentials between product acquisition prices paid
by wholesalers and lower government contract pricing paid by eligible customers
covered under federally qualified programs. Distributor services accruals are
based on actual fees paid to wholesale distributors for services provided.
Medicaid rebates and distributor charge-backs increased due to higher sales
volumes and price increases, which increase the respective rebate and chargeback
amounts. The gross to net accrued balances were $34.2 million and $19.7 million
at December 31, 2005 and 2004, respectively. Gross to net sales accruals for the
years ended December 31, 2005, 2004 and 2003 were as follows:
--------------------------------------------------------------------------------
% CHANGE
----------------
2004 2003
TO TO
(IN THOUSANDS $) 2005 2004 2003 2005 2004
--------------------------------------------------------------------------------
Gross product sales $548,853 $385,055 $283,208 42.5% 36.0%
Less: Gross to net sales
accruals
Returns and allowances 21,256 16,279 12,659 30.6% 28.6%
Discounts 10,948 7,448 5,503 47.0% 35.3%
Medicaid rebates 35,098 15,780 12,975 122.4% 21.6%
Distributor charge-backs 33,658 14,977 7,618 124.7% 96.6%
Distributor services 2,268 -- -- N/A N/A
------------------------------
Total net product sales $445,625 $330,571 $244,453 34.8% 35.2%
================================================================================
COLLABORATIVE AGREEMENTS AND OTHER REVENUE: Revenues from collaborative
agreements and other sources in 2005 included a $20.0 million milestone payment
from Novartis for the NDA approval of Focalin XR(TM); $13.9 million related to
our sponsored research, license and other agreements with Pharmion Corporation;
$5.1 million from umbilical cord blood enrollment, collection and storage fees
generated through our LifeBank USA(SM) business; $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, $0.9 million from other
miscellaneous research and development agreements. Revenues from collaborative
agreements and other sources in 2004 included a
37
$7.5 million milestone payment from Novartis related to their FOCALIN(R) XR NDA
submission; $7.5 million related to our sponsored research, license and other
agreements with Pharmion Corporation; $3.7 million of umbilical cord blood
enrollment, collection and storage fees generated through our Celgene Cellular
Therapeutics division; $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 $0.8
million from other miscellaneous research and development and licensing
agreements. Revenues from collaborative agreements and other sources in 2003
included $6.0 million related to the agreement to terminate the Gelclair(TM)
co-promotion agreement with OSI Pharmaceuticals Inc.; $4.3 million of
thalidomide research and development funding and S.T.E.P.S. licensing fees
received in connection with the Pharmion collaboration agreements; $1.3 million
of reimbursements from Novartis for shipments of bulk raw material used in the
formulation of FOCALIN(R) XR and utilized in clinical studies conducted by
Novartis; $2.9 million of umbilical cord blood enrollment, collection and
storage fees generated through our Stem Cell Therapies segment; and $0.7 million
from other miscellaneous research and development and licensing agreements.
ROYALTY REVENUE: Royalty revenue in 2005 included $48.5 million of royalties
received from Novartis on sales of their entire family of Ritalin(R) drugs and
Focalin XR(TM), which gained FDA approval on May 27, 2005; $0.6 million of
royalties received from Pharmion on their commercial sales of THALOMID(R), and
$0.8 million of miscellaneous other royalties. Royalty revenue in 2004 and 2003
was $26.9 million and $11.8 million, respectively, and consisted solely of
royalties received from Novartis on sales of their entire family of RITALIN(R)
drugs. The year-over-year increases 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 years
ended December 31, 2005, 2004 and 2003 were as follows:
---------------------------------------------------------------------------
(IN THOUSANDS $) 2005 2004 2003
---------------------------------------------------------------------------
Cost of goods sold $ 80,727 $ 59,726 $ 52,950
Increase from prior year $ 21,001 $ 6,776 $ 32,083
Percentage increase from prior year 35.2% 12.8% 153.7%
Percentage of net product sales 18.1% 18.1% 21.7%
===========================================================================
2005 COMPARED TO 2004: Cost of goods sold were higher in 2005, as compared to
2004, primarily due to higher royalties on THALOMID(R) net sales and higher
ALKERAN(R) costs as a result of higher sales volumes. As a percentage of net
product sales, cost of goods sold in 2005 were in line with 2004.
2004 COMPARED TO 2003: Cost of goods sold increased in 2004 from 2003, primarily
as a result of higher royalties paid on THALOMID(R), partially offset by lower
ALKERAN(R) costs. As a percentage of net product sales, however, cost of goods
sold decreased primarily due to lower ALKERAN(R) costs. Profit margins on
THALOMID(R) remained flat, as the increase in cost of goods sold (resulting from
higher royalties paid) were offset by higher net sales (which were due to price
increases implemented in the second half of 2003 and in the first nine months of
2004).
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
38
consumable research supplies, regulatory and quality expenditures and allocated
facilities charges such as building rent and utilities.
Research and development expenses and related percentages for the years ended
December 31, 2005, 2004 and 2003 were as follows:
------------------------------------------------------------------------------
(IN THOUSANDS $) 2005 2004 2003
------------------------------------------------------------------------------
Research and development expenses $ 190,834 $ 160,852 $ 122,700
Increase from prior year $ 29,982 $ 38,152 $ 37,776
Percentage increase from prior year 18.6% 31.1% 44.5%
Percentage of total revenue 35.5% 42.6% 45.2%
==============================================================================
2005 COMPARED TO 2004: Research and development expenses were higher in 2005, as
compared to 2004, primarily due to higher costs to support further clinical
development and regulatory advancement of REVLIMID(R) Phase II and Phase III
programs in myelodysplastic syndromes and multiple myeloma, including the
ongoing pivotal Phase III MDS deletion 5q trial to support our MAA seeking
approval to market REVLIMID(R) in Europe. Research and development expenses are
targeted to increase 20 to 25 percent in 2006 in support of our ongoing global
regulatory filings, late stage clinical trials and clinical progress in multiple
proprietary development programs.
2004 COMPARED TO 2003: Research and development expenses increased by $38.2
million in 2004 from 2003, primarily due to increased spending in various
late-stage regulatory programs such as Phase II regulatory programs for
REVLIMID(R) in myelodysplastic syndromes and multiple myeloma, including ongoing
REVLIMID(R) Phase III SPA trials in multiple myeloma.
Research and development expenses in 2005 consisted of $73.9 million spent on
human pharmaceutical clinical programs; $69.1 million spent on other
pharmaceutical programs, including toxicology, analytical research and
development, drug discovery, quality assurance and regulatory affairs; $36.9
million spent on biopharmaceutical discovery and development programs; and $10.9
million spent on placental stem cell and biomaterials programs. These
expenditures support multiple core programs, including REVLIMID(R), THALOMID(R),
CC-10004, CC-4047, CC-11006, TNF(alpha) inhibitors, other investigational
compounds, such as kinase inhibitors, benzopyranones and ligase inhibitors and
placental and cord blood derived stem cell programs. Research and development
expenses in 2004 consisted of $67.0 million spent on human pharmaceutical
clinical programs; $44.7 million spent on other human pharmaceutical programs,
including toxicology, analytical research and development, drug discovery,
quality assurance and regulatory affairs; $40.6 million spent on
biopharmaceutical discovery and development programs; and $8.6 million spent on
placental stem cell and biomaterials programs. In 2003, $47.6 million was spent
on human pharmaceutical clinical programs; $34.4 million was spent on other
human pharmaceutical programs, including toxicology, analytical research and
development, drug discovery, quality assurance and regulatory affairs; $33.7
million was spent on biopharmaceutical discovery and development programs; and
$7.0 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
39
the various stages of clinical development, which would significantly impact the
costs incurred to bring a project to completion.
For information about the commercial and development status and target diseases
of our drug compounds, refer to the product overview table contained in Part I,
Item I of this annual report.
In general, the estimated times to completion within the various stages of
clinical development are as follows:
-------------------------------------------------------------------------------
CLINICAL PHASE ESTIMATED COMPLETION
TIME
-------------------------------------------------------------------------------
Phase I 1-2 years
Phase II 2-3 years
Phase III 2-3 years
-------------------------------------------------------------------------------
Due to the significant risks and uncertainties inherent in preclinical testing
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 in completing a project.
SELLING, GENERAL AND ADMINISTRATIVE: Selling expenses consist primarily of
salaries and benefits for sales and marketing and customer service personnel and
other commercial expenses to support our sales force. General and administrative
expenses consist primarily of salaries and benefits, outside services for legal,
audit, tax and investor activities and allocations of facilities costs,
principally for rent, utilities and property taxes.
Selling, general and administrative expenses and related percentages for the
years ended December 31, 2005, 2004 and 2003 were as follows:
-----------------------------------------------------------------------------
(IN THOUSANDS $) 2005 2004 2003
-----------------------------------------------------------------------------
Selling, general and administrative
expenses $ 181,796 $ 114,196 $ 98,474
Increase from prior year $ 67,600 $ 15,722 $ 32,302
Percentage increase from prior year 59.2% 16.0% 48.8%
Percentage of total revenue 33.9% 30.3% 36.3%
=============================================================================
2005 COMPARED TO 2004: Selling, general and administrative expenses were higher
in 2005, as compared to 2004, primarily due to the inclusion in 2005 of
approximately $40.0 million of REVLIMID(R) pre-launch commercial expenses, such
as global market research, marketing and educational programs and sales and
marketing training and an increase of approximately $22.7 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, offset by lower
THALOMID(R) and ALKERAN(R) related marketing expenses. Included in selling,
general and administrative expenses in 2005 was $2.5 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 targeted to increase 10 to 15 percent in
2006; in addition, international selling, general and administrative expenses
are expected to be in a range
40
of $30 to $35 million for ongoing expansion of commercial and manufacturing
capabilities in Europe. Actual expenses will be dependent on the progress of
discussions with the international regulatory authorities.
2004 COMPARED TO 2003: Selling, general and administrative expenses increased by
$15.7 million in 2004 from 2003, as a result of an increase of approximately
$12.0 million in general administrative and medical affairs expenses primarily
due to higher headcount-related expenses and an increase of approximately $3.6
million in sales force expenses primarily due to the creation of a sales
operations group. The sales operations group, among other things, manages
pricing and reimbursement, corporate accounts, customer service and government
affairs, as well as sales fleet expenses.
INTEREST AND OTHER INCOME, NET: Interest and other income, net in 2005 included
$27.7 million of interest and realized gains on our cash, and cash equivalents
and marketable securities portfolio, offset by unrealized losses of $6.9 million
for changes in the estimated value of our investment in EntreMed, Inc. warrants
prior to our March 31, 2005 exercise, $3.1 million for other-than-temporary
impairment write-downs recognized on two securities held in our
available-for-sales marketable securities portfolio and $0.7 million of foreign
exchange and other miscellaneous net losses. Interest and other income, net in
2004 included $28.3 million of interest and realized gains on our cash, and cash
eqivalents and marketable securities portfolio and $3.6 million of foreign
exchange and other miscellaneous net gains, offset by an unrealized losses of
$1.9 million for changes in the estimated value of our investment in EntreMed,
Inc. warrants. Interest and other income, net in 2003 included $21.8 million of
interest and realized gains on our cash, and cash equivalents and marketable
securities portfolio and $16.6 million of unrealized gains for changes in the
estimated value of our investment in EntreMed, Inc. warrants.
EQUITY IN LOSSES OF AFFILIATED COMPANIES: 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 that are
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 $6.9 million in 2005,
which includes a charge of $4.4 million to write down the value of the
investment ascribed to in-process research and development, $0.2 million related
to amortization of acquired intangible assets, $1.6 million to record our share
of EntreMed losses and a charge of $0.7 million to eliminate our share of
THALOMID(R) royalties payable to EntreMed, Inc. During 2003, we recorded $4.4
million for our share of the EntreMed losses until the investment was written
down to zero in the third quarter of 2003.
On February 2, 2006 we, along with a group of other investors, entered into an
agreement to invest $30.0 million in EntreMed in return for newly issued
EntreMed common stock and warrants to purchase additional shares of EntreMed
common stock at a conversion price of $2.3125 per warrant. Our portion of the
investment was $2.0 million for which we received 864,864 shares of EntreMed
common stock and 432,432 warrants. The warrants will be accounted for at fair
value with changes in fair value recorded through earnings.
INTEREST EXPENSE: Interest expense was $9.5 million, $9.6 million and $5.7
million in 2005, 2004 and 2003, respectively, and primarily reflects interest
expense and amortization of debt issuance costs on the $400 million convertible
notes issued on June 3, 2003. Interest expense in 2003 only includes seven
months of interest expense and amortization of debt issuance costs.
INCOME TAX BENEFIT (PROVISION): The income tax provision for 2005 was $20.6
million and reflects tax expense impacted by certain expenses incurred outside
the United States for which no tax benefits can be recorded offset by the
benefit from elimination of valuation allowances totaling $42.6 million as of
March 31, 2005, which was based on the fact that we determined it was more
likely than not that certain benefits of our deferred tax assets
41
would be realized. This determination was based upon the external Independent
Data Monitoring Committee's, or IDMC, analyses of two Phase III Special Protocol
Assessment 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.
The income tax provision for 2004 was $10.4 million, which reflects an effective
underlying tax rate of 16.5%. Our tax rate in 2004 rose from 2003 primarily due
to federal tax expense and decreases in the valuation allowance available to
offset income tax expense. In 2003, our income tax provision was $0.7 million
and included income tax expense of $1.1 million for federal and state purposes,
offset by a tax benefit of $0.4 million from the sale of certain state net
operating loss carryforwards.
GAIN ON SALE OF CHIRAL ASSETS: In January 1998, we completed the sale of our
chiral intermediate business to Cambrex Corporation. Pursuant to the minimum
royalty provisions of the agreement, we received $0.8 million in 2003.
NET INCOME: Net income and per common share amounts for the years ended December
31, 2005, 2004 and 2003 were as follows:
---------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2005 2004 2003
---------------------------------------------------------------------------
Net income $ 63,656 $ 52,756 $ 24,943
Per common share amounts:
Basic $ 0.19 $ 0.16 $ 0.08
Diluted $ 0.18 $ 0.15 $ 0.08
Weighted average number of shares of
common stock utilized to calculate
per common share amounts:
Basic 335,512 327,738 323,548
Diluted 390,585 345,710 341,592
===========================================================================
Amounts have been adjusted for the two-for-one stock splits effected in February
2006 and October 2004.
42
2005 COMPARED TO 2004: Net income and per common share amounts were higher in
2005, as compared to 2004, primarily due to an increase in total revenues of
$159.4 million (driven primarily by a $79.2 million increase in THALOMID(R) net
sales, a $32.8 million increase in ALKERAN(R) net sales, a $21.8 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 $118.6 million (driven by REVLIMID(R) clinical and regulatory
research and development costs and REVLIMID(R) pre-launch selling, general and
administrative costs) and unrealized losses recorded in 2005 of $6.9 million for
changes in the estimated value of our investment in EntreMed, Inc. warrants
prior to our March 31, 2005 exercise, $3.1 million for other-than-temporary
impairment write-downs recognized on two securities held in our
available-for-sales marketable securities portfolio and our share of equity
losses of EntreMed, Inc. of $6.9 million.
2004 COMPARED TO 2003: Income from continuing operations increased in 2004 from
2003 due to an increase in total revenue of $106.0 million (attributable
primarily to an increase in THALOMID(R) net sales) partly offset by higher
operating expenses of $60.7 million and a decrease in interest and other income,
net of $7.9 million (attributable to a $1.9 million decrease in fair value of
EntreMed warrants versus a prior year increase of $16.6 million partly offset by
an increase in interest income and foreign exchange gains and the inclusion in
2003 of equity losses of associated companies of $4.4 million).
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $41.9 million in 2005, as compared
to $155.9 million in 2004. The decrease was primarily due to higher working
capital levels and higher income taxes paid, partially offset by higher net
income in 2005. Net cash provided by operating activities in 2004 increased
$137.2 million from 2003. The increase in 2004 compared to 2003 was primarily
due to higher earnings, the receipt of $80.0 million in connection with the
December 2004 THALOMID(R) development and commercialization collaboration with
Pharmion and a decrease in net working capital levels.
Net cash used in investing activities was $103.1 million in 2005 and included
cash outflows of $35.9 million for capital expenditures, $7.2 million for
acquisition costs and working capital adjustments related to the October 2004
acquisition of Penn T, $49.5 million for net purchases of available-for-sale
marketable securities and $10.5 million for the exercise of warrants to purchase
7,000,000 shares of EntreMed common stock. Net cash used in investing activities
was $92.6 million in 2004 and included cash outflows of $109.9 million for the
October 2004 acquisition of Penn T, $7.0 million for an investment and $36.0
million for capital expenditures. Partially offsetting these outflows were cash
inflows of $60.3 million from net sales of available-for-sale marketable
securities. Net cash used in investing activities was $443.6 million in 2003 and
included cash outflows of $421.2 million for net purchases of available-for-sale
marketable securities, $12.0 million for the purchase of a Pharmion Corporation
senior convertible note and $11.2 million for capital expenditures.
Net cash provided by financing activities was $52.6 million, $16.0 million and
$399.7 million in 2005, 2004 and 2003, respectively, and included cash inflows
from the exercise of common stock options and warrants of $52.6 million, $16.0
million and $12.0 million in 2005, 2004 and 2003, respectively. Included in 2003
were cash inflows of $387.8 million from net proceeds of the issuance of our
convertible notes on June 3, 2003.
Currency rate changes negatively impacted our cash and cash equivalents balances
by $3.3 million and $4.4 million in 2005 and 2004, respectively. At December 31,
2005, cash, cash equivalents and
43
marketable securities were $724.3 million, a decrease of $24.3 million from
December 31, 2004 levels. The decrease was primarily due to a decrease in cash
and cash equivalents and a reduction in unrealized gains on our
available-for-sale marketable securities portfolio.
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
increased commercial expenses, such as marketing and market research. 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
The following table sets forth our contractual obligations as of December 31,
2005:
--------------------------------------------------------------------------------
PAYMENT DUE BY PERIOD
---------------------
LESS THAN MORE THAN
(IN MILLIONS $) 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS TOTAL
--------------------------------------------------------------------------------
Convertible note obligations $ -- $ 400.0 $ -- $ -- $ 400.0
Operating leases 3.4 5.5 5.0 3.9 17.8
ALKERAN(R) supply agreements 34.7 67.3 -- -- 102.0
Other contract commitments 4.5 7.3 2.0 -- 13.8
---------------------------------------------------
$ 42.6 $ 480.1 $ 7.0 $ 3.9 $ 533.6
================================================================================
CONVERTIBLE DEBT: In June 2003, we issued an aggregate principal amount of
$400.0 million of unsecured convertible notes. The convertible notes have a
five-year term and a coupon rate of 1.75% payable semi-annually. The convertible
notes can be converted at any time into 33,022,360 shares of common stock at a
stock-split adjusted conversion price of $12.1125 per share. At December 31,
2005, the fair value of the convertible notes exceeded the carrying value of
$400.0 million by $660.0 million (for more information see Note 10 of the Notes
to the Consolidated Financial Statements).
OPERATING (FACILITIES) LEASES: We occupy the following facilities under lease
arrangements that have remaining lease terms greater than one year.
o 73,500-square feet of laboratory and office space in Warren, New
Jersey. The two leases for this facility have terms ending in May 2007
and July 2010, respectively, and each have two five-year renewal
options. Annual rent for these facilities is $0.8 million.
o 78,202-square feet of laboratory and office space in San Diego,
California. The lease for this facility has a term ending in August
2012 with one five-year renewal option. Annual rent for this facility
is $2.0 million and is subject to specified annual rental increases.
o 20,000-square feet of office and laboratory space in Cedar Knolls, New
Jersey. The leases for this facility have terms ending between
September 2007 and April 2009 with renewal options ranging from either
one or two additional five-year terms. Annual rent for this facility
is $0.3 million and is subject to specified annual rental increases.
44
o 11,000 square feet of laboratory space in Baton Rouge, Louisiana. The
lease for this facility has a term ending in May 2008 with one
three-year renewal option. Annual rent for this facility is $0.1
million.
Under these lease arrangements, we also are required to reimburse the lessors
for real estate taxes, insurance, utilities, maintenance and other operating
costs. All leases are with unaffiliated parties.
For a schedule of payments related to operating leases, refer to Note 18 of the
Notes to the Consolidated Financial Statements.
ALKERAN(R) PURCHASE COMMITMENTS: In March 2003, we entered into a supply and
distribution agreement with GlaxoSmithKline, or GSK, to distribute, promote and
sell ALKERAN(R) (melphalan), a therapy approved by the FDA for the palliative
treatment of multiple myeloma and carcinoma of the ovary. Under the terms of the
agreement, we purchase 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 us to purchase certain minimum quantities each year under a
take-or-pay arrangement. The agreement has been extended through March 31, 2009.
On December 31, 2005, the remaining minimum purchase requirements under the
agreement totaled $102.0 million.
OTHER CONTRACT COMMITMENTS: We signed an exclusive license agreement with CMCC,
which terminated any existing thalidomide analog agreements between CMCC and
EntreMed and directly granted to Celgene an exclusive worldwide license for the
analog patents. Under the agreement, we are required to pay CMCC $2.0 million
between 2005 and 2006. The outstanding balance related to this agreement was
$1.0 million at December 31, 2005. Additional payments are possible under the
agreement depending on the successful development and commercialization of
thalidomide analogs.
In connection with the acquisition of Penn T on October 21, 2004, we 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 December 31, 2005,
the remaining cost to be incurred was approximately $7.8 million.
In October 2003, we signed an agreement with Institute of Drug Technology
Australia Limited, or IDT, for the manufacture of finished dosage form of
THALOMID(R) capsules. The agreement requires minimum payments for THALOMID(R)
capsules of $4.7 million for the three-year term commencing with the FDA's
approval of IDT as an alternate supplier. The FDA granted IDT approval to
manufacture THALOMID(R) capsules in April 2005. The agreement provides us with
additional capacity and reduces our dependency on one manufacturer for the
production of THALOMID(R). At December 31, 2005, the remaining minimum
obligation under this agreement was $4.0 million.
NEW ACCOUNTING PRINCIPLES
In December 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 123R, "Share-Based Payment," or
SFAS 123R. SFAS 123R requires compensation cost relating to share-based payment
transactions be recognized in financial statements based on the fair value of
the equity or liability instruments issued. SFAS 123R covers a wide range of
share-based compensation arrangements including stock options, restricted stock
plans, performance-based awards, stock appreciation rights, and employee stock
purchase plans. SFAS 123R replaces SFAS No. 123, "Accounting for Stock-Based
Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees." SFAS No. 123, as originally issued in 1995, established as
preferable a fair-value-based method of accounting for share-based payment
transactions with employees.
45
However, SFAS No. 123 permitted entities to continue to apply the guidance in
APB Opinion No. 25, as long as the footnotes to financial statements disclosed
what net income would have been had the preferable fair-value-based method been
used. We will be required to adopt the provisions of SFAS No. 123R in the first
quarter of fiscal year 2006. Management is currently evaluating the requirements
of SFAS No. 123R. The adoption of SFAS No. 123R is expected to have a material
effect on our consolidated financial statements. See Note 1, Nature of Business
and Summary of Significant Accounting Policies, to the Consolidated Financial
Statements included elsewhere in this Annual Report for the pro forma impact on
net income and net income per share from calculating stock-based compensation
cost under the fair value method of SFAS No. 123. However, the calculation of
compensation cost for share-based payment transactions after the effective date
of SFAS No. 123R may be different from the calculation of compensation cost
under SFAS No. 123.
In December 2005, in recognition of the significance of the REVLIMID(R)
regulatory approval, the Board of Directors approved a resolution to grant the
2006 annual stock option awards in 2005 pursuant to the 1998 Stock Incentive
Plan, or the 1998 Plan, and the 1995 Non-Employee Directors' Incentive Plan. All
stock options awarded pursuant to the 1998 Plan were granted fully vested, with
half issued at an exercise price, or strike price, of $34.05 per option and the
other half issued at a strike price of $35.67 per option, which was at a premium
to the closing price of $32.43 per share, adjusted for the February 17, 2006
two-for-one stock split, of our common stock on the Nasdaq National Market on
the grant date of December 29, 2005. The Board's decision to grant these options
was in recognition of the REVLIMID(R) regulatory approval and in response to a
review of our long-term incentive compensation programs in light of changes in
market practices and recently issued changes in accounting rules resulting from
the issuance of FASB No. 123R, which we are required to adopt effective the
first quarter of 2006. Management believes that granting these options prior to
the adoption of FASB No. 123R will result in our not being required to recognize
cumulative compensation expense of approximately $70.8 million for the four-year
period ending December 31, 2009.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment
of ARB No. 43. This Statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). The
new rule requires that items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal" as stated in ARB
No. 43. Additionally, SFAS 151 requires that the allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 is effective for fiscal years beginning after
June 15, 2005. The Company is currently evaluating the potential impact of this
pronouncement on its financial position and results of operations.
Emerging Issues Task Force, or EITF, Issue No. 03-01, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," or
EITF 03-01, was issued in February 2004. The provisions of EITF 03-01 for
measuring and recognizing an other-than-temporary impairment proved
controversial and as a result, FASB Staff Position ("FSP") FSP 115-1 and FSP
124-1 "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" was issued in November 2005, clarifying the requirements of
EITF 03-01 concerning the evaluation of whether an impairment is
other-than-temporary. FSP FAS 115-1 and FAS 124-1 refers to SEC Staff Accounting
Bulletin ("SAB") Topic 5M, "Other Than Temporary Impairment of Certain
Investments In Debt And Equity Securities," and EITF Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interest in Securitized Financial Assets," to evaluate whether an
impairment is other than temporary. We are in compliance with these requirements
and continue to monitor these developments to assess the possible impact on our
financial position and results of operations.
46
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one which is both important to the portrayal of
our financial condition and results of operation and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. While
our significant accounting policies are more fully described in Note 1 of the
Notes to the Consolidated Financial Statements included in this annual report,
we believe the following accounting policies to be critical:
REVENUE RECOGNITION ON COLLABORATION AGREEMENTS: We have formed collaborative
research and development agreements and alliances with several pharmaceutical
companies. These agreements are in the form of research and development and
license agreements. The agreements are for both early- and late-stage compounds
and are focused on specific disease areas. For the early-stage compounds, the
agreements are relatively short-term agreements that are renewable depending on
the success of the compounds as they move through preclinical development. The
agreements call for nonrefundable upfront payments, milestone payments on
achieving significant milestone events, and in some cases ongoing research
funding. The agreements also contemplate royalty payments on sales if and when
the compound receives FDA marketing approval.
Our revenue recognition policies for all nonrefundable upfront license fees and
milestone arrangements are in accordance with the guidance provided in the
Securities and Exchange Commission's Staff Accounting Bulletin, or SAB, No. 101,
"Revenue Recognition in Financial Statements," as amended by SAB No. 104,
"Revenue Recognition," or SAB 104. In addition, we follow the provisions of
Emerging Issues Task Force Issue, or EITF, 00-21, "Revenue Arrangements with
Multiple Deliverables," or EITF 00-21, for multiple element revenue arrangements
entered into or materially amended after June 30, 2003. EITF 00-21 provides
guidance on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into separate
units of accounting for revenue recognition purposes, and if this division is
required, how the arrangement consideration should be allocated among the
separate units of accounting. If the deliverables in a revenue arrangement
constitute separate units of accounting according to the EITF's separation
criteria, the revenue-recognition policy must be determined for each identified
unit. If the arrangement is a single unit of accounting, the revenue-recognition
policy must be determined for the entire arrangement.
In accordance with SAB 104, upfront payments are recorded as deferred revenue
and recognized over the estimated service period of the last item of performance
to be delivered. If the estimated service period is subsequently modified, the
period over which the upfront fee is recognized is modified accordingly on a
prospective basis. Revenues from the achievement of research and development
milestones, which represent the achievement of a significant step in the
research and development process are recognized when and if the milestones are
achieved.
GROSS TO NET SALES ACCRUALS FOR SALES RETURNS, MEDICAID REBATES AND CHARGEBACKS:
We record an allowance for sales returns based on the actual returns history for
consumed lots and the trend experience for lots where product is still being
returned. We record sales discounts accruals based on payment terms extended to
customers. We record Medicaid rebate accruals based on historical payment data
and estimates of Medicaid beneficiary utilization. We record distributor
charge-back accruals based on the differentials between product acquisition
prices paid by wholesalers and lower government contract pricing paid by
eligible customers covered under federally qualified programs. We record
distributor services accruals based on actual fees paid to wholesale
distributors for services provided.
47
INCOME TAXES: We utilize 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. We provide a valuation
allowance when it is more likely than not that deferred tax assets will not be
realized.
OTHER-THAN-TEMPORARY IMPAIRMENTS OF AVAILABLE-FOR-SALE MARKETABLE SECURITIES: A
decline in the market value of any available-for-sale marketable security below
its cost that is deemed to be other-than-temporary results in a reduction in
carrying amount to fair value. The impairment is charged to earnings and a new
cost basis for the security established. Factors evaluated to determine if an
investment is other-than-temporarily impaired include significant deterioration
in the earnings performance, credit rating, asset quality, or business prospects
of the issuer; adverse changes in the general market condition in which the
issuer operates; 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; and, issues that raise concerns about the issuer's ability to
continue as a going concern. At the end of 2005, we determined that two
securities with an amortized cost basis of $7.0 million had sustained an
other-than-temporary impairment and recognized a $3.1 million impairment loss,
which was recorded in interest and other income, net.
ACCOUNTING FOR LONG-TERM INCENTIVE PLANS: The recorded liability for long-term
incentive plans was $8.3 million as of December 31, 2005. Plan payouts may be in
the range of 0% to 200% of the participant's salary for the 2005 Plan, 0% to
150% of the participant's salary for the 2006 Plan and 0% to 200% of the
participant's salary for the 2007 Plan. The 2006 performance cycle was approved
by the Management Compensation and Development Committee of the Board of
Directors on January 19, 2006 and began on January 1, 2006 and will end on
December 31, 2008, or the 2008 Plan. Plan payouts may be in the range of 0% to
200% of the participant's salary for the 2008 Plan. The estimated payout for the
2005 Plan is $4.5 million and maximum potential payouts are $4.5 million, $6.8
million and $7.2 million for the 2006, 2007 and 2008 Plans, respectively. The
Company accrues the long-term incentive liability over each three-year cycle.
Prior to the end of a three-year cycle, our accrual is based on an estimate of
our level of achievement during the cycle. Upon a change in control,
participants will be entitled to an immediate payment equal to their target
award, or, if higher, an award based on actual performance through the date of
the change in control.
ITEM 7A. 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. At December 31,
2005, our market risk sensitive instruments consisted of marketable securities
available for sale and unsecured convertible notes issued by us.
The Company may periodically utilize foreign currency denominated forward
contracts to hedge currency fluctuations of transactions denominated in
currencies other than the functional currency. At December 31, 2005, we had one
foreign currency forward contract outstanding to buy U.S. dollars and sell Swiss
francs for a notional amount of $62.0 million. The forward contract expires on
April 13, 2006 and is an economic hedge of a U.S. dollar payable of a Swiss
foreign entity, which is remeasured through earnings each period based on
changes in the spot rate. The unrealized loss on the forward contract, based on
its fair value at December 31, 2005, was approximately $0.2 million, and was
recorded in accrued expenses with the offsetting loss recorded in earnings.
Assuming that the year-end exchange rates between the U.S. dollar and the Swiss
franc were to adversely change by a hypothetical ten percent, the change in the
fair value of the contract would decrease by approximately $6.4 million.
However, since the contract hedges foreign currency payables, any change in the
fair value of the contract would be offset by a change in the underlying value
of the hedged item.
MARKETABLE SECURITIES AVAILABLE FOR SALE: At December 31, 2005, our marketable
securities available for sale consisted of U.S. government agency securities,
mortgage-backed obligations, 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
48
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. At the end of 2005, we determined
that two securities with an amortized cost basis of $7.0 million had sustained
an other-than-temporary impairment and recognized a $3.1 million impairment loss
related to these securities due to reductions in their future estimated cash
flows.
As of December 31, 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 1 TO 3 3 TO 5 5 TO 7 OVER 7
(IN THOUSANDS $) YEAR YEARS YEARS YEARS YEARS TOTAL
------------------------------------------------------------------------------------------------------------------
Principal amount $ 272,760 $74,904 $227,402 $3,000 $2,900 $580,966
Fair value $ 272,857 $75,714 $213,070 $1,980 $2,856 $566,477
Average interest rate 4.4% 4.7% 4.4% 7.1% N/A 4.5%
PHARMION COMMON STOCK: At December 31, 2005, we held a total of 1,939,600 shares
of Pharmion Corporation common stock, which had an estimated fair value of
approximately $34.5 million (based on the closing price reported by the National
Association of Securities Dealers Automated Quotations, or NASDAQ system, and,
which exceeded the cost by approximately $14.3 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 our investment.
CONVERTIBLE DEBT: In June 2003, we issued an aggregate principal amount of
$400.0 million of unsecured convertible notes. The convertible notes have a
five-year term and a coupon rate of 1.75% payable semi-annually. The convertible
notes can be converted at any time into 33,022,360 shares of common stock at a
stock-split adjusted conversion price of $12.1125 per share (for more
information see Note 10 of the Notes to the Consolidated Financial Statements).
At December 31, 2005, the fair value of the convertible notes exceeded the
carrying value of $400.0 million by approximately $660.0 million, which we
believe reflects the increase in the market price of our common stock to $32.40
per share, on a split-adjusted basis, as of December 31, 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 15 of this Annual Report.
49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND
PROCEDURES
As of the end of the period covered by this annual report, we carried out an
evaluation, under the supervision and with the participation of our 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
us in the reports that we file or submit 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.
50
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting and for the assessment of the effectiveness of
internal control over financial reporting. As defined by the Securities and
Exchange Commission, internal control over financial reporting is a process
designed by, or under the supervision of our principal executive and principal
financial officers and effected by our Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the consolidated financial statements
in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect our transactions and dispositions of our
assets; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of the consolidated financial statements in
accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our
management and directors; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In connection with the preparation of our annual consolidated financial
statements, management has undertaken an assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, or the COSO
Framework. Management's assessment included an evaluation of the design of our
internal control over financial reporting and testing of the operational
effectiveness of those controls.
Based on this evaluation, management has concluded that our internal control
over financial reporting was effective as of December 31, 2005.
KPMG LLP, the independent registered public accounting firm that audited our
consolidated financial statements included in this report, has issued their
report on management's assessment of and the effectiveness of internal control
over financial reporting, a copy of which is included herein.
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Celgene Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Celgene
Corporation and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO. Celgene Corporation's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Celgene Corporation and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2005, is fairly stated, in all material respects, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Also,
in our opinion, Celgene Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, or
COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Celgene Corporation and subsidiaries as of
52
December 31, 2005 and 2004, and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the years in the
three-year period ended December 31, 2005, and the related consolidated
financial statement schedule, and our report dated March 15, 2006 expressed an
unqualified opinion on those consolidated financial statements and related
schedule.
/s/ KPMG LLP
Short Hills, New Jersey
March 15, 2006
53
CHANGES IN INTERNAL CONTROLS 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.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K,
the information required by Part III (Items 10, 11, 12 , 13 and 14) is being
incorporated by reference herein from our definitive proxy statement (or an
amendment to our Annual Report on Form 10-K) to be filed with the Securities and
Exchange Commission within 120 days of the end of the fiscal year ended December
31, 2005 in connection with our 2006 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
See Item 10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Item 10.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
See Item 10.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1),(a)(2) See Index to Consolidated Financial Statements and
Consolidated Financial Statement Schedule immediately following Signatures and
Power of Attorney.
(a)(3) Exhibits
The following exhibits are filed with this report or
incorporated by reference:
54
EXHIBIT
NO. EXHIBIT DESCRIPTION
-------- --------------------------------------------------------------
2.1 Purchase Option Agreement and Plan of Merger, dated April 26,
2002, among the Company, Celgene Acquisition Corp. and
Anthrogenesis Corp. (incorporated by reference to Exhibit 2.1
to the Company's Registration Statement on Form S-4 dated
November 13, 2002 (No. 333-101196)).
2.2 Amendment to the Purchase Option Agreement and Plan of Merger,
dated September 6, 2002, among the Company, Celgene
Acquisition Corp. and Anthrogenesis Corp. (incorporated by
reference to Exhibit 2.2 to the Company's Registration
Statement on Form S-4 dated November 13, 2002 (No.
333-101196)).
2.3 Asset Purchase Agreement by and between the Company and
EntreMed, Inc., dated as of December 31, 2002 (incorporated by
reference to Exhibit 99.6 to the Company's Schedule 13D filed
on January 3, 2003).
2.4 Securities Purchase Agreement by and between EntreMed, Inc.
and the Company, dated as of December 31, 2002 (incorporated
by reference to Exhibit 99.2 to the Company's Schedule 13D
filed on January 3, 2003).
2.5 Share Acquisition Agreement for the Purchase of the Entire
Issued Share Capital of Penn T Limited among Craig Rennie and
Others, Celgene UK Manufacturing Limited and the Company dated
October 21, 2004 (incorporated by reference to Exhibit 99.1 to
the Company's Current Report on Form 8-K dated October 26,
2004).
3.1* Certificate of Incorporation of the Company, as amended
through February 16, 2006.
3.2 Bylaws of the Company (incorporated by reference to Exhibit 2
to the Company's Current Report on Form 8-K, dated September
16, 1996).
4.1 Rights Agreement, dated as of September 16, 1996, between the
Company and American Stock Transfer & Trust Company
(incorporated by reference to the Company's Registration
Statement on Form 8A, filed on September 16, 1996), as amended
on February 18, 2000 (incorporated by reference to Exhibit 99
to the Company's Current Report on Form 8-K filed on February
22, 2000), as amended on August 13, 2003 (incorporated by
reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K filed on August 14, 2003).
4.2 Indenture dated as of June 3, 2003 between the Company and The
Bank of New York, Trustee (incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form
S-3 dated August 14, 2003 (No. 333-107977)).
10.1 Purchase and Sale Agreement between Ticona LLC, as Seller, and
the Company, as Buyer, relating to the purchase of the
Company's Summit, New Jersey, real property (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2004).
55
10.2 1986 Stock Option Plan (incorporated by reference to Exhibit A
to the Company's Proxy Statement dated April 13, 1990).
10.3 1992 Long-Term Incentive Plan (incorporated by reference to
Exhibit A to the Company's Proxy Statement, dated May 30,
1997).
10.4 1995 Non-Employee Directors' Incentive Plan (incorporated by
reference to Exhibit A to the Company's Proxy Statement, dated
May 24, 1999).
10.5 Form of indemnification agreement between the Company and each
officer and director of the Company (incorporated by reference
to Exhibit 10.12 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996).
10.6 Amended and Restated Employment Agreement dated as of May 1,
2003 between the Company and John W. Jackson (incorporated by
reference to Exhibit 10.7 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2003).
10.7 Amended and Restated Employment Agreement dated as of May 1,
2003 between the Company and Sol J. Barer (incorporated by
reference to Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2003).
10.8 Amended and Restated Employment Agreement dated as of May 1,
2003 between the Company and Robert J. Hugin (incorporated by
reference to Exhibit 10.9 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2003).
10.9 Celgene Corporation Replacement Stock Option Plan
(incorporated by reference to Exhibit 99.1 to the Company's
Registration Statement on Form S-3 dated May 18, 1998 (No.
333-52963)).
10.10 Form of Stock Option Agreement to be issued in connection with
the Celgene Corporation Replacement Stock Option Plan
(incorporated by reference to Exhibit 99.2 to the Company's
Registration Statement on Form S-3 dated May 18, 1998 (No.
333-52963)).
10.11 1998 Stock Incentive Plan, Amended and Restated as of April
23, 2003 (incorporated by reference to Exhibit A to the
Company's Proxy Statement, filed April 30, 2003).
10.12 Stock Purchase Agreement dated June 23, 1998 between the
Company and Biovail Laboratories Incorporated (incorporated by
reference to Exhibit 10 to the Company's Current Report on
Form 8-K filed on July 17, 1998).
10.13 Registration Rights Agreement dated as of July 6, 1999 between
the Company and the Purchasers in connection with the issuance
of the Company's 9.00% Senior Convertible Note Due June 30,
2004 (incorporated by reference to Exhibit 10.27 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999).
10.14 Development and License Agreement between the Company and
Novartis Pharma AG, dated April 19, 2000 (incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000).
56
10.15 Collaborative Research and License Agreement between the
Company and Novartis Pharma AG, dated December 20, 2000
(incorporated by reference to Exhibit 10.22 to the Company's
Annual Report on Form 10-K for the year ended December 31,
2000).
10.16 Custom Manufacturing Agreement between the Company and Johnson
Matthey Inc., dated March 5, 2001 (incorporated by reference
to Exhibit 10.24 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2001).
10.17 Manufacturing and Supply Agreement between the Company and
Mikart, Inc., dated as of April 11, 2001 (incorporated by
reference to Exhibit 10.25 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001).
10.18 Distribution Services Agreement between the Company and Ivers
Lee Corporation, d/b/a Sharp, dated as of June 1, 2000
(incorporated by reference to Exhibit 10.26 to the Company's
Annual Report on Form 10-K for the year ended December 31,
2001).
10.19 Amendment No. 1 to the 1992 Long-Term Incentive Plan,
effective as of June 22, 1999 (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).
10.20 Amendment No. 1 to the 1995 Non-Employee Directors' Incentive
Plan, effective as of June 22, 1999 (incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).
10.21 Amendment No. 2 to the 1995 Non-Employee Directors' Incentive
Plan, effective as of April 18, 2000 (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002).
10.22 Celgene Corporation 2005 Deferred Compensation Plan, effective
as of January 1, 2005.
10.23 Anthrogenesis Corporation Qualified Employee Incentive Stock
Option Plan (incorporated by reference to Exhibit 10.35 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2002).
10.24 Agreement dated August 2001 by and among the Company,
Children's Medical Center Corporation, Bioventure Investments
KFT and EntreMed Inc. (certain portions of the agreement have
been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential
treatment, which request has been granted) (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002).
10.25 Exclusive License Agreement among the Company, Children's
Medical Center Corporation and, solely for purposes of certain
sections thereof, EntreMed, Inc., effective December 31, 2002
(incorporated by reference to Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the year ended December 31,
2002).
10.26 Supply Agreement between the Company and Sifavitor s.p.a.,
dated as of September 28, 1999 (incorporated by reference to
Exhibit 10.32 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2002).
57
10.27 Supply Agreement between the Company and Seigfried (USA),
Inc., dated as of January 1, 2003 (incorporated by reference
to Exhibit 10.33 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2002).
10.28 Distribution and Supply Agreement by and between SmithKline
Beecham Corporation, d/b/a GlaxoSmithKline and Celgene
Corporation, entered into as of March 31, 2003 (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2003).
10.29 Securities Purchase Agreement dated as of April 8, 2003
between the Company and Pharmion Corporation in connection
with the purchase by the Company of Pharmion's Senior
Convertible Promissory Note in the principal amount of
$12,000,000 (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003).
10.30 Purchase Agreement dated May 28, 2003 between the Company and
Morgan Stanley & Co. Incorporated, as Initial Purchaser, in
connection with the purchase of $400,000,000 principal amount
of the Company's 1 3/4% Convertible Note Due 2008
(incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).
10.31 Registration Rights Agreement dated as of June 3, 2003 between
the Company, as Issuer, and Morgan Stanley & Co. Incorporated,
as Initial Purchaser (incorporated by reference to Exhibit 4.2
to the Company's Registration Statement on Form S-3 dated
August 14, 2003 (No. 333-107977)).
10.32 Form of 1 3/4% Convertible Note Due 2008 (incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement of Form S-3 dated August 14, 2003).
10.33 Technical Services Agreement among the Company, Celgene UK
Manufacturing II, Limited (f/k/a Penn T Limited), Penn
Pharmaceutical Services Limited and Penn Pharmaceutical
Holding Limited dated October 21, 2004.
10.34 Purchase and Sale Agreement between Ticona LLC and the Company
dated August 6, 2004, with respect to the Summit, New Jersey
property (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 31, 2003).
10.35 Letter Agreement among the Company, Pharmion Corporation and
Pharmion GmbH dated December 3, 2004.
10.36* License Agreement among the Company, Pharmion Corporation and
Pharmion GmbH, dated as of November 16, 2001.
10.37* Amendment No. 1, dated March 3, 2003, to License Agreement
among the Company, Pharmion Corporation and Pharmion GmbH,
dated as of November 16, 2001.
10.38* Letter Agreement, dated March 3, 2003, to License Agreement
among the Company, Pharmion Corporation and Pharmion GmbH,
dated as of November 16, 2001.
58
10.39* Amendment No. 2, dated April 8, 2003, to License Agreement
among the Company, Pharmion Corporation and Pharmion GmbH,
dated as of November 16, 2001, as further amended.
10.40* Letter Agreement, dated August 18, 2003, to License Agreement
among the Company, Pharmion Corporation and Pharmion GmbH,
dated as of November 16, 2001, as further amended.
10.41 Letter Agreement, dated December 2, 2004, to License Agreement
among the Company, Pharmion Corporation and Pharmion GmbH,
dated as of November 16, 2001, as further amended
(incorporated by reference to Exhibit 10.36 to the Company's
Annual Report on Form 10-K for the year ended December 31,
2004).
10.42 Letter Agreement among the Company, Pharmion Corporation and
Pharmion GmbH dated December 3, 2004 (incorporated by
reference to Exhibit 10.37 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2004).
10.43 Amendment No. 2 to the Amended and Restated Distribution and
License Agreement dated as of November 16, 2001, as amended
March 4, 2003 and supplemented June 18, 2003, by and between
Pharmion GmbH and Celgene UK Manufacturing II, Limited, dated
December 3, 2004 (incorporated by reference to Exhibit 10.38
to the Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
10.44 Sublease between Gateway, Inc. ("Sublandlord") and Celgene
Corporation ("Subtenant"), entered into as of December 10,
2001, with respect to the San Diego property (incorporated
by reference to Exhibit 10.39 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2004).
10.45 Lease Agreement, dated January 16, 1987, between the Company
and Powder Horn Associates, with respect to the Warren, New
Jersey property (incorporated by reference to Exhibit 10.17 to
the Company's Registration Statement on Form S-1, dated July
24, 1987) (incorporated by reference to Exhibit 10.40 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
10.46 Amendment No. 3 to the 1995 Non-Employee Directors' Incentive
Plan, effective as of April 23, 2003 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2005).
10.47 Amendment No. 4 to the 1995 Non-Employee Directors' Incentive
Plan, effective as of April 5, 2005 (incorporated by reference
to Exhibit 99.2 to the Company's Registration Statement on
Form S-8 (No. 333-126296).
10.48 Amendment No. 1 to the 1998 Stock Incentive Plan, Amended and
Restated as of April 23, 2003, effective as of April 14, 2005
(incorporated by reference to Exhibit 99.2 to the Company's
Registration Statement on Form S-8 (No. 333-126296).
10.49 Forms of Award Agreement for the 1998 Stock Incentive Plan
(incorporated by reference to Exhibit 99.1 to the Company's
Post-Effective Amendment to the Registration Statement on Form
S-3 dated December 30, 2005 (Registration No. 333-75636).
59
10.50* Supply Agreement between the Company and Evotec OAI Limited,
dated August 1, 2004 (certain portions of the agreement have
been redacted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential
treatment, which request is still pending).
10.51* Commercial Contract Manufacturing Agreement between the
Company and OSG Norwich Pharmaceuticals, Inc., dated April 26,
2004 (certain portions of the agreement have been redacted and
filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment, which
request is still pending).
10.52* Finished Goods Supply Agreement (Revlimid(TM)) between the
Company and Penn Pharmaceutical Services Limited, dated
September 8, 2004 (certain portions of the agreement have been
redacted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment,
which request is still pending).
10.53* Distribution Services and Storage Agreement between the
Company and Sharp Corporation, dated January 1, 2005 (certain
portions of the agreement have been redacted and filed
separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment, which
request is still pending).
14.1 Code of Ethics (incorporated by reference to Exhibit 14.1 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
21.1* List of Subsidiaries.
23.1* Consent of KPMG LLP.
24.1* Power of Attorney (included in Signature Page).
31.1* Certification by the Company's Chief Executive Officer.
31.2* Certification by the Company's Chief Financial Officer.
32.1* Certification by the Company's Chief Executive Officer
pursuant to 18 U.S.C. Section 1350.
32.2* Certification by the Company's Chief Financial Officer
pursuant to 18 U.S.C. Section 1350.
* Filed herewith.
(c) See Financial Statements immediately following Index to Consolidated
Financial Statements and Consolidated Financial Statement Schedule.
60
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person or entity whose
signature appears below constitutes and appoints John W. Jackson, Sol J. Barer
and Robert J. Hugin, and each of them, its true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for it and in its
name, place and stead, in any and all capacities, to sign any and all amendments
to this Form 10-K and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all contents and purposes as it might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or substitutes may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ John W. Jackson
----------------------------
John W. Jackson
Chairman of the Board and
Chief Executive Officer
Date: March 15, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John W. Jackson Chairman of the Board and Chief March 15, 2006
---------------------- Executive Officer
John W. Jackson
/s/ Sol J. Barer Director, Chief Operating Officer March 15, 2006
----------------------
Sol J. Barer
/s/ Robert J. Hugin Director, Chief Financial Officer March 15, 2006
----------------------
Robert J. Hugin
/s/ Jack L. Bowman Director March 15, 2006
----------------------
Jack L. Bowman
61
Signature Title Date
--------- ----- ----
/s/ Michael D. Casey Director March 15, 2006
-----------------------------
Michael D. Casey
/s/ Arthur Hull Hayes, Jr. Director March 15, 2006
-----------------------------
Arthur Hull Hayes, Jr.
/s/ Gilla Kaplan Director March 15, 2006
-----------------------------
Gilla Kaplan
/s/ Richard C. E. Morgan Director March 15, 2006
-----------------------------
Richard C. E. Morgan
/s/ Walter L. Robb Director March 15, 2006
-----------------------------
Walter L. Robb
/s/ James R. Swenson Controller (Chief Accounting March 15, 2006
----------------------------- Officer)
James R. Swenson
The foregoing constitutes a majority of the directors.
62
CELGENE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-3
Consolidated Statements of Operations - Years Ended December 31, 2005, 2004, and 2003 F-4
Consolidated Statements of Cash Flows - Years Ended December 31, 2005, 2004, and 2003 F-5
Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2005, 2004, and 2003 F-7
Notes to Consolidated Financial Statements F-8
Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts F-38
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Celgene Corporation:
We have audited the accompanying consolidated balance sheets of Celgene
Corporation and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the years in the three-year period ended December 31, 2005. In
connection with our audits of the consolidated financial statements, we also
have audited the consolidated financial statement schedule, "Schedule II -
Valuation and Qualifying Accounts." These consolidated financial statements and
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial statement schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Celgene Corporation
and subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2005, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Celgene
Corporation and subsidiaries' internal control over financial reporting as of
December 31, 2005, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, or COSO, and our report dated March 15, 2006 expressed an
unqualified opinion on management's assessment of, and the effective operation
of, internal control over financial reporting.
/s/ KPMG LLP
Short Hills, New Jersey
March 15, 2006
F-2
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
-----------------------------------------------------------------------------------------------------------------------------------
December 31, 2005 2004
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 123,316 $ 135,227
Marketable securities available for sale 600,944 613,310
Accounts receivable, net of allowance of $3,739 and $2,208
at December 31, 2005 and December 31, 2004, respectively 77,913 46,074
Inventory 20,242 24,404
Deferred income taxes 113,059 4,082
Other current assets 37,363 26,783
-----------------------------------------------------------------------------------------------------------------------------------
Total current assets 972,837 849,880
-----------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 77,477 53,738
Investment in affiliated company 17,017 --
Intangible assets, net 96,988 108,955
Goodwill 33,815 41,258
Deferred income taxes 31,260 14,613
Other assets 17,243 38,849
-----------------------------------------------------------------------------------------------------------------------------------
Total assets $1,246,637 $1,107,293
-----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,414 $ 18,650
Accrued expenses 92,908 68,534
Income taxes payable 14,715 41,188
Current portion of deferred revenue 6,473 6,926
Deferred income taxes -- 5,447
Other current liabilities 5,127 670
-----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 135,637 141,415
-----------------------------------------------------------------------------------------------------------------------------------
Long term convertible notes 399,984 400,000
Deferred revenue, net of current portion 59,067 73,992
Other non-current liabilities 16,174 14,442
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 610,862 629,849
-----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share, 5,000,000 shares
authorized; none outstanding at December 31, 2005 and 2004 -- --
Common stock, $.01 par value per share, 575,000,000 and 275,000,000 shares
authorized at December 31, 2005 and 2004, respectively; issued 344,125,158
and 165,079,198 shares at December 31, 2005 and 2004, respectively 3,441 1,651
Common stock in treasury, at cost; 1,953,282 and 10,564 shares
at December 31, 2005 and December 31, 2004, respectively (50,601) (306)
Additional paid-in capital 853,601 641,907
Accumulated deficit (170,754) (234,410)
Accumulated other comprehensive income 88 68,602
-----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 635,775 477,444
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,246,637 $ 1,107,293
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
F-3
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------
Years ended December 31, 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Revenue:
Net product sales $ 445,625 $ 330,571 $ 244,453
Collaborative agreements and other revenue 41,334 20,012 15,174
Royalty revenue 49,982 26,919 11,848
------------------------------------------------------------------------------------------------------------------------------------
Total revenue 536,941 377,502 271,475
------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Cost of goods sold 80,727 59,726 52,950
Research and development 190,834 160,852 122,700
Selling, general and administrative 181,796 114,196 98,474
------------------------------------------------------------------------------------------------------------------------------------
Total expenses 453,357 334,774 274,124
------------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 83,584 42,728 (2,649)
Other income and expense:
Interest and other income, net 17,048 29,994 38,369
Equity in losses of affiliated company 6,923 -- 4,392
Interest expense 9,497 9,551 5,667
------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 84,212 63,171 25,661
------------------------------------------------------------------------------------------------------------------------------------
Income tax provision 20,556 10,415 718
------------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 63,656 52,756 24,943
------------------------------------------------------------------------------------------------------------------------------------
Discontinued operations:
Gain on sale of chiral assets -- -- 750
------------------------------------------------------------------------------------------------------------------------------------
Net income $ 63,656 $ 52,756 $ 25,693
====================================================================================================================================
Income from continuing operations per
common share:
Basic $ 0.19 $ 0.16 $ 0.08
Diluted $ 0.18 $ 0.15 $ 0.07
Discontinued operations per common share:
Basic $ -- $ -- $ 0.01
Diluted $ -- $ -- $ 0.01
Net income per common share:
Basic $ 0.19 $ 0.16 $ 0.08
Diluted $ 0.18 $ 0.15 $ 0.08
See accompanying Notes to Consolidated Financial Statements
F-4
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
(Revised)
Cash flows from operating activities:
Net income $ 63,656 $ 52,756 $ 25,693
Discontinued operations -- -- (750)
---------- ---------- ----------
Income from continuing operations 63,656 52,756 24,943
Adjustments to reconcile income from continuing operations to net cash provided
by operating activities:
Depreciation and amortization of long-term assets 14,286 9,690 8,027
Provision for accounts receivable allowances 11,463 8,315 5,951
Realized loss (gain) on marketable securities available for sale 1,853 (3,050) (7,355)
Unrealized loss (gain) on value of EntreMed warrants 6,875 1,922 (16,574)
Equity losses of affiliated company 6,923 -- 4,392
Non-cash stock-based compensation expense (243) 449 704
Amortization of premium/discount on marketable
securities available for sale, net 1,763 2,085 1,238
Loss on asset disposals 290 -- 84
Amortization of debt issuance cost 2,443 2,443 1,422
Amortization of discount on note obligation 53 108 137
Deferred income taxes (91,356) (79,847) --
Shares issued for employee benefit plans 3,506 4,267 2,775
Change in current assets and liabilities, excluding the effect
of acquisition:
Increase in accounts receivable (43,496) (13,051) (23,776)
Decrease (increase) in inventory 4,125 (11,192) (4,891)
(Increase) decrease in other operating assets (21,514) 59,978 (9,253)
Increase in accounts payable and accrued expenses 11,809 1,454 30,599
Increase (decrease) in income tax payable 74,155 40,404 (196)
(Decrease) increase in deferred revenue (4,674) 79,208 498
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 41,917 155,939 18,725
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (35,861) (36,015) (11,227)
Purchase of intangible assets (122) -- --
Business acquisition (7,152) (109,882) --
Proceeds from the sale of equipment -- -- 138
Proceeds from sales and maturities of marketable securities
available for sale 598,319 539,200 415,595
Purchases of marketable securities available for sale (647,815) (478,939) (836,827)
Investment in affiliated company (10,500) -- (12,000)
Purchase of investment securities -- (7,000) --
Proceeds from the sale of discontinued operations -chiral assets -- -- 750
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (103,131) (92,636) (443,571)
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from exercise of common stock options and warrants 52,640 16,036 11,970
Proceeds from convertible notes -- -- 400,000
Debt issuance cost -- -- (12,212)
Proceeds from notes receivable from stockholders -- -- 42
Repayment of capital lease and note obligations (9) (34) (101)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 52,631 16,002 399,699
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Effect of currency rate changes on cash and cash equivalents (3,328) (4,406) --
------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (11,911) 74,899 (25,147)
Cash and cash equivalents at beginning of period 135,227 60,328 85,475
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 123,316 $ 135,227 $ 60,328
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements
F-5
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and
financing activity:
Change in net unrealized (loss) gain on marketable
securities available for sale $ (60,098) $ 53,312 $ (3,584)
------------------------------------------------------
Matured shares tendered for stock option exercises
and employee tax withholdings (50,295) (306) --
------------------------------------------------------
Conversion of convertible notes 16 -- --
------------------------------------------------------
Accrual for business acquisition -- 7,499 --
------------------------------------------------------
Accrual for license acquisition 4,250 -- --
------------------------------------------------------
Equipment acquisition on capital leases -- -- 110
------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 7,000 $ 7,000 $ 3,584
------------------------------------------------------
Income taxes paid 36,258 5,493 (653)
------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
F-6
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Accumulated
Notes Other
Additional Receivable Comprehensive
Common Treasury Paid-in Accumulated from Income
Years Ended December 31, 2005, 2004 and 2003 Stock Stock Capital Deficit Stockholders (Loss) Total
------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002 $ 802 $ -- $ 591,277 $(312,859) $ (42) $ 7,028 $ 286,206
====================================================================================================================================
Net income 25,693 25,693
Other comprehensive income:
Net change in unrealized gain on
available for sale securities, net of tax 10,939 10,939
Less: reclassification adjustment for gain
included in net income (7,355) (7,355)
---------
Comprehensive income $ 29,277
Exercise of stock options and warrants 11 11,959 11,970
Issuance of common stock for employee
benefit plans 1 2,774 2,775
Expense related to non-employee stock options
and restricted stock granted to employees 704 704
Income tax benefit upon exercise of
stock options 770 770
Collection of notes receivable from
stockholders 42 42
------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2003 $ 814 $ -- $ 607,484 $(287,166) $ -- $ 10,612 $ 331,744
====================================================================================================================================
Net income 52,756 52,756
Other comprehensive income:
Net change in unrealized gain on
available for sale securities, net of tax 56,362 56,362
Less: reclassification adjustment for gain
included in net income (3,050) (3,050)
Currency translation adjustments 4,678 4,678
---------
Comprehensive income $ 110,746
Treasury stock -mature shares tendered related --
to option exercise (306) (306)
Issuance of common stock related to the 2:1
stock split 823 (823) --
Exercise of stock options and warrants 13 16,329 16,342
Issuance of common stock for employee
benefit plans 1 4,266 4,267
Expense related to non-employee stock options
and restricted stock granted to employees 449 449
Income tax benefit upon exercise of
stock options 14,202 14,202
------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2004 $ 1,651 $ (306) $ 641,907 $(234,410) $ -- $ 68,602 $ 477,444
====================================================================================================================================
Net income 63,656 63,656
Other comprehensive income:
Net change in unrealized (loss) on
available for sale securities, net of tax (46,171) (46,171)
Less: reclassification adjustment for gain
included in net income 1,853 1,853
Income tax benefit upon recognition
of deferred tax assets and liabilities (14,775) (14,775)
Currency translation adjustments (9,421) (9,421)
---------
Comprehensive income $ (4,858)
Recognition of deferred tax asset 30,199 30,199
Treasury stock - mature shares tendered related --
to option exercise (50,295) (50,295)
Issuance of common stock related to the 2:1
stock split 1,720 (1,720) --
Conversion of long-term convertible notes 16 16
Exercise of stock options and warrants 69 76,346 76,415
Issuance of common stock for employee
benefit plans 1 3,506 3,507
Expense related to restricted stock granted
to employees (243) (243)
Income tax benefit upon exercise of
stock options 103,590 103,590
------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2005 $ 3,441 $ (50,601) $ 853,601 $(170,754) $ -- $ 88 $ 635,775
====================================================================================================================================
See accompanying Notes to Consolidated Financial Statements
F-7
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS 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 Company's commercial stage programs include
pharmaceutical sales of REVLIMID(R), THALOMID(R), and ALKERAN(R) and sales of
FOCALIN(TM) to Novartis Pharma AG, or Novartis; a licensing agreement with
Novartis which entitles us to royalties on FOCALIN XR(TM) and the entire
RITALIN(R) family of drugs; a licensing and product supply agreement with
Pharmion for its sales of thalidomide; and sales of bio-therapeutic products and
services through its Cellular Therapeutics subsidiary.
REVLIMID(R) is an oral immunomodulatory drug approved by the U.S. Food and Drug
Administration, or FDA, on December 27, 2005 for the treatment of patients with
transfusion-dependent anemia due to low- or intermediate-1-risk myelodysplastic
syndromes associated with a deletion 5q cytogenetic abnormality with or without
additional cytogenetic abnormalities distributed through contracted pharmacies
under the RevAssist(sm) program, which is a proprietary risk-management
distribution program tailored specifically for REVLIMID(R). THALOMID(R)
(thalidomide), approved by the FDA for the treatment of acute cutaneous
manifestations of moderate to severe erythema nodosum leprosum, or ENL, an
inflammatory complication of leprosy, is widely prescribed for treating multiple
myeloma and other cancers. Net THALOMID(R) product sales accounted for
approximately 72%, 82% and 82% of total revenues in 2005, 2004 and 2003,
respectively. In October 2004, the Company acquired all of the outstanding
shares of Penn T Limited, the UK-based manufacturer of THALOMID(R). This
acquisition expanded the Company's corporate capabilities and enabled the
Company to control manufacturing for THALOMID(R) worldwide. In March 2003, the
Company entered into a supply and distribution agreement with GlaxoSmithKline,
or GSK, to distribute, promote and sell in the United States ALKERAN(R)
(melphalan), a therapy approved for the palliative treatment of multiple myeloma
and of carcinoma of the ovary. FOCALIN(TM) is approved by the FDA for the
treatment of attention deficit hyperactivity disorder, or ADHD, in children and
adolescents. FOCALIN XR(TM), an extended release version is approved for the
treatment of ADHD in adults, adolescents and children. FOCALIN(TM) and FOCALIN
XR(TM) are marketed by Novartis. Under the agreement with Novartis, the Company
receives royalty payments on the entire RITALIN(R) family line of products. In
December 2002, the Company acquired Anthrogenesis Corp., or Celgene Cellular
Therapeutics, a privately held New Jersey based biotherapeutics company and cord
blood banking business, which is pioneering the recovery of stem cells from
human placental tissues following the completion of full-term, successful
pregnancies. The portfolio of products in the Company's preclinical and
clinical-stage pipeline includes IMiDs(R) compounds, TNF(alpha) inhibitors,
benzopyrans, kinases inhibitors and ligase inhibitors.
On December 27, 2005, the Company announced that the Board of Directors approved
a two-for-one stock split payable in the form of a 100 percent stock dividend.
Stockholders received one additional share for every share they owned as of the
close of business on February 17, 2006. The additional shares were distributed
on February 24, 2006. As a result, the Company's authorized shares increased
from 280,000,000 to 580,000,000 and shares outstanding increased from
172,057,726 shares to 344,115,452 shares as of the close of business on February
24, 2006. All share and per share amounts in the consolidated financial
statements have been restated to reflect the two-for-one stock split effective
February 17, 2006.
F-8
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The consolidated financial statements include the accounts of Celgene
Corporation and its subsidiaries. All inter-company transactions and balances
have been eliminated. The equity method of accounting is used for the Company's
investment in EntreMed common shares. Certain reclassifications have been made
to prior years' financial statements in order to conform to the current year's
presentation.
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect reported amounts and disclosures.
Actual results could differ from those estimates. The Company is subject to
certain risks and uncertainties such as uncertainty of product development,
uncertainties regarding regulatory approval, no assurance of market acceptance
of products, risk of product liability, uncertain scope of patent and
proprietary rights, intense competition, and rapid technological change.
CASH FLOW STATEMENT REVISION: The Company reports cash flows from operations
using the indirect method as permitted under Statement of Financial Accounting
Standards, or SFAS, No. 95, "Statement of Cash Flows". The Company previously
followed the common practice of starting with income from continuing operations
to reconcile to net operating cash flows. Upon further review, it was determined
that cash flows from operations, under the indirect method, should be reported
by reconciling from net income to net operating cash flows and therefore, the
Company has revised its Consolidated Statement of Cash Flows for the year ended
December 31, 2003. The revision does not result in a change to net cash provided
by operating activities for the year then ended.
CASH EQUIVALENTS: At December 31, 2005 and 2004, cash equivalents were $83.6
million and $24.8 million, respectively, and consisted principally of highly
liquid funds invested in commercial paper, money market funds, and U.S.
government securities such as treasury bills and notes. These instruments have
maturities of three months or less when purchased and are stated at cost, which
approximates market value because of the short maturity of these investments.
FINANCIAL INSTRUMENTS: Certain financial instruments reflected in the
Consolidated Balance Sheets, (e.g., cash and cash equivalents, accounts
receivable, certain other assets, accounts payable and certain other
liabilities) are recorded at cost, which approximate fair value due to their
short-term nature. The fair values of financial instruments other than
marketable securities are determined through a combination of management
estimates and information obtained from third parties using the latest market
data. The fair value of available for sale marketable securities is based on
quoted market prices. The fair value of the following financial instruments are
disclosed in the following footnotes: marketable securities (Note 4); EntreMed,
Inc. common stock (Note 7); EntreMed, Inc. warrants (Note 8); convertible debt
(Note 9); and a foreign currency forward contract is disclosed in the following
paragraph.
DERIVATIVE INSTRUMENTS: The Company may periodically utilize foreign currency
denominated forward contracts to hedge currency fluctuations of transactions
denominated in currencies other than the functional currency. At December 31,
2005, the Company had one foreign currency forward contract outstanding to buy
U.S. dollars and sell Swiss francs for a notional amount of $62.0 million. The
forward contract expires on April 13, 2006 and is an economic hedge of a U.S.
dollar payable of a Swiss foreign entity, which is remeasured through earnings
each period based on changes in the spot rate. The unrealized loss on the
forward contract, based on its fair value at December 31, 2005, was
approximately $0.2 million, and was recorded in accrued expenses with the
offsetting loss recorded in earnings.
MARKETABLE SECURITIES: The Company's marketable securities are all classified as
securities available for sale in current assets and are carried at fair value.
Such securities are held for an indefinite period of time and are intended to be
used to meet the ongoing liquidity needs of the Company. Unrealized gains and
losses (which are deemed to be temporary), if any, are reported in a separate
component of stockholders' equity. The cost of investments in debt securities is
adjusted for amortization of premiums and accretion of discounts
F-9
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
to maturity. The amortization, along with realized gains and losses, is included
in interest and other income. The cost of securities is based on the specific
identification method.
Premiums and discounts are amortized or accreted over the life of the related
available-for-sale security as an adjustment to yield using the
effective-interest method. Dividend and interest income are recognized when
earned.
A decline in the market value of any available-for-sale security below cost that
is deemed to be other-than-temporary results in a reduction in carrying amount
to fair value. The impairment would be charged to earnings and a new cost basis
for the security established. Factors evaluated to determine if an investment is
other-than-temporarily impaired include significant deterioration in the
earnings performance, credit rating, asset quality, or business prospects of the
issuer; adverse changes in the general market condition in which the issuer
operates; 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; and,
issues that raise concerns about the issuer's ability to continue as a going
concern. At the end of 2005, the Company determined that two securities with an
amortized cost basis of $7.0 million had sustained an other-than-temporary
impairment and recognized a $3.1 million impairment loss, which was recorded in
interest and other income, net.
CONCENTRATION OF CREDIT RISK: Cash, cash equivalents, and marketable securities
are financial instruments that potentially subject the Company to concentration
of credit risk. The Company invests its excess cash primarily in U.S. government
agency securities, mortgage obligations and marketable debt securities of
financial institutions and corporations with strong credit ratings. The Company
may also invest in unrated or below investment grade securities, such as
collateralized debt obligations or equity in private companies. The Company has
established guidelines relative to diversification and maturities to maintain
safety and liquidity. These guidelines are reviewed periodically and may be
modified to take advantage of trends in yields and interest rates. The Company
has the ability to sell these investments before maturity and has therefore
classified the investments as available for sale. The Company has not realized
any significant losses on disposal of its investments.
As is typical in the pharmaceutical industry, the Company sells its products
primarily through wholesale distributors and therefore, wholesale distributors
account for a large portion of the Company's trade receivables and net product
revenues. In light of this concentration, the Company continuously monitors the
creditworthiness of its customers and has internal policies regarding customer
credit limits. The Company estimates an allowance for doubtful accounts based on
the creditworthiness of its customers as well as general economic conditions. An
adverse change in those factors could affect the Company's estimate of its bad
debts.
INVENTORY: Inventories are carried at the lower of cost or market. Cost is
determined using the first-in, first-out, or FIFO, method.
PROPERTY, PLANT AND EQUIPMENT: Plant and equipment are stated at cost.
Depreciation of plant and equipment is provided using the straight-line method.
Leasehold improvements are depreciated over the lesser of the economic useful
life of the asset or the remaining term of the lease. The estimated useful lives
of fixed assets are as follows:
Buildings 40 years
Building and operating equipment 15 years
Machinery and equipment 5 years
Furniture and fixtures 5 years
Computer equipment and software 3 years
F-10
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
Maintenance and repairs are charged to operations as incurred, while renewals
and improvements are capitalized.
INVESTMENT IN AFFILIATED COMPANY: On March 31, 2005, the Company exercised
warrants to purchase 7,000,000 shares of EntreMed, Inc. common stock. 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. 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 in the second quarter of 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 as of December 31, 2005 no adjustment to its
investment is required.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of cost of
an acquired entity over the fair value of identifiable assets acquired and
liabilities assumed in a business combination. Under SFAS No. 142, "Goodwill and
Other Intangible Assets", or SFAS 142, goodwill and intangible assets acquired
in a purchase business combination and determined to have an indefinite useful
life are not amortized, but instead are tested for impairment at least annually
in accordance with the provisions of SFAS 142. SFAS 142 also requires that
intangible assets with estimable useful lives be amortized to their estimated
residual values over their respective estimated useful lives, and reviewed for
impairment in accordance with SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets", or SFAS 144.
The Company's intangible assets are categorized as either supply agreements,
contract based agreements or technology. Amortization periods related to these
categories range from 12 to 14 years.
IMPAIRMENT OF LONG-LIVED ASSETS: In accordance with SFAS No. 144, long-lived
assets, such as property, plant, and equipment, software costs and purchased
intangibles subject to amortization are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to the estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future undiscounted net cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. Assets to be disposed of would be
separately presented in the consolidated balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale would be presented separately in the appropriate asset and liability
sections of the consolidated balance sheet.
BUSINESS COMBINATIONS: SFAS No. 141, "Business Combinations", or SFAS 141,
requires that all business combinations be accounted for using the purchase
method of accounting. The Company's acquisitions of Penn T Limited on October
21, 2004 and Anthrogenesis Corp. on December 31, 2002, were accounted for using
the purchase method.
F-11
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
FOREIGN CURRENCY TRANSLATION: Operations in non-U.S. subsidiaries are generally
recorded in local currencies which are also the functional currencies for
financial reporting purposes. The results of operations for non-U.S.
subsidiaries are translated from local currencies into U. S. dollars using the
average currency rate during each period which approximates the results that
would be obtained using actual currency rates on the dates of individual
transactions. Assets and liabilities are translated using currency rates at the
end of the period with translation adjustments recorded as a component of other
comprehensive income. Transaction gains and losses are recorded as incurred in
interest and other income, net in the Consolidated Statement of Operations.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT ("IPR&D"): The value assigned to
acquired in-process research and development is determined by identifying those
acquired specific in-process research and development projects that would be
continued and for which (a) technological feasibility has not been established
at the acquisition date, (b) there is no alternative future use, and (c) the
fair value is estimable with reasonable reliability. Amounts assigned to IPR&D
are charged to expense at the acquisition date.
RESEARCH AND DEVELOPMENT COSTS: All research and development costs are expensed
as incurred. These include all internal costs, external costs related to
services contracted by the Company and research services conducted for others.
Research and development costs consist primarily of salaries and benefits,
contractor fees (paid principally to contract research organizations to assist
in our clinical development programs), cost of drug supplies for our clinical
and pre-clinical programs, costs of other consumable research supplies,
regulatory and quality control expenditures and allocated facilities charges
such as building rent and utilities. Upfront and milestone payments made to
third parties in connection with research and development collaborations are
expensed as incurred up to the point of regulatory approval. Payments made to
third parties subsequent to regulatory approval are capitalized and amortized
over the remaining useful life of the related product.
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. A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax asset will not be realized. Research and
development tax credits will be recognized as a reduction of the provision for
income taxes when realized.
REVENUE RECOGNITION: Revenue from the sale of products is recognized upon
product shipment. Provisions for discounts for early payments, rebates and sales
returns under terms customary in the industry are provided for in the same
period the related sales are recorded. Provisions recorded in 2005, 2004 and
2003 totaled approximately $103.2 million, $54.5 million and $38.8 million,
respectively. Revenue under research contracts is recorded as earned under the
contracts, as services are provided. In accordance with SEC Staff Accounting
Bulletin ("SAB") No. 104 upfront nonrefundable fees associated with license and
development agreements where the Company has continuing involvement in the
agreement, are recorded as deferred revenue and recognized over the estimated
service period of the last item of performance to be delivered. If the estimated
service period is subsequently modified, the period over which the up-front fee
is recognized is modified accordingly on a prospective basis.
SAB No. 104 requires companies to identify separate units of accounting based on
the consensus reached on Emerging Issues Task Force, or EITF, Issue No. 00-21,
"REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES", or EITF 00-21. EITF 00-21
provides guidance on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into separate
units of accounting for revenue recognition purposes, and if this division is
required, how the arrangement consideration should be allocated among the
separate units of accounting. EITF 00-21 is effective for
F-12
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
revenue arrangements entered into in quarters beginning after June 15, 2003. If
the deliverables in a revenue arrangement constitute separate units of
accounting according to the EITF's separation criteria, the revenue-recognition
policy must be determined for each identified unit. If the arrangement is a
single unit of accounting, the revenue-recognition policy must be determined for
the entire arrangement. Revenues from the achievement of research and
development milestones, which represent the achievement of a significant step in
the research and development process, are recognized when and if the milestones
are achieved.
Continuation of certain contracts and grants are dependent upon the Company
achieving specific contractual milestones; however, none of the payments
received to date are refundable regardless of the outcome of the project. Grant
revenue is recognized in accordance with the terms of the grant and as services
are performed, and generally equals the related research and development
expense.
STOCK-BASED COMPENSATION: The Company applies the intrinsic value-based method
of accounting prescribed by Accounting Principles Board, or APB, Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its fixed stock option plans. As such, compensation expense for
grants to employees or members of the Board of Directors would be recorded on
the date of grant only if the current market price of the Company's stock
exceeded the exercise price. 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 period.
The following table illustrates the effect on net income and net income per
share as if the fair-value-based method under SFAS 123 had been applied. Option
forfeitures are accounted for as they occurred and no amounts of compensation
expense have been capitalized into inventory or other assets, but instead are
considered period expenses in the pro forma amounts. Per share data has been
adjusted to reflect the February 17, 2006 two-for-one stock split.
F-13
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 63,656 $ 52,756 $ 25,693
Add stock-based employee compensation (credit)
expense included in reported net income (2005 net of
tax) (143) 250 250
Deduct total stock-based employee compensation
expense determined under the fair value-based
method (2005 net of tax) (1) (52,746) (26,027) (21,226)
-----------------------------------------------------
Pro forma net income $ 10,767 $ 26,979 $ 4,717
=====================================================
------------------------------------------------------------------------------------------------------------------------------------
Net income per common share:
Basic, as reported $ 0.19 0.16 0.08
Basic, pro forma 0.03 0.08 0.01
Diluted, as reported 0.18 0.15 0.08
Diluted, pro forma 0.03 0.08 0.01
------------------------------------------------------------------------------------------------------------------------------------
(1) Includes benefit attributable to recognizing deferred tax assets in 2005.
The weighted-average fair value per share was $9.60, $5.22 and $3.64 for stock
options granted in 2005, 2004 and 2003, respectively. The Company estimated the
fair values using the Black-Scholes option-pricing model based on the following
assumptions:
----------------------------------------------------------------------------
2005 2004 2003
----------------------------------------------------------------------------
Risk-free interest rate 4.24% 3.05% 2.39%
Expected stock price volatility 40.6% 47.4% 52.5%
Expected term until exercise (years) 4.20 3.70 3.50
Expected dividend yield 0% 0% 0%
============================================================================
EARNINGS PER SHARE: Basic earnings per common share is computed by dividing net
income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per common share is computed by dividing net income by
the weighted-average number of common shares outstanding during the period
increased to include all additional common shares that would have been
outstanding assuming potentially dilutive common shares had been issued and any
proceeds thereof used to repurchase common stock at the average market price
during the period. The proceeds used to repurchase common stock are assumed to
be the sum of the amount to be paid to the Company upon exercise of options, the
amount of compensation cost attributed to future services and not yet recognized
and, if applicable, the amount of income taxes that would be credited to or
deducted from capital upon exercise.
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss), 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.
Comprehensive income (loss) is presented in the Consolidated Statements of
Stockholders' Equity.
CAPITALIZED SOFTWARE COSTS: Capitalized software costs are capitalized in
accordance with Statement of Position No. 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED AND OBTAINED FOR INTERNAL USE, are included in other
assets and are amortized over their estimated useful life of three years from
the date the systems are ready for their intended use.
F-14
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
NEW ACCOUNTING PRINCIPLES: In December 2004 the FASB, issued SFAS No. 123R,
"Share-Based Payment", or SFAS 123R. SFAS 123R requires compensation cost
relating to share-based payment transactions be recognized in financial
statements based on the fair value of the equity or liability instruments
issued. SFAS 123R covers a wide range of share-based compensation arrangements
including stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee stock purchase plans. SFAS 123R replaces SFAS
123, and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, SFAS 123 permitted entities to continue to apply the
guidance in APB Opinion No. 25, as long as the footnotes to financial statements
disclosed what net income would have been had the preferable fair-value-based
method been used. The Company will be required to adopt the provisions of SFAS
123R in the first quarter of fiscal year 2006. Management is currently
evaluating the requirements of SFAS 123R. The adoption of SFAS 123R is expected
to have a material effect on our consolidated financial statements as noted
elsewhere in this footnote. However, the calculation of compensation cost for
share-based payment transactions after the effective date of SFAS 123R may be
different from the calculation of compensation cost under SFAS 123.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs--An Amendment
of ARB No. 43. This Statement amends the guidance in ARB No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). The
new rule requires that items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal" as stated in ARB
No. 43. Additionally, SFAS 151 requires that the allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 is effective for fiscal years beginning after
June 15, 2005. The Company is currently evaluating the potential impact of this
pronouncement on its financial position and results of operations.
EITF Issue No. 03-01, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments," or EITF 03-01, was issued in February 2004.
The provisions of EITF 03-01 for measuring and recognizing an
other-than-temporary impairment proved controversial and as a result, FASB Staff
Position ("FSP") FSP FAS 115-1 and FAS 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments," was
issued in November 2005, clarifying the requirements of EITF 03-01 concerning
the evaluation of whether an impairment is other-than-temporary. FSP FAS 115-1
and FAS 124-1 refers to SEC Staff Accounting Bulletin ("SAB") Topic 5M, "Other
Than Temporary Impairment of Certain Investments In Debt And Equity Securities,"
and EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interest in Securitized Financial Assets," to
evaluate whether an impairment is other than temporary. We are in compliance
with these requirements and continue to monitor these developments to assess the
possible impact on our financial position and results of operations.
(2) ACQUISITIONS AND DISPOSITIONS
PENN T LIMITED: 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 $117.0 million in
cash, net of cash acquired and including working capital adjustments and
transaction costs paid during the first quarter of 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.
F-15
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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, net of cash acquired $ 16,855
Intangible assets 99,841
Goodwill 35,465
--------------------------------------------------------
Assets acquired 152,161
--------------------------------------------------------
Current liabilities 1,983
Deferred taxes 33,144
--------------------------------------------------------
Liabilities assumed 35,127
--------------------------------------------------------
Net assets acquired $117,034
========================================================
Prior to the acquisition, Celgene and Penn T were parties to a manufacturing
agreement pursuant to which Penn T manufactured THALOMID(R) for Celgene. Through
a manufacturing agreement entered into with a third party in connection with the
acquisition, the Company is able to control manufacturing for THALOMID(R)
worldwide and increases its participation in the potential growth of THALOMID(R)
opportunities in key international markets. This acquisition was accounted for
using the purchase method of accounting for business combinations.
The intangible assets consist principally of a product supply agreement that is
being amortized over its useful life, which is 13 years. The resulting goodwill
and intangible asset have been assigned to the Company's Human Pharmaceuticals
operating segment.
The following unaudited pro forma information presents a summary of consolidated
results of operations for the year ended December 31, 2004 as if the acquisition
of Penn T had occurred on January 1, 2004, adjusted to reflect the February 17,
2006 two-for-one stock split. The unaudited pro forma results of operations is
presented for illustrative purposes only and is not necessarily indicative of
the operating results that would have occurred if the transaction had been
consummated at the date indicated, nor is it 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.
----------------------------------------------------
Pro forma (UNAUDITED) 2004
----------------------------------------------------
Total revenues $ 394,097
Net income 56,661
Net income per diluted share $ 0.16
====================================================
The unaudited pro forma information includes an adjustment to reflect the
amortization of intangible assets resulting from the acquisition.
DISPOSITION OF CHIRAL INTERMEDIATES BUSINESS: In January 1998, the Company
completed the sale of its chiral intermediate business to Cambrex Corporation.
The Company received $7.5 million upon the closing of the transaction and is
entitled to future royalties, with a present value not exceeding $7.5 million
and certain minimum royalty payments due in 2000 through 2003. Included in the
transaction were the rights to Celgene's enzymatic technology for the production
of chirally pure intermediates for the pharmaceutical industry, including the
pipeline of third party products and the equipment and personnel associated with
the business. Pursuant to the minimum royalty provision of the agreement, the
Company received
F-16
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
approximately $0.8 million during 2003. The chiral intermediates business is
presented as a discontinued operation in the consolidated financial statements.
(3) EARNINGS PER SHARE (EPS)
------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
INCOME AVAILABLE TO COMMON STOCKHOLDERS:
Income from continuing operations $ 63,656 $ 52,756 $ 24,943
Discontinued Operations - gain on sale of chiral assets -- -- 750
-------------------------------------------------
Net income 63,656 52,756 25,693
Interest expense on convertible debt, net of tax 5,571 -- --
-------------------------------------------------
Net income available to common stockholders $ 69,227 $ 52,756 $ 25,693
=================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic: 335,512 327,738 323,548
Effect of dilutive securities:
Options 21,204 17,062 17,480
Warrants 353 436 372
Restricted shares and other long-term incentives 494 474 192
Convertible debt 33,022 -- --
-------------------------------------------------
Diluted: 390,585 345,710 341,592
=================================================
EARNINGS PER SHARE:
Income from continuing operations
Basic $ 0.19 $ 0.16 $ 0.08
Diluted $ 0.18 $ 0.15 $ 0.07
Discontinued operations
Basic $ -- $ -- $ --
Diluted $ -- $ -- $ 0.01
Net income
Basic $ 0.19 $ 0.16 $ 0.08
Diluted $ 0.18 $ 0.15 $ 0.08
------------------------------------------------------------------------------------------------------------------------------------
The potential common shares related to the convertible notes issued June 3, 2003
(see Note 9) were anti-dilutive and were excluded from the diluted earnings per
share computation for the years 2004 and 2003. The total number of potential
common shares excluded from the diluted earnings per share computation because
their inclusion would have been anti-dilutive was 10,224, 41,686,756 and
42,257,440 shares in 2005, 2004 and 2003, respectively. Share and per share
amounts have been adjusted to reflect the February 17, 2006 two-for-one stock
split.
F-17
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(4) 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 December 31, 2005 and 2004 was as
follows:
-------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2005 COST GAIN LOSS VALUE
-------------------------------------------------------------------------------------------------------
Mortgage-backed obligations $ 118,222 $ 366 $ (1,459) $ 117,129
Government agency bonds and notes 95,961 39 (2,373) 93,627
Corporate debt securities 128,292 192 (5,338) 123,146
Auction rate notes 232,575 -- -- 232,575
Marketable equity securities 20,212 14,255 -- 34,467
-----------------------------------------------------
$ 595,262 $ 14,852 $ (9,170) $ 600,944
=====================================================
-------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2004 COST GAIN LOSS VALUE
-------------------------------------------------------------------------------------------------------
Mortgage-backed 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
-----------------------------------------------------
$ 549,383 $ 65,488 $ (1,561) $ 613,310
=====================================================
The fair value of available-for-sale securities with unrealized losses at
December 31, 2005 was as follows:
------------------------------------------------------------------------------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
---------------------- --------------------- ---------------------
ESTIMATED GROSS ESTIMATED GROSS ESTIMATED GROSS
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
DECEMBER 31, 2005 VALUE LOSS VALUE LOSS VALUE LOSS
------------------------------------------------------------------------------------------------------------------------
Mortgage-backed
obligations $ 26,211 $ 218 $ 46,699 $ 1,241 $ 72,910 $ 1,459
Government agency bonds
and notes 78,469 2,364 236 9 78,705 2,373
Corporate debt securities 100,875 4,633 14,295 705 115,170 5,338
-----------------------------------------------------------------
$205,555 $ 7,215 $ 61,230 $ 1,955 $266,785 $ 9,170
=================================================================
Government agency bonds and notes include U.S. Treasury and U.S. government
agency obligations. Unrealized losses for mortgage-backed obligations and
government agency bonds and notes were primarily due to increases in interest
rates. Unrealized losses for corporate debt securities were primarily due to
increases in interest rates as well as downgrades by corporate bond rating
agencies. Celgene has more then sufficient liquidity and the intent to hold
these securities until the market value recovers. Moreover, the Company does not
believe it is probable that it will be unable to collect all amounts due
according to the contractual terms of the individual investments.
F-18
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
Duration of debt securities classified as available-for-sale were as follows at
December 31, 2005:
-------------------------------------------------------------------
AMORTIZED FAIR
COST VALUE
-------------------------------------------------------------------
Duration of one year or less $ 273,007 $ 272,857
Duration of one through three years 76,632 75,714
Duration of three through five years 219,569 213,070
Duration of five through seven years 2,985 1,980
Duration greater than seven years 2,857 2,856
-----------------------------
$ 575,050 $ 566,477
=============================
(5) INVENTORY
Inventory at December 31, 2005 and 2004 consisted of the following:
-------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------
Raw materials $ 5,044 $ 4,081
Work in process 1,644 4,356
Finished goods 13,554 15,967
-----------------------------
$ 20,242 $ 24,404
=============================
(6) PLANT AND EQUIPMENT
Plant and equipment at December 31, 2005 and 2004 consisted of the following:
-------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------
Land $ 17,836 $ 14,700
Buildings 12,509 10,658
Building and operating equipment 2,618 -
Leasehold improvements 8,741 14,355
Machinery and equipment 27,603 22,955
Furniture and fixtures 6,751 3,865
Computer equipment and software 22,370 11,989
Construction in progress 7,103 63
-----------------------------
105,531 78,585
Less: accumulated depreciation and
Amortization 28,054 24,847
-----------------------------
$ 77,477 $ 53,738
=============================
(7) 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 that are 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
F-19
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
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), 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 subsequent to that date. The
investment in EntreMed had a carrying value of approximately $17.0 million at
December 31, 2005, which exceeds estimated fair value of the Company's common
stock investment by approximately $3.4 million based on the closing share price
of EntreMed common stock on December 31, 2005. The Company deems this decline
below carrying value to be temporary. Financial results of the EntreMed equity
method investment are included in the human pharmaceuticals segment.
A summary of EntreMed's financial information follows:
December 31, 2005
-----------------------------------------------------------------------------
(Unaudited)
Current assets $ 35,326
Noncurrent assets 1,106
------------------------
Total assets $ 36,432
-----------------------------------------------------------------------------
Current liabilities $ 6,649
Noncurrent liabilities 230
Minority interest 17
Total equity 29,536
------------------------
Total liabilities and equity $ 36,432
-----------------------------------------------------------------------------
(Audited)
Interest in EntreMed equity (1) $ 4,025
Excess of investment over share of EntreMed equity 12,992
------------------------
Total investment $ 17,017
=============================================================================
Nine-Month Period
Ended
December 31, 2005
-----------------------------------------------------------------------------
(Unaudited)
Total revenues $ 5,893
Operating loss 11,648
Net loss 10,792
-----------------------------------------------------------------------------
(Audited)
Celgene share of EntreMed, Inc. losses (1) $ 1,617
Amortization of intangibles 236
Write-off of in-process research and development 4,383
Elimination of inter-company transaction 687
------------------------
Equity in losses of affiliated company $ 6,923
=============================================================================
(1) The Company records its share of losses based on its common stock ownership
of approximately 14% at December 31, 2005.
On February 2, 2006 the Company, along with a group of investors, entered into
an agreement to invest $30.0 million in EntreMed in return for newly issued
EntreMed common stock and warrants to purchase additional shares of EntreMed
common stock at a conversion price of $2.3125 per warrant. The Company's portion
of the investment was $2.0 million for which it received 864,864 shares of
EntreMed common stock
F-20
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
and 432,432 warrants. The warrants will be accounted for at fair value with
changes in fair value recorded through earnings.
(8) OTHER FINANCIAL INFORMATION
Accrued expenses at December 31, 2005 and 2004 consisted of the following:
--------------------------------------------------------------------------
2005 2004
--------------------------------------------------------------------------
Professional and consulting fees $ 3,906 $ 2,026
Accrued compensation 22,087 15,783
Accrued interest, royalties and license fees 18,181 12,840
Accrued sales returns 5,017 9,595
Accrued rebates and chargebacks 27,763 9,255
Accrued acquisition related costs -- 8,010
Accrued clinical trial costs 10,866 7,440
Accrued insurance and taxes 2,256 1,882
Other 2,832 1,703
-----------------------------
$ 92,908 $ 68,534
=============================
Other assets at December 31, 2005 and 2004 consisted of the following:
--------------------------------------------------------------------------
2005 2004
--------------------------------------------------------------------------
Long-term investments $ 7,000 $ 7,000
Long-term deposits 1,754 1,495
Debt issuance costs 5,904 8,347
EntreMed Inc. warrants -- 19,768
Other 2,585 2,239
-----------------------------
$ 17,243 $ 38,849
=============================
On March 31, 2005, the Company exercised the EntreMed Inc. warrants to purchase
7,000,000 shares of EntreMed common stock and has applied the equity method of
accounting to its common stock investment in EntreMed subsequent to that date.
Interest and other income, net included unrealized losses of $6.9 million and
$1.9 million related to EntreMed warrants for the years ended December 31, 2005
and 2004, respectively.
(9) CONVERTIBLE DEBT
In June 2003, the Company issued an aggregate principal amount of $400.0 million
of unsecured convertible notes. The notes have a five-year term and a coupon
rate of 1.75% payable semi-annually on June 1 and December 1. Each $1,000
principal amount of convertible notes is convertible into 82.5592 shares of
common stock as adjusted, or a conversion rate of $12.1125 per share, which
represented a 50% premium to the closing price on May 28, 2003 of the Company's
common stock of $8.075, after adjusting prices for the two-for-one stock splits
affected on February 17, 2006 and October 22, 2004. The debt issuance costs
related to these convertible notes, which totaled approximately $12.2 million,
are classified under "Other Assets" on the consolidated balance sheet and are
being amortized over five years, assuming no conversion. Under the terms of the
purchase agreement, the noteholders can convert the outstanding notes at any
time into 33,022,360 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
F-21
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
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 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 year ended December 31,
2005, an immaterial amount of principal was converted into common stock.
At December 31, 2005 and 2004, the fair value of the Company's convertible notes
exceeded the carrying value of $400.0 million by approximately $660.0 million
and $117.0 million respectively.
(10) GOODWILL AND INTANGIBLE ASSETS
INTANGIBLE ASSETS: At December 31, 2005, the Company's intangible assets
primarily related to the October 21, 2004 acquisition of Penn T and are being
amortized over their estimated useful lives. In December 2005, the Company
recognized a $4.3 million intangible for a licensing agreement with Children's
Medical Center Corporation, or CMCC, which is being amortized over the patent
life of the related product. 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.
The gross carrying value and accumulated amortization by major intangible asset
class at December 31, 2005 and 2004 were as follows:
----------------------------------------------------------------------------------------------------------------------
2005
----------------------------------------------------------------------------------------------------------------------
Gross Cumulative Intangible Weighted
Carrying Accumulated Translation Assets, Average
Value Amortization Adjustment Net Life (Years)
----------------------------------------------------------------------------------------------------------------------
Penn T supply agreements $ 99,841 $ (2,787) $ (4,435) $ 92,619 12.9
License 4,250 -- -- 4,250 13.8
Technology 122 (3) -- 119 12.0
----------------------------------------------------------------------------------------------------------------------
Total $104,213 $ (2,790) $ (4,435) $ 96,988 13.0
======================================================================================================================
----------------------------------------------------------------------------------------------------------------------
2004
----------------------------------------------------------------------------------------------------------------------
Gross Cumulative Intangible Weighted
Carrying Accumulated Translation Assets, Average
Value Amortization Adjustment Net Life (Years)
----------------------------------------------------------------------------------------------------------------------
Penn T acquisition:
Supply agreements $ 99,841 $ (75) $ 6,802 $106,568 12.9
Anthrogenesis acquisition:
Supplier relationships 710 (284) -- 426 5.0
Customer lists 1,700 (227) -- 1,473 15.0
Technology 609 (121) -- 488 10.0
----------------------------------------------------------------------------------------------------------------------
Total $102,860 $ (707) $ 6,802 $108,955 12.9
======================================================================================================================
Amortization of acquired intangible assets was approximately $2.1 million and
$0.4 million for the years ended December 31, 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 $8.5 million for 2006 and $8.1 million for each of the years
2007 through 2010.
GOODWILL: At December 31, 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
F-22
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
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 that had been
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, 2003 $ -- $ 3,490 $ 3,490
Proceeds from sale of net operating loss tax benefit -- (484) (484)
Penn T acquisition 35,812 -- 35,812
Foreign currency translation 2,440 -- 2,440
----------------------------------------------
BALANCE, DECEMBER 31, 2004 $ 38,252 $ 3,006 $ 41,258
Reversal of deferred tax asset valuations -- (3,006) (3,006)
Purchase accounting adjustments (347) -- (347)
Foreign currency translation (4,090) -- (4,090)
----------------------------------------------
BALANCE, DECEMBER 31, 2005 $ 33,815 $ -- $ 33,815
====================================================================================================
(11) RELATED PARTY TRANSACTIONS: EntreMed earns royalty income relating to
THALOMID(R). As prescribed under the equity method of accounting, the Company
eliminates its share of EntreMed's royalty income.
In March 2005, the Company licensed to EntreMed rights to develop and
commercialize its tubulin inhibitor compounds. Under the terms of the agreement,
Celgene received an up-front license payment of $1.0 million and is entitled to
additional payments upon successful completion of certain clinical, regulatory
and sales milestones. Under the agreement, EntreMed will provide all resources
needed to conduct clinical research and regulatory activities associated with
seeking marketing approvals of the tubulin inhibitors for oncology applications.
(12) STOCKHOLDERS' EQUITY
PREFERRED STOCK: The Board of Directors is authorized to issue, at any time,
without further stockholder approval, up to 5,000,000 shares of preferred stock,
and to determine the price, rights, privileges, and preferences of such shares.
COMMON STOCK: On December 27, 2005, the Company announced a two-for-one stock
split payable in the form of a 100 percent stock dividend to shareholders of
record on February 17, 2006. On February 16, 2006, the Company's shareholders
approved an increase in the number of authorized common shares of stock from
275,000,000 to 575,000,000 with a par value of $.01 per share, of which
342,171,876 shares were outstanding at December 31, 2005.
TREASURY STOCK: During 2005, certain employees exercised certain stock options
containing a reload feature and, pursuant to our stock option plan, tendered
1,831,054 mature shares related to stock option exercises. Such tendered shares
are reflected as treasury stock. At December 31, 2005, treasury shares totaled
1,953,282.
F-23
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
A summary of changes in common stock issued and treasury stock is presented
below:
----------------------------------------------------------------------------------------------------------
Common Stock
Balance December 31, Common Stock in Treasury
----------------------------------------------------------------------------------------------------------
2002 80,176,713 --
----------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants 1,105,074 --
Issuance of common stock for employee benefit plans 129,268 --
----------------------------------------------------------------------------------------------------------
2003 81,411,055 --
----------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants 1,300,297 --
Issuance of common stock for employee benefit plans 98,215 --
Treasury stock - mature shares tendered related to option exercises -- (5,282)
Issuance of common stock related to 2:1 stock split 82,269,631 (5,282)
----------------------------------------------------------------------------------------------------------
2004 165,079,198 (10,564)
----------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants 6,850,375 --
Issuance of common stock for employee benefit plans 132,346 --
Treasury stock - mature shares tendered related to option exercises -- (966,077)
Conversion of long-term convertible notes 660 --
Issuance of common stock related to 2:1 stock split 172,062,579 (976,641)
----------------------------------------------------------------------------------------------------------
2005 344,125,158 (1,953,282)
==========================================================================================================
RIGHTS PLAN: During 1996, the Company adopted a shareholder rights plan, or
Rights Plan. The Rights Plan involves the distribution of one Right as a
dividend on each outstanding share of the Company's common stock to each holder
of record on September 26, 1996. Each Right shall entitle the holder to purchase
one-tenth of a share of common stock. The Rights trade in tandem with the common
stock until, and are exercisable upon, certain triggering events, and the
exercise price is based on the estimated long-term value of the Company's common
stock. In certain circumstances, the Rights Plan permits the holders to purchase
shares of the Company's common stock at a discounted rate. The Company's Board
of Directors retains the right at all times prior to acquisition of 15% of the
Company's voting common stock by an acquirer, to discontinue the Rights Plan
through the redemption of all rights or to amend the Rights Plan in any respect.
The Rights Plan, as amended on February 17, 2000, increased the exercise price
per Right from $100.00 to $700.00 and extended the final expiration date of the
Rights Plan to February 17, 2010. On August 13, 2003, the Rights Plan was
further amended to permit a qualified institutional investor to beneficially own
up to 17% of the Company's common stock outstanding without being deemed an
"acquiring person," if such institutional investor meets certain requirements.
(13) STOCK-BASED COMPENSATION
STOCK OPTIONS AND RESTRICTED STOCK AWARDS: The Company has one shareholder
approved equity incentive plan, or the Incentive Plan, that provides for the
granting of options, restricted stock awards, stock appreciation rights,
performance awards and other stock-based awards to employees and officers of the
Company to purchase not more than an aggregate of 69,700,000 shares of common
stock under the 1998 plan, as amended, subject to adjustment under certain
circumstances. The Management Compensation and Development Committee of the
Board of Directors, or the Compensation Committee, determines the type, amount
and terms, including vesting, of any awards made under the Incentive Plans. The
1998 Plan will terminate in 2008.
F-24
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
With respect to options granted under the Incentive Plan, the exercise price may
not be less than the market price of the common stock on the date of grant. In
general, options granted under the Incentive Plan vest over periods ranging from
immediate vesting to four-year vesting and expire ten years from the date of
grant, subject to earlier expiration in case of termination of employment. The
vesting period for options and restricted stock awards granted under the Plans
is subject to certain acceleration provisions if a change in control, as defined
in the Plans, occurs.
As a result of the acquisition of Anthrogenesis, the Company assumed the former
Anthrogenesis Qualified Employee Incentive Stock Option Plan and the
Anthrogenesis Non-Qualified Recruiting and Retention Stock Option Plan. Options
granted under the Anthrogenesis plans prior to Celgene's acquisition of
Anthrogenesis generally vested immediately and expire ten years from the date of
grant. The Anthrogenesis options converted into Celgene options at an exchange
ratio of 0.4545 on a pre-October 2004 and February 2006 stock split basis. No
future awards will be granted under the Non-Qualified Plan. The Qualified Plan
authorizes the award of incentive stock options, which are stock options that
qualify for special federal income tax treatment. The exercise price of any
stock options granted under the Qualified Plan may not be less than the fair
value of the common stock on the date of grant. In general, options granted
under the Qualified Plan vest evenly over a four-year period and expire ten
years from the date of grant, subject to earlier expiration in case of
termination of employment. The vesting period is subject to certain acceleration
provisions if a change in control occurs. No award will be granted under the
Qualified Plan on or after December 31, 2008.
Stock options granted to executives at the vice-president level and above, after
September 18, 2000, contain a reload feature which provides that if (1) the
optionee exercises all or any portion of the stock option (a) at least six
months prior to the expiration of the stock option, (b) while employed by the
Company and (c) prior to the expiration date of the 1998 Incentive Plan and (2)
the optionee pays the exercise price for the portion of the stock option
exercised or pays applicable withholding taxes by using common stock owned by
the optionee for at least six months prior to the date of exercise, the optionee
shall be granted a new stock option under the 1998 Incentive Plan on the date
all or any portion of the stock option is exercised to purchase the number of
shares of common stock equal to the number of shares of common stock exchanged
by the optionee to exercise the stock option or to pay withholding taxes
thereon. The reload stock option will be exercisable on the same terms and
conditions as apply to the original stock option except that (x) the reload
stock option will become exercisable in full on the day which is six months
after the date the original stock option is exercised, (y) the exercise price
shall be the fair value (as defined in the 1998 Incentive Plan) of the common
stock on the date the reload stock option is granted and (z) the expiration of
the reload stock option will be the date of expiration of the original stock
option. An optionee may not reload the reload stock option unless otherwise
permitted by the Compensation Committee. As of December 31, 2005, the Company
has issued 10,876,300 stock options to executives that contain the reload
features noted above, of which 6,232,004 are still outstanding.
In June 1995, the stockholders of the Company approved the 1995 Non-Employee
Directors' Incentive Plan, which, as amended, provides for the granting of
non-qualified stock options to purchase an aggregate of not more than 4,100,000
shares of common stock (subject to adjustment under certain circumstances) to
directors of the Company who are not officers or employees of the Company, or
Non-Employee Directors. Each new Non-Employee Director, upon the date of
election or appointment, receives an option to purchase 20,000 shares of common
stock, which vest in four equal annual installments commencing on the first
anniversary of the date of grant. Additionally, upon the date of each annual
meeting of stockholders, each continuing Non-Employee Director receives an
option to purchase 10,000 shares of common stock (or a pro rata portion thereof
for service less than one year), which vest in full on the date of the first
annual meeting of stockholders held following the date of grant. As amended in
2003, continuing Non-Employee Directors receive quarterly grants of 3,750
options aggregating 15,000 options annually, instead of receiving one
F-25
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
annual grant of 15,000 options and vesting occurs one year from the date of
grant instead of on the date of the first annual meeting of stockholders held
following the date of grant. The 1995 Non-Employee Directors' Incentive Plan
also provides for a discretionary grant upon the date of each annual meeting of
an additional option to purchase up to 5,000 shares to a Non-employee Director
who serves as a member (but not a chairman) of a committee of the Board of
Directors and up to 10,000 shares to a Non-employee Director who serves as the
chairman of a committee of the Board of Directors. All options are granted at an
exercise price that equals the fair value of the Company's common stock at the
grant date and expire ten years after the date of grant. This plan terminates on
June 30, 2015. In December 2005, in recognition of the significance of the
REVLIMID(R) regulatory approval, continuing Non-Employee Directors received the
2006 annual stock option award of 15,000 shares, which were granted at an
exercise price equal to the fair value of the Company's common stock on December
29, 2005 and vest pursuant to the standard terms of the plan.
In June 2005, the stockholders of the Company approved amendments to the 1998
Stock Incentive Plan, or the 1998 Plan, and the 1995 Non-Employee Directors'
Incentive Plan, or the 1995 Plan, to among other things, increase, on a
pre-split basis, the number of shares of common stock that may be subject to
awards from 25,000,000 to 31,000,000 for the 1998 Plan and from 3,600,000 to
3,850,000 for the 1995 Plan.
The following table summarizes the stock option activity for the aforementioned
Plans:
--------------------------------------------------------------------------------
OPTIONS OUTSTANDING
--------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE EXERCISE
Balance December 31, FOR GRANT SHARES PRICE PER SHARE
-------------------------------------------------------------------------------
2002 1,160,723 10,829,432 $21.37
-------------------------------------------------------------------------------
Authorized 4,000,000 --- ---
Expired (308,857) --- ---
Granted (2,424,027) 2,424,027 36.60
Exercised --- (1,041,618) 10.69
Cancelled 172,826 (200,092) 26.78
-------------------------------------------------------------------------------
2003 2,600,665 12,011,749 $25.28
-------------------------------------------------------------------------------
Stock split impact 2,600,665 11,324,297 ---
Granted (4,073,768) 4,073,768 27.36
Exercised --- (1,300,297) 7.99
Cancelled 793,837 (844,799) 19.27
-------------------------------------------------------------------------------
2004 1,921,399 25,264,718 $15.15
-------------------------------------------------------------------------------
Authorized 6,250,000 --- ---
Granted (7,302,665) 7,302,665 54.32
Exercised --- (6,840,682) 11.16
Cancelled 405,262 (429,512) 23.72
Stock split impact 1,273,996 25,297,189 ---
-------------------------------------------------------------------------------
2005 2,547,992 50,594,378 $13.70
================================================================================
F-26
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The following table summarizes information concerning options outstanding under
the Incentive Plans at December 31, 2005:
------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER EXERCISE REMAINING NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING PRICE TERM (YRS.) EXERCISABLE PRICE
------------------------------------------------------------------------------
$ 0.04 - 5.00 9,773,502 $ 2.15 4.0 9,753,502 $ 2.15
5.01 - 10.00 12,174,984 6.88 5.8 12,134,434 6.92
10.01 - 15.00 11,177,106 12.65 7.9 10,950,572 12.91
15.01 - 20.00 6,086,396 16.52 7.2 5,694,516 17.65
20.01 - 30.00 4,982,196 25.10 8.5 4,739,246 26.38
30.01 - 35.67 6,400,194 34.62 9.9 6,188,194 35.81
-------------------------------------------------------------
50,594,378 $ 13.70 6.9 49,460,464 $ 14.02
=============================================================
In December 2005, in recognition of the significance of the REVLIMID(R)
regulatory approval, the Board of Directors approved a resolution to grant the
2006 annual stock option awards in 2005. All stock options awarded were granted
fully vested. Half of the options granted had an exercise price, or strike
price, of $34.05 per option, which was at a 5% premium to the split-adjusted
closing price of the Company's common stock of $32.43 on the grant date of
December 29, 2005, the remaining options granted had a strike price of $35.67
per option, which was at a 10% premium to the split-adjusted closing price of
the Company's common stock of $32.43 on the grant date of December 29, 2005. The
Board's decision to grant these options was in recognition of the REVLIMID(R)
regulatory approval and in response to a review of the Company's long-term
incentive compensation programs in light of changes in market practices and
recently issued changes in accounting rules resulting from the issuance of SFAS
123R, which the Company is required to adopt effective in the first quarter of
2006. In addition, the Company granted certain options to key-employees at
exercise prices equal to the market price of the Company's common stock on the
date of grant that also vested immediately. Management believes that granting
fully vested options prior to the adoption of SFAS 123R will result in the
Company not being required to recognize cumulative compensation expense of
approximately $76.0 million for the four-year period ending December 31, 2009.
During 2001, the Company issued to certain employees an aggregate of 210,000
restricted stock awards of which 120,000 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 these restricted stock awards at the grant date was $0.8 million, which
is being amortized as compensation expense over the contractual vesting period
and classified in selling, general and administrative expenses. The Company
recorded a $0.2 million credit to compensation expense for the year ended
December 31, 2005 due to cancellation of 90,000 restricted stock awards during
the year. The Company recorded compensation expense of $0.3 million for the
years ended December 31, 2004 and 2003, respectively.
WARRANTS: In connection with its acquisition of Anthrogenesis, the Company
assumed the Anthrogenesis warrants outstanding, which were converted into
warrants to purchase 867,356 shares of the Company's common stock. Anthrogenesis
had issued warrants to investors at exercise prices equivalent to the per share
price of their investment. As of December 31, 2005, Celgene had 404,696 warrants
outstanding to acquire an equivalent number of shares of Celgene common stock at
a weighted average exercise price of $2.95 per warrant. These warrants expire on
various dates from 2008 to 2012.
F-27
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(14) EMPLOYEE BENEFIT PLANS
The Company sponsors an investment savings plan, which qualifies under Section
401(k) of the Internal Revenue Code, as amended. The Company's contributions to
the savings plan are discretionary and have historically been made in the form
of the Company's common stock. Such contributions are based on specified
percentages of employee contributions and aggregated a total expense charged to
operations of $6.5 million in 2005, $3.5 million in 2004 and $4.2 million in
2003.
During 2000, the Company's Board of Directors approved a deferred compensation
plan effective September 1, 2000. In February, 2005, the Company's Board of
Directors adopted the Celgene Corporation 2005 Deferred Compensation Plan,
effective as of January 1, 2005, which operates as the Company's ongoing
deferred compensation plan and which is intended to comply with the American
Jobs Creation Act of 2004, which added new Section 409A to the Internal Revenue
Code, changing the income tax treatment, design and administration of certain
plans that provide for the deferral of compensation. The Company's Board of
Directors also froze the 2000 deferred compensation plan, effective as of
December 31, 2004, so that no additional contributions or deferrals can be made
to that plan. Accrued benefits under the frozen plan will continue to be
governed by the terms under the tax laws in effect prior to the enactment of
Section 409A. Eligible participants, which include certain top-level executives
of the Company as specified by the plan, can elect to defer up to 25% of the
participant's base salary, 100% of cash bonuses and restricted stock and stock
options gains (both subject to a minimum deferral of 50% of each award of
restricted stock or stock option gain approved by the Compensation Committee for
deferral). Company contributions to the deferred compensation plan represent a
100% match of the participant's deferral up to a specified percentage (ranging
from 10% to 25%, depending on the employee's position as specified in the plan)
of the participant's base salary. The Company recorded expense of $0.4 million,
$0.8 million and $0.6 million associated with the matching of the deferral of
compensation in 2005, 2004 and 2003, respectively. All amounts are 100% vested
at all times, except with respect to restricted stock, which will not be vested
until the date the applicable restrictions lapse. At December 31, 2005 and 2004,
the Company had a deferred compensation liability included in other non-current
liabilities in the consolidated balance sheets of approximately $11.2 million
and $8.8 million, respectively, which included the participant's elected
deferral of salaries and bonuses, the Company's matching contribution and
earnings on deferred amounts as of that date. The plan provides various
alternatives for the measurement of earnings on the amounts participants defer
under the plan. The measuring alternatives are based on returns of a variety of
funds that offer plan participants the option to spread their risk across a
diverse group of investments.
In 2003, the Company adopted a Long-Term Incentive Plan, or LTIP designed to
provide key officers and executives with performance based incentive
opportunities contingent upon achievement of pre-established corporate
performance objectives, and payable only if employed at the end of the
performance cycle. The 2003 performance cycle began on May 1, 2003 and ended on
December 31, 2005, or the 2005 Plan. The 2004 performance cycle began on January
1, 2004 and will end on December 31, 2006, or the 2006 Plan and the 2005
performance cycle began on January 1, 2005 and will end on December 31, 2007, or
the 2007 Plan. The 2006 performance cycle was approved by the Management
Compensation and Development Committee of the Board of Directors on January 19,
2006 and began on January 1, 2006 and will end on December 31, 2008, or the 2008
Plan. Performance measures for the Plans are based on the following components:
25% on earnings per share, 25% on net income and 50% on revenue.
Payouts may be in the range of 0% to 200% of the participant's salary for the
2005, 2007 and 2008 Plans and 0% to 150% of the participant's salary for the
2006 Plan. The estimated payout for the 2005 Plan is $4.5 million and the
maximum potential payout, assuming objectives are achieved at the 150% level for
the 2006 Plan and at the 200% level for the 2007 and 2008 Plans are $4.5
million, $6.8 million and $7.2 million for the 2006 Plan, 2007 Plan and 2008
Plan, respectively. Such awards are payable in cash or, at its discretion,
F-28
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
the Company can elect to pay the same value in its common stock based upon the
Company's common stock fair value at the payout date. The Company accrues the
long-term incentive liability over each three-year cycle. Prior to the end of a
three-year cycle, the accrual is based on an estimate of the Company's level of
achievement during the cycle. Upon a change in control, participants will be
entitled to an immediate payment equal to their target award, or, if higher, an
award based on actual performance through the date of the change in control. For
the years ended December 31, 2005, 2004 and 2003, the Company recognized expense
related to LTIP of $4.4 million, $3.4 million and $0.5 million, respectively.
(15) ACCUMULATED COMPREHENSIVE INCOME
Other Accumulated Comprehensive Income at December 31, 2005 and 2004 consisted
of the following:
------------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------------
Net unrealized gains on marketable securities, net of tax $ 4,833 $63,926
Currency translation adjustment (4,745) 4,676
--------------------
$ 88 $68,602
====================
(16) SPONSORED RESEARCH, LICENSE AND OTHER AGREEMENTS
PHARMION: In November 2001, we licensed to Pharmion Corporation exclusive rights
relating to the development and commercial use of our intellectual property
covering thalidomide and S.T.E.P.S(R). Under the terms of the agreement, we
receive a royalty of 8% of Pharmion's net thalidomide sales in countries where
Pharmion has received regulatory approval and a S.T.E.P.S(R) license fee of 8%
in all other licensed territories. Separately in December 2004, following our
acquisition of Penn T Limited, our wholly-owned subsidiary Celgene UK
Manufacturing II Limited, or CUK II, (formerly known as "Penn T Limited")
entered into an amended thalidomide supply agreement with Pharmion whereby in
exchange for a reduction in Pharmion's purchase price of thalidomide to 15.5% of
its net sales of thalidomide, we received a one-time payment of $77.0 million.
Under the December 2004 agreement, we also received a one-time payment of $3.0
million in return for granting license rights to Pharmion to develop and market
thalidomide in additional territories and eliminating certain of our license
termination rights. Under the agreements, as amended, the territory licensed to
Pharmion is for all countries other than the United States, Canada, Mexico,
Japan and all provinces of China other than Hong Kong. The agreements with
Pharmion terminate upon the ten-year anniversary following receipt of the first
regulatory approval for thalidomide in the United Kingdom.
To support the further clinical development of thalidomide, Pharmion has also
provided research funding under various agreements of approximately $10.7
million through December 31, 2005 and is required to fund an additional $2.7
million in each of 2006 and 2007.
At December 31, 2005 and 2004, we held 1,939,600 shares of Pharmion common stock
received in connection with the conversion of a five-year Senior Convertible
Promissory Note purchased in April 2003 under a Securities Purchase Agreement
with Pharmion and the exercise of warrants received in connection with the
November 2001 thalidomide license and April 2003 Securities Purchase Agreement.
NOVARTIS PHARMA AG: In April 2000, we entered into an agreement with Novartis in
which we granted to Novartis an exclusive worldwide license (excluding Canada)
to develop and market FOCALIN(TM) (d-methylphenidate, or d- MPH) and FOCALIN
XR(TM), the long-acting drug formulation. We have retained the exclusive
commercial rights to FOCALIN(TM) and FOCALIN XR(TM) for oncology-related
disorders, such as chronic fatigue associated with chemotherapy. We also granted
Novartis rights to all of our related intellectual property and patents,
including new formulations of the currently marketed RITALIN(R). Under the
agreement, we have received upfront and regulatory achievement milestone
payments totaling $55.0
F-29
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
million and are entitled to additional payments upon attainment of certain other
milestone events. We also sell FOCALIN(TM) to Novartis as well as receive
royalties on sales of all of Novartis' FOCALIN XR(TM) and RITALIN(R) family of
ADHD-related products. The research portion of the agreement ended in June 2003.
SERONO: In late 2004, the Company assumed co-exclusive rights with Serono SA to
discover and develop therapeutics that modulate the NFkB pathway utilizing
technology and know-how previously licensed to Serono SA. Celgene made a
one-time payment of $6.0 million to Serono SA, which was recorded as research
and development expense since this relates to undeveloped technology, and will
make milestone and royalty payments on the sales on any resulting products.
Serono SA will have reciprocal milestone payment and royalty obligations to
Celgene for any products Serono SA discovers, develops and commercializes
utilizing the technology and know-how.
S.T.E.P.S. LICENSE AGREEMENTS: In late 2004, the Company entered into an
agreement providing manufacturers of isotretinoin (Acutane(R)) with a
non-exclusive license to its patent portfolio directed to methods for safely
delivering isotretinoin (Acutane(R)) in potentially high-risk patient
populations in exchange for $0.5 million. The manufacturers of isotretinoin have
licensed these patents with the intention of implementing a new pregnancy risk
management system to safely deliver isotretinoin in potentially high-risk
patient populations. The Company is entitled to future royalties under these
agreements.
(17) INCOME TAXES
The income tax provision is based on income before income taxes as follows:
--------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
U.S. $ 135,048 $ 244,034 $ 25,661
Non-U.S (50,836) (180,863) --
------------------------------------
Income before income taxes $ 84,212 $ 63,171 $ 25,661
====================================
The provision/(benefit) for taxes on income from continuing operations is as
follows:
--------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
United States:
Taxes currently payable:
Federal $ 11,538 $ 6,429 $ --
State and local 8,609 4,067 718
Deferred income taxes (3,430) -- --
--------------------------------------------------------------------------------
Total U.S. tax provision 16,717 10,496 718
--------------------------------------------------------------------------------
International:
Taxes currently payable 4,926 23,486 --
Deferred income taxes (1,087) (23,567) --
--------------------------------------------------------------------------------
Total international tax provision 3,839 (81) --
--------------------------------------------------------------------------------
Total provision $ 20,556 $ 10,415 $ 718
================================================================================
Amounts are reflected in the preceding tables based on the location of the
taxing authorities. As of December 31, 2005, we have not made a U.S. tax
provision on approximately $77.6 million of unremitted earnings of our
international subsidiaries. These earnings are expected to be reinvested
overseas. It is not practicable to compute the estimated deferred tax liability
on these earnings.
F-30
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The Company operates under an incentive tax holiday in Switzerland that expires
in 2015 and exempts the Company from certain Swiss income taxes.
Deferred taxes arise because of different treatment between financial statement
accounting and tax accounting, known as "temporary differences." The company
records the tax effect on these temporary differences as "deferred tax assets"
(generally items that can be used as a tax deduction or credit in future
periods) or "deferred tax liabilities" (generally items for which the company
received a tax deduction but that have not yet been recorded in the consolidated
statement of operations). 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 deferred tax assets, including its 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 December 31, 2005, 2004 and 2003 the tax effects of
temporary differences that give rise to deferred tax assets were as follows:
------------------------------------------------------------------------------------------------------------------------------------
2005 2004 2003
------------------------------------------------------------------------------------------------------------------------------------
Assets Liabilities Assets Liabilities Assets Liabilities
------ ----------- ------ ----------- ------ -----------
Federal and state net
operating loss carryforwards $ 84,161 $ -- $ 53,477 $ -- $ 141,379 $ --
Prepaid/deferred items 30,016 -- 29,863 -- -- --
Deferred Revenue 19,533 -- 24,174 -- -- --
Capitalized research expenses 6,861 -- 8,971 -- 16,774 --
Research and experimentation tax
credit carryforwards 19,770 -- 17,431 -- 9,154 --
Plant and equipment, primarily
differences in depreciation 618 (295) 2,307 (295) 1,524 --
Inventory 1,607 -- 1,362 (928) -- --
Other Assets -- (7,325) -- (2,230) -- --
Intangibles 7,910 (27,786) 3,182 (29,761) 5,615 --
Accrued and other expenses 20,493 -- 14,590 -- 6,686 --
Unrealized losses/(gains) on
securities -- (848) -- (33,385) 4,188 (8,893)
------------------------------------------------------------------------------------------------------------------------------------
Subtotal 190,969 (36,254) 155,357 (66,599) 185,320 (8,893)
Valuation allowance (10,396) -- (75,510) -- (176,427) --
------------------------------------------------------------------------------------------------------------------------------------
Total Deferred Taxes $ 180,573 $ (36,254) $ 79,847 $ (66,599) $ 8,893 $ (8,893)
------------------------------------------------------------------------------------------------------------------------------------
Net Deferred Tax Asset $ 144,319 $ -- $ 13,248 $ -- $ -- $ --
====================================================================================================================================
Reconciliation of the U.S. statutory income tax rate to our effective tax rate
for continuing operations is as follows:
-----------------------------------------------------------------------------
PERCENTAGES 2005 2004 2003
-----------------------------------------------------------------------------
US statutory rate 35.0% 35.0% 35.0%
Foreign losses without tax benefit 27.2 50.5 --
State taxes, net of federal benefit 9.6 4.3 3.3
Other 3.2 1.7 --
Change in valuation allowance (50.6) (75.0) (35.5)
-----------------------------------------------------------------------------
Effective income tax rate 24.4% 16.5% 2.8%
=============================================================================
F-31
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
At March 31, 2005, the Company determined it was more likely than not that
certain 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. As a result of eliminating the related valuation allowances, the Company
recorded an income tax benefit in 2005 of $42.6 million and an increase to
additional paid-in capital of $30.2 million. At December 31, 2005, it was more
likely than not that the Company would realize its deferred tax assets, net of
valuation allowances.
At December 31, 2005, the Company had federal net operating loss carryforwards
of approximately $198.0 million and combined state net operating loss
carryforwards of approximately $ 218.7 million that will expire in the years
2006 through 2025. The Company also has research and experimentation credit
carryforwards of approximately $19.7 million that expire in the years 2006
through 2025. Ultimate utilization/availability of such net operating losses and
credits may be curtailed if a significant change in ownership occurs. Signal and
Anthrogenesis experienced an ownership change, as that term is defined in
section 382 of the Internal Revenue Code, when acquired by Celgene, as such,
there is an annual limitation on the use of these net operating losses in the
amount of approximately $11.6 million and $3.4 million, respectively.
Approximately $8.1 million of deferred tax assets acquired in the Anthrogenesis
acquisition at December 31, 2002 consisted primarily of net operating losses; as
such there may be an annual limitation on the Company's ability to utilize the
acquired net operating losses in the future.
The Company realized stock option deduction benefits in 2005, 2004, and 2003 for
income tax purposes and has increased paid-in capital in the amount of
approximately $103.6 million, $14.2 million, and $0.8 million, respectively.
(18) COMMITMENTS AND CONTINGENCIES
LEASES: The Company leases office and research facilities under several
operating lease agreements in the United States, Switzerland and United Kingdom.
The minimum annual rents may be subject to specified annual rental increases. At
December 31, 2005, the non-cancelable lease terms for the operating leases
expire at various dates between 2006 and 2012 and include renewal options. In
general, the Company is also required to reimburse the lessors for real estate
taxes, insurance, utilities, maintenance and other operating costs associated
with the leases.
F-32
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The Company leases certain equipment under a capital lease arrangement. Assets
held under capital leases are included in plant and equipment and the
amortization of these assets is included in depreciation expense. Future minimum
lease payments under noncancelable operating leases (with initial or remaining
lease terms in excess of one year) and future minimum capital lease payments as
of December 31, 2005 are:
--------------------------------------------------------------------------------
OPERATING CAPITAL
(In millions) LEASES LEASES
--------------------------------------------------------------------------------
2006 $ 3.4 $ 2
2007 2.9 2
2008 2.6 -
2009 2.5 -
2010 2.5 -
Thereafter 3.9 -
------------------------
Total minimum lease payments $ 17.8 $ 4
===========
Less amount representing interest 1
-----------
Present value of net minimum
capital lease payments 3
Less current installments of obligations
under capital leases 1
-----------
Obligations under capital leases,
excluding current installments $ 2
============
Total facilities rental expense under operating leases was approximately $4.5
million in 2005, $4.3 million in 2004 and $3.9 million in 2003.
CONTRACTS: 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
December 31, 2005, the remaining cost to be incurred was approximately $7.8
million.
In March 2003, the Company entered into a supply and distribution agreement with
GSK to distribute, promote and sell ALKERAN(R) (melphalan), a therapy approved
by the FDA 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 under a take-or-pay arrangement.
The agreement has been extended through March 31, 2009. On December 31, 2005,
the remaining minimum purchase requirements under the agreement totaled $102.0
million.
The Company signed an exclusive license agreement with CMCC, which terminated
any existing thalidomide analog agreements between CMCC and EntreMed and
directly granted to Celgene an exclusive worldwide license for the analog
patents. Under the agreement, the Company is required to pay CMCC $2.0 million
between 2005 and 2006. The outstanding balance related to this agreement was
$1.0 million at December 31, 2005. Additional payments are possible under the
agreement depending on the successful development and commercialization of
thalidomide analogs.
F-33
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
In October 2003, the Company signed an agreement with Institute of Drug
Technology Australia Limited, or IDT, for the manufacture of finished dosage
form of THALOMID(R) capsules. The agreement requires minimum purchases of
THALOMID(R) capsules of $4.7 million for the three-year term commencing with the
April 2005 FDA approval of IDT as an alternate supplier. This agreement provides
the Company with additional capacity and reduces its dependency on one
manufacturer for the production of THALOMID(R). The outstanding balance related
to this agreement was $4.0 million at December 31, 2005.
CONTINGENCIES: The Company believes it maintains insurance coverage adequate for
its current needs. The Company's operations are subject to environmental laws
and regulations, which impose limitations on the discharge of pollutants into
the air and water and establish standards for the treatment, storage and
disposal of solid and hazardous wastes. The Company reviews the effects of such
laws and regulations on its operations and modifies its operations as
appropriate. The Company believes it is in substantial compliance with all
applicable environmental laws and regulations.
On August 19, 2004, the Company, together with its exclusive licensee Novartis,
filed an infringement action in the United States District Court of New Jersey
against Teva Pharmaceuticals USA, Inc., in response to notices of Paragraph IV
certifications made by Teva in connection with the filing of an ANDA for
FOCALIN(TM). The notification letters contend that United States Patent Nos.
5,908,850, or '850 patent, and 6,355,656, or '656 patent, were invalid. The '656
patent is currently the subject of reexamination proceedings in the United
States Patent and Trademark Office. After the suit was filed, Novartis listed
another patent, United States Patent No. 6,528,530, or '530 patent, in the
Orange Book in association with the FOCALIN(TM) NDA. Neither the '656 patent nor
the '530 patent is part of the patent infringement action against Teva. This
case does not involve an ANDA for RITALIN LA(R) or FOCALIN XR(TM) as such an
ANDA has not been filed. Recently, Teva amended its answer to contend that the
'850 patent was not infringed by the filing of its ANDA, and that the '850
patent is not enforceable due to an allegation of inequitable conduct. Fact
discovery expired on February 28, 2006. No trial date has been set. If
successful, Teva will be permitted to sell a generic version of FOCALIN(TM),
which could significantly reduce the Company's sales of FOCALIN(TM) to Novartis.
(19) SEGMENTS AND RELATED INFORMATION
The Company operates in two business segments - Human Pharmaceuticals and Stem
Cell Therapies. The accounting policies of the segments are the same as
described in the summary of significant accounting policies.
HUMAN PHARMACEUTICALS: The Human Pharmaceutical segment is engaged in the
discovery, development and commercialization of innovative therapies designed to
treat cancer and immuno-inflammatory diseases through regulation of cellular,
genomic and proteomic targets. The segment derives its revenues from
pharmaceutical sales of REVLIMID(R), THALOMID(R), ALKERAN(R) and FOCALIN(TM);
royalties from Novartis on their sales of FOCALIN XR(TM) and the entire
RITALIN(R) family of drugs; and, a licensing and product supply agreement with
Pharmion for its sales of thalidomide. This segment includes the EntreMed equity
method investment and Signal Pharmaceuticals, LLC., a wholly-owned San
Diego-based biopharmaceutical company focused on the discovery and development
of drugs that regulate genes and proteins associated with diseases.
STEM CELL THERAPIES: With the acquisition of Anthrogenesis Corp. in December
2002, the Company acquired a biotherapeutics company pioneering the development
of stem cell therapies and biomaterials derived from human placental tissue that
now operates as Celgene Cellular Therapeutics, or CCT. CCT has organized its
business into three main units: (1) stem cells banking for transplantation, (2)
private stem cell banking and (3) the development of biomaterials for organ and
tissue repair. CCT has developed proprietary methods for producing biomaterials
for organ and tissue repair (i.e. BIOVANCE(TM)). Additionally, CCT has developed
proprietary technology for collecting, processing and storing placental stem
cells with potentially broad therapeutic applications in cancer, as well as
autoimmune, cardiovascular, neurological, and degenerative diseases.
F-34
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
Summarized segment information is as follows:
--------------------------------------------------------------------------------------------------------------
Human Stem Cell
Pharmaceuticals Therapies Unallocated(2) Total
--------------------------------------------------------------------------------------------------------------
2005
Total assets $ 499,753 $ 22,624 $ 724,260 $ 1,246,637
Revenue from external customers 530,094 6,847 -- 536,941
Inter-segment revenue -- 12,036 -- 12,036
------------------------------------------------------------------------
Total revenue $ 530,094 $ 18,883 $ -- $ 548,977
Income (loss) before income
taxes(1) 109,474 (13,226) -- 96,248
Capital expenditures 34,491 1,370 -- 35,861
Depreciation and amortization of
long-term assets 13,209 1,077 -- 14,286
--------------------------------------------------------------------------------------------------------------
2004
Total assets $ 334,932 $ 23,824 $ 748,537 $ 1,107,293
Revenue from external customers 372,957 4,545 -- 377,502
Inter-segment revenue -- -- -- --
------------------------------------------------------------------------
Total revenue $ 372,957 $ 4,545 $ -- $ 377,502
Income (loss) before income
taxes(1) 78,810 (15,639) -- 63,171
Capital expenditures 34,790 1,225 -- 36,015
Depreciation and amortization of
long-term assets 8,714 976 -- 9,690
--------------------------------------------------------------------------------------------------------------
2003
Total assets $ 135,123 $ 10,936 $ 666,967 $ 813,026
Revenue from external customers 267,980 3,495 -- 271,475
Inter-segment revenue -- -- -- --
------------------------------------------------------------------------
Total revenue $ 267,980 $ 3,495 $ -- $ 271,475
Income (loss) before income
taxes(1) 42,279 (16,618) -- 25,661
Capital expenditures 8,726 2,501 -- 11,227
Depreciation and amortization of
long-term assets 7,339 688 -- 8,027
==============================================================================================================
(1) Expenses incurred at the consolidated level are included in the results
of the Human Pharmaceuticals segment.
(2) Unallocated corporate assets consist of cash and cash equivalents and
marketable securities available for sale.
F-35
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The following table provides a reconciliation of selected segment information to
corresponding amounts contained in the Company's Consolidated financial
statements:
--------------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------------
Total Revenue from segments $ 548,977 $ 377,502 $ 271,475
Elimination of intersegment revenue (12,036) -- --
----------------------------------------
Total consolidated revenue $ 536,941 $ 377,502 $ 271,475
----------------------------------------
Income before income taxes from
segments $ 96,248 $ 63,171 $ 25,661
Elimination of intercompany profit (12,036) -- --
----------------------------------------
Consolidated income before income
taxes $ 84,212 $ 63,171 $ 25,661
========================================
OPERATIONS BY GEOGRAPHIC AREA: Revenues outside of North America consist
primarily of sales of THALOMID(R) and REVLIMID(R) in Europe and royalties from
Novartis on their international sales of RITALIN(R) LA.
----------------------------------------------------------------------
REVENUES 2005 2004 2003
----------------------------------------------------------------------
North America $ 518,439 $ 374,686 $ 271,475
All Other 18,502 2,816 --
-------------------------------------------
Total Revenues $ 536,941 $ 377,502 $ 271,475
===========================================
-------------------------------------------------------
LONG LIVED ASSETS(1) 2005 2004
-------------------------------------------------------
North America $ 73,340 $ 59,131
All Other 134,940 144,820
----------------------------
Total Long Lived Assets $ 208,280 $ 203,951
============================
(1) Long-lived assets consist of net property, plant and equipment,
intangible assets and goodwill.
REVENUES BY PRODUCT: Total revenue from external customers by product for the
years ended December 31, 2005, 2004 and 2003, were as follows:
----------------------------------------------------------------------
(IN THOUSANDS $) 2005 2004 2003
----------------------------------------------------------------------
Net product sales:
THALOMID(R) $ 387,816 $ 308,577 $ 223,686
FOCALIN(TM) 4,210 4,177 2,383
ALKERAN(R) 49,748 16,956 17,827
REVLIMID(R) 2,862 -- --
Other 989 861 557
-------------------------------------------
Total net product sales $ 445,625 $ 330,571 $ 244,453
Collaborative agreements
and other revenue 41,334 20,012 15,174
Royalty revenue 49,982 26,919 11,848
-------------------------------------------
Total revenue $ 536,941 $ 377,502 $ 271,475
===========================================
MAJOR CUSTOMERS: As is typical in the pharmaceutical industry, the Company sells
its products primarily through wholesale distributors and therefore, wholesale
distributors account for a large portion of the Company's net product revenues.
In 2005, 2004 and 2003, there were three customers that each accounted for more
than 10% of the Company's total revenue. The percent of total sales to each such
customer in 2005, 2004 and 2003 were as follows: Cardinal Health 39.0%, 29.5%
and 32.5%; McKesson Corp. 27.3%, 18.6% and 17.4%; and Amerisource Bergen Corp.
19.9%, 17.9% and 23.7%. Sales to such customers were included in the results of
the Human Pharmaceuticals segment. These same customers accounted for the
following percentages of accounts receivable for the years ended December 31,
2005 and 2004, respectively: McKesson Corp. 32.8% and 25.3%; Cardinal Health
30.0% and 32.2%; and Amerisource Bergen Corp. 13.2% and 14.0%.
F-36
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(20) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------------------------------------------------------------------------------
1Q 2Q 3Q 4Q YEAR
------------------------------------------------------------------------------------------------------------------------------------
2005
Total revenue $ 112,396 $ 145,701 $ 129,506 $ 149,338 $ 536,941
Gross profit(1) 99,792 127,505 106,307 122,610 456,214
Income tax benefit (provision) 34,172 (29,967) (12,975) (11,786) (20,556)
Net income 48,214 10,846 668 3,928 63,656
Net earnings per common share(2) -
basic $ 0.15 $ 0.03 $ -- $ 0.01 $ 0.19
diluted $ 0.13 $ 0.03 $ -- $ 0.01 $ 0.18
Weighted average number of shares of
common stock outstanding(3) -
basic 331,225 334,282 336,596 339,839 335,512
diluted 382,216 352,023 359,724 359,998 390,585
------------------------------------------------------------------------------------------------------------------------------------
1Q 2Q 3Q 4Q YEAR
------------------------------------------------------------------------------------------------------------------------------------
2004
Total revenue $ 82,873 $ 87,753 $ 101,468 $ 105,408 $ 377,502
Gross profit(1) 61,726 64,916 68,637 75,566 270,845
Income tax provision (801) (1,156) (1,974) (6,484) (10,415)
Net income 8,914 2,595 19,008 22,239 52,756
Net earnings per common share(2) -
basic $ 0.03 $ 0.01 $ 0.06 $ 0.07 $ 0.16
diluted $ 0.03 $ 0.01 $ 0.05 $ 0.06 $ 0.15
Weighted average number of shares of
common stock outstanding(3) -
basic 325,902 327,348 328,181 329,499 327,738
diluted 349,050 353,709 354,128 347,339 345,710
====================================================================================================================================
(1) Gross profit is computed by subtracting cost of goods sold from net
product sales.
(2) The sum of the quarters may not equal the full year basic and diluted
earnings per share since each period is calculated separately.
(3) The weighted average number of shares outstanding reflects the February
17, 2006 two- for- one stock split.
F-37
CELGENE CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Balance at
Beginning of Expense or End of
Year ended December 31, Year Sales Deductions Year
--------------------------------------------------------------------------------------------------
2005
Allowance for doubtful accounts $ 1,370 $ 1,029 $ 107 $ 2,292
Allowance for customer discounts 838 10,434 9,825 1,447
-------------------------------------------------------------
Subtotal 2,208 11,463 9,932 3,739
Allowance for sales returns 9,595 21,160 (1) 25,738 5,017
-------------------------------------------------------------
$ 11,803 $ 32,623 $ 35,670 $ 8,756
=============================================================
--------------------------------------------------------------------------------------------------
2004
Allowance for doubtful accounts $ 873 $ 867 $ 370 $ 1,370
Allowance for customer discounts 657 7,448 7,267 838
-------------------------------------------------------------
Subtotal 1,530 8,315 7,637 2,208
Allowance for sales returns 8,368 16,279 (1) 15,052 9,595
-------------------------------------------------------------
$ 9,898 $ 24,594 $ 22,689 $ 11,803
=============================================================
--------------------------------------------------------------------------------------------------
2003
Allowance for doubtful accounts $ 729 $ 448 $ 304 $ 873
Allowance for customer discounts 291 5,503 5,137 657
-------------------------------------------------------------
Subtotal 1,020 5,951 5,441 1,530
Allowance for sales returns 2,783 12,659 (1) 7,074 8,368
-------------------------------------------------------------
$ 3,803 $ 18,610 $ 12,515 $ 9,898
=============================================================
--------------------------------------------------------------------------------------------------
(1) Amounts are a reduction from gross sales.
F-38