UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-14879
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Cytogen Corporation
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2322400
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
650 College Road East, Suite 3100, Princeton, NJ 08540-5308
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(Address of Principal Executive Offices and Zip Code)
Registrant's Telephone Number, Including Area Code: (609) 750-8200
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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 .
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Outstanding at August 5, 2005
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Common Stock, $.01 par value 17,155,933
CYTOGEN CORPORATION
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION............................................ 1
Item 1. Consolidated Financial Statements (unaudited)............... 1
Consolidated Balance Sheets as of June 30, 2005 and
December 31, 2004....................................... 2
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 2005 and 2004............. 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2005 and 2004 ........................... 4
Notes to Consolidated Financial Statements.................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 31
Item 4. Controls and Procedures..................................... 31
PART II. OTHER INFORMATION................................................ 33
Item 4. Submission of Matters to a Vote of Security Holders......... 33
Item 6. Exhibits.................................................... 34
SIGNATURES................................................................. 35
ProstaScint(R), Quadramet(R) and OncoScint(R) are registered United States
trademarks of Cytogen Corporation. All other trade names, trademarks or
servicemarks appearing in this Quarterly Report on Form 10-Q are the property of
their respective owners, and not the property of Cytogen Corporation or any of
its subsidiaries.
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PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share and per share data)
(Unaudited)
JUNE 30, DECEMBER 31,
2005 2004
------------- -------------
ASSETS:
Current assets:
Cash and cash equivalents....................................... $ 20,532 $ 13,046
Short-term investments.......................................... -- 22,779
Accounts receivable, net........................................ 1,821 1,406
Inventories..................................................... 5,103 3,623
Prepaid expenses................................................ 563 1,242
Other current assets............................................ 145 258
------------- -------------
Total current assets.......................................... 28,164 42,354
Property and equipment, net.......................................... 801 787
Quadramet license fee, net........................................... 6,675 7,024
Other assets......................................................... 400 248
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$ 36,040 $ 50,413
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term liabilities........................ $ 2,298 $ 2,296
Liability related to joint venture.............................. 1,100 396
Accounts payable and accrued liabilities........................ 6,130 7,644
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Total current liabilities..................................... 9,528 10,336
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Long-term liabilities................................................ 38 47
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Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,400,000 shares
authorized-Series C Junior Participating Preferred
Stock, $.01 par value, 200,000 shares authorized,
none issued and outstanding................................... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 15,527,920 and 15,489,116 shares issued
and outstanding at June 30, 2005 and December 31,
2004, respectively............................................ 155 155
Additional paid-in capital...................................... 427,228 426,153
Unearned compensation........................................... (847) --
Common stock to be issued (92,799 shares)....................... 500 --
Accumulated other comprehensive income.......................... 50 --
Accumulated deficit............................................. (400,612) (386,278)
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Total stockholders' equity.................................... 26,474 40,030
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$ 36,040 $ 50,413
============= =============
The accompany notes are an integral part of these statements.
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CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ -----------------------------
2005 2004 2005 2004
------------- ------------ ------------ ------------
REVENUES:
Product revenue:
Quadramet............................................. $ 2,153 $ 1,616 $ 4,207 $ 3,470
ProstaScint........................................... 1,924 2,312 3,823 4,039
Other................................................. -- -- -- 1
------------- ------------ ------------ ------------
Total product revenue............................. 4,077 3,928 8,030 7,510
License and contract revenue............................ 79 24 120 43
------------- ------------ ------------ ------------
Total revenues.................................... 4,156 3,952 8,150 7,553
------------- ------------ ------------ ------------
OPERATING EXPENSES:
Cost of product revenue................................. 2,251 2,396 4,678 4,795
Selling, general and administrative..................... 6,692 4,914 13,716 8,805
Research and development................................ 1,362 541 2,101 1,345
Equity in loss of joint venture......................... 1,704 542 2,202 1,351
------------- ------------ ------------ ------------
Total operating expenses.......................... 12,009 8,393 22,697 16,296
------------- ------------ ------------ ------------
Operating loss.................................... (7,853) (4,441) (14,547) (8,743)
INTEREST INCOME.............................................. 154 106 297 170
INTEREST EXPENSE............................................. (42) (49) (84) (93)
------------- ------------ ------------ ------------
NET LOSS $ (7,741) $ (4,384) $ (14,334) $ (8,666)
============= ============ ============ ============
BASIC AND DILUTED NET LOSS PER SHARE......................... $ (0.50) $ (0.30) $ (0.92) $ (0.63)
============= ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING................... 15,525 14,848 15,519 13,859
============= ============ ============ ============
The accompany notes are an integral part of these statements.
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CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
----------------------------------------
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (14,334) $ (8,666)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................. 492 534
Stock-based compensation expenses............................. 13 11
Stock-based milestone obligation.............................. 500 --
Decrease in provision for doubtful accounts................... (39) --
Amortization of premiums/discounts on
investments, net............................................. 52 28
Deferred rent................................................. 21 17
Loss on disposition of assets................................. -- 3
Write down of property and equipment.......................... -- 100
Changes in assets and liabilities:
Receivables.................................................. (376) (501)
Inventories.................................................. (1,474) 455
Other assets................................................. 690 247
Liability related to joint venture........................... 704 --
Accounts payable and accrued liabilities..................... (1,535) (1,144)
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Net cash used in operating activities............................ (15,286) (8,916)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of short-term investments............................... 22,727 8,000
Purchases of short-term investments................................ -- (15,383)
Purchases of property and equipment................................ (163) (371)
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Net cash provided by (used in) investing activities.............. 22,564 (7,754)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............................. 215 24,021
Payment of long-term liabilities................................... (7) (81)
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Net cash provided by financing activities........................ 208 23,940
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Net increase in cash and cash equivalents.......................... 7,486 7,270
Cash and cash equivalents, beginning of period..................... 13,046 13,630
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Cash and cash equivalents, end of period........................... $ 20,532 $ 20,900
============= =============
Supplemental disclosure of non-cash information:
Capital lease of equipment......................................... $ 1 $ 70
============= =============
Unrealized holding gain on marketable securities................... $ 50 $ --
============= =============
Supplemental disclosure of cash information:
Cash paid for interest............................................. $ 84 $ 93
============= =============
The accompany notes are an integral part of these statements.
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CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. THE COMPANY
BACKGROUND
Founded in 1980, Cytogen Corporation (the "Company" or "Cytogen") of
Princeton, NJ is a product-driven biopharmaceutical company that develops and
commercializes innovative molecules that can be used to build leading
franchises. The Company's marketed products include QUADRAMET(R) (samarium
Sm-153 lexidronam injection) and PROSTASCINT(R) (capromab pendetide) kit for the
preparation of Indium In-111 capromab pendetide in the United States. The
Company also has exclusive United States marketing rights to COMBIDEX(R)
(ferumoxtran-10) for all applications, and the exclusive right to market and
sell ferumoxtol (formerly Code 7228) for oncology applications in the United
States. On March 3, 2005, the U.S. Food and Drug Administration's (the "FDA")
Oncologic Drugs Advisory Committee (ODAC) voted to not recommend approval of the
proposed broad indication for COMBIDEX. On March 24, 2005, Advanced Magnetics,
Inc. informed Cytogen that Advanced Magnetics received an approvable letter from
the FDA for Combidex, subject to certain conditions.
The Company is also developing therapeutics targeting prostate-specific
membrane antigen (PSMA), a protein highly expressed on the surface of prostate
cancer cells and the neovasculature of solid tumors.
The Company has had a history of operating losses since its inception. The
Company currently relies on two products, PROSTASCINT and QUADRAMET, for
substantially all of its revenues. In addition, the Company has, from time to
time, stopped selling certain products, such as NMP22 BLADDERCHEK, BRACHYSEED
and ONCOSCINT, that the Company previously believed would generate significant
revenues. The Company's products are subject to significant regulatory review by
the FDA and other federal and state agencies, which requires significant time
and expenditures in seeking, maintaining and expanding product approvals. In
addition, the Company relies on collaborative partners to a significant degree,
among other things, to manufacture its products, to secure raw materials, and to
provide licensing rights to their proprietary technologies for the Company to
sell and market to others. The Company is also subject to credit concentration
risks as a limited number of its customers provide a high percentage of total
revenues and corresponding receivables.
The Company has also incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend, substantial
funds to implement its planned product development efforts, including
acquisition of products and complementary technologies, research and
development, clinical studies and regulatory activities, and to further the
Company's marketing and sales programs. The Company expects that it will have
additional requirements for debt or equity capital, irrespective of whether or
when it reaches profitability,
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for further product development costs, product and technology acquisition costs
and working capital.
BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Cytogen and its subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
BASIS OF PRESENTATION
The consolidated financial statements and notes thereto of Cytogen are
unaudited and include all adjustments which, in the opinion of management, are
necessary to present fairly the financial condition and results of operations as
of and for the periods set forth in the Consolidated Balance Sheets,
Consolidated Statements of Operations and Consolidated Statements of Cash Flows.
All such accounting adjustments are of a normal, recurring nature. The
consolidated financial statements do not include all of the information and
footnote disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles and should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K, as amended, filed with the
Securities and Exchange Commission, which includes financial statements as of
and for the year ended December 31, 2004. The results of the Company's
operations for any interim period are not necessarily indicative of the results
of the Company's operations for any other interim period or for a full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash in banks and all
highly-liquid investments with a maturity of three months or less at the time of
purchase.
SHORT-TERM INVESTMENTS
The Company had no short-term investments at June 30, 2005 compared to
$22.8 million at December 31, 2004, which consisted of investments in U.S.
government agency notes. The Company had the ability and intent to hold these
investments until maturity and therefore had classified the investments as
held-to-maturity. Held-to-maturity investments were recorded at amortized cost,
adjusted for the accretion of discounts or premiums. Discounts or premiums were
accreted into interest income over the life of the related investment using the
straight-line method, which approximated the effective yield method. Dividend
and interest income were recognized when earned.
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INVENTORIES
The Company's inventories are primarily related to ProstaScint. Inventories
are stated at the lower of cost or market using the first-in, first-out method
and consisted of the following (all amounts in thousands):
JUNE 30, 2005 DECEMBER 31, 2004
--------------- -----------------
Raw materials........................ $ 283 $ 427
Work-in-process...................... 4,616 2,345
Finished goods....................... 204 851
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$ 5,103 $ 3,623
=========== ==========
NET LOSS PER SHARE
Basic net loss per common share is calculated by dividing the Company's net
loss by the weighted-average common shares outstanding during each period.
Diluted net loss per common share is the same as basic net loss per share for
each of the three and six month periods ended June 30, 2005 and 2004 because the
inclusion of common stock equivalents, which consist of warrants and options to
purchase shares of the Company's common stock, would be antidilutive due to the
Company's losses.
VARIABLE INTEREST ENTITIES
The Company follows the revised Financial Accounting Standards Board
("FASB") Interpretation No. 46 ("FIN 46R"), "Consolidation of Variable Interest
Entities", which addresses how a business enterprise should evaluate whether it
has a controlling financial interest in an entity through means other than
voting rights and accordingly should consolidate the entity.
In June 1999, Cytogen entered into a joint venture with Progenics
Pharmaceuticals, Inc. ("Progenics," and collectively with Cytogen, the
"Members") to form the PSMA Development Company LLC (the "Joint Venture"). The
Joint Venture is currently developing antibody-based and vaccine
immunotherapeutic products utilizing Cytogen's exclusively licensed
prostate-specific membrane antigen ("PSMA") technology. The Joint Venture is
owned equally by the Members (see Note 2). Cytogen accounts for the Joint
Venture using the equity method of accounting. The Company is not required to
consolidate the Joint Venture under the requirements of FIN 46R.
STOCK-BASED COMPENSATION
The Company follows the intrinsic value method of accounting for
stock-based employee compensation in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. The
Company records deferred compensation for option grants to employees for the
amount, if any, by which the market price per share exceeds the exercise price
per share at the measurement date, which is generally the grant date.
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The Company follows the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." Had compensation cost for
options been recognized in the consolidated statements of operations using the
fair value method of accounting, the Company's net loss and net loss per share
would have been as follows (all amounts in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- --------------------
2005 2004 2005 2004
---- ---- ---- ----
Net loss, as reported...................................... $ (7,741) $ (4,384) $ (14,334) $ (8,666)
Add: Stock-based employee compensation
expense included in reported net loss .................. 13 - 13 11
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards.................. (565) (341) (1,128) (574)
-------- -------- ---------- ---------
Pro forma net loss......................................... $ (8,293) $ (4,725) $ (15,449) $ (9,229)
======== ======== ========== =========
Basic and diluted net loss per
share, as reported...................................... $ (0.50) $ (0.30) $ (0.92) $ (0.63)
======== ======== ========== =========
Pro forma basic and diluted net
loss per share.......................................... $ (0.53) $ (0.32) $ (1.00) $ (0.67)
======== ======== ========== =========
On June 14, 2005, the Company awarded an aggregate of 168,600 shares of
restricted common stock, $0.01 par value per share, to employees of the Company
pursuant to the terms of the Company's 2004 Stock Incentive Plan, as a long term
incentive. Such restricted shares are subject to future vesting over a period of
six years, and will be issued upon the satisfaction of such vesting provisions
and other terms and conditions related thereto. The Company recorded $868,000 of
unearned compensation upon the granting of the restricted stock, which
represented the fair market value of Cytogen's common stock on the date of
grant. The unearned compensation is amortized on a straight-line basis over the
six year vesting period. For the three months ended June 30, 2005, the Company
recorded a charge of $9,000 in the accompanying statements of operations for the
amortization of unearned compensation. The Company reversed $12,000 of unearned
compensation related to unvested restricted stock upon the termination of
certain employees in the second quarter of 2005.
OTHER COMPREHENSIVE INCOME OR LOSS
Other comprehensive income consisted of an unrealized holding gain or loss
on marketable securities. For the three months ended June 30, 2005, the
unrealized holding loss of those securities was $19,000, and as a result, the
comprehensive loss for the three months ended June 30, 2005 was $7,760,000. For
the six months ended June 30, 2005, the unrealized holding gain of the
securities was $50,000 and as a result the comprehensive loss for the six months
ended June 30, 2005 was $14,284,000. There was no other comprehensive income or
loss in the three and six months ended June 30, 2004.
-8-
RECENT ACCOUNTING PRONOUNCEMENTS
ABNORMAL INVENTORY COSTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"), to clarify that abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage) should be recognized as current period charges, and that fixed
production overheads should be allocated to inventory based on the normal
capacity of production facilities. This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Accordingly,
the Company will adopt SFAS No. 151 in its fiscal year beginning January 1,
2006. The Company is currently evaluating the impact of adopting this statement.
SHARE-BASED PAYMENT
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment",
which revised SFAS No. 123 and superseded APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 123(R) requires that companies recognize
compensation expense associated with grants of stock options and other equity
instruments to employees in the financial statements effective as of the first
interim or annual reporting period that begins after June 15, 2005. In April
2005, the SEC announced the adoption of a new rule allowing companies to
implement SFAS No. 123(R) at the beginning of their next fiscal year that begins
after June 15, 2005. Compensation cost will be measured based on the fair value
of the instrument on the grant date and will be recognized over the vesting
period. This pronouncement applies to all grants after the effective date and to
the unvested portion of stock options outstanding as of the effective date. SFAS
No. 123(R) eliminates the ability to account for such transactions using the
intrinsic method currently used by the Company. SFAS No. 123(R) also requires
that companies recognize compensation expense associated with purchases of
shares of common stock by employees at a discount to market value under employee
stock purchase plans that meet certain criteria. Accordingly, the Company will
adopt SFAS No. 123(R) in the fiscal year beginning January 1, 2006. Although
management has not yet determined the impact of the adoption of this standard,
it is expected to have a material effect on the Company's consolidated financial
statements.
RECLASSIFICATION
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the current year presentation.
2. EQUITY LOSS IN THE PSMA DEVELOPMENT COMPANY LLC
In June 1999, Cytogen entered into a joint venture with Progenics to form
the PSMA Development Company LLC (the "Joint Venture"), a development stage
enterprise. The Joint Venture is currently developing antibody-based and vaccine
immunotherapeutic products utilizing Cytogen's proprietary PSMA technology. The
Joint Venture is owned equally by Cytogen and Progenics.
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Cytogen accounts for the Joint Venture using the equity method of
accounting. Cytogen has recognized 50% of the Joint Venture's operating results
in its consolidated statements of operations for the three and six months ended
June 30, 2005 and 2004. On June 6, 2005, Cytogen and Progenics agreed on a work
plan and annual budget for the Joint Venture for 2005. In 2005, the Members each
expect to provide up to $5.7 million in funding for the development of the PSMA
technologies through the Joint Venture. Each Member has funded $1.6 million to
the Joint Venture as of June 30, 2005. The report of the independent auditors on
the financial statements of the Joint Venture included in the Company's Annual
Report on Form 10-K, as amended, for the year ended December 31, 2004 filed with
the Securities and Exchange Commission, contained an explanatory paragraph which
states that the Joint Venture has suffered recurring losses from operations and
has a net capital deficiency that raises substantial doubt about its ability to
continue as a going concern, and that its financial statements do not include
any adjustments that might result from the outcome of that uncertainty. The
Members have not committed to fund the Joint Venture beyond December 31, 2005 at
this time, except for obligations under existing contractual commitments as of
that date. The Joint Venture may incur losses in future years provided an
agreement between the Members is reached on research program goals and budgets
for periods after 2005 and the Joint Venture's operations are funded.
For the three and six months ended June 30, 2005, Cytogen recognized $1.7
million and $2.2 million, respectively, of the Joint Venture's losses, compared
to $542,000 and $1.4 million of the Joint Venture's losses in the same periods
of 2004. As of June 30, 2005, the carrying value of the Company's investment in
the Joint Venture was $102,000, which represents the Company's investment in the
Joint Venture, less its cumulative share of losses, which net investment is
recorded in other assets. At June 30, 2005 and December 31, 2004, Cytogen's
liability to the Joint Venture was $1.1 million and $396,000, respectively. The
respective liability, as reported in the Liability related to Joint Venture in
the accompanying consolidated balance sheets, represents Cytogen's obligation
related to the capital contribution to the Joint Venture at June 30, 2005 and
Cytogen's cumulative share of losses in excess of its investment in the Joint
Venture at December 31, 2004. Selected financial statement information of the
Joint Venture is as follows (all amounts in thousands):
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BALANCE SHEET DATA:
JUNE 30, DECEMBER 31,
2005 2004
---------------- ----------------
ASSETS:
Cash...................................................................... $ 161 $ --
Prepaid expenses.......................................................... 28 12
--------------- ---------------
$ 189 $ 12
=============== ===============
LIABILITIES AND MEMBERS' DEFICIT:
Accounts payable to Cytogen Corporation, a related party.................. $ 131 $ 4
Accounts payable to Progenics Pharmaceuticals, Inc.,
a related party........................................................ 1,257 189
Accounts payable and accrued expenses..................................... 814 629
--------------- ---------------
Total liabilities.................................................... 2,202 822
--------------- ---------------
Capital contributions..................................................... 28,698 23,298
Contributions receivable.................................................. (2,200) --
Deficit accumulated during the development stage.......................... (28,511) (24,108)
--------------- ---------------
Total members' deficit........................................... (2,013) (810)
--------------- ---------------
Total liabilities and members' deficit........................... $ 189 $ 12
=============== ===============
INCOME STATEMENT DATA:
THREE SIX FOR THE PERIOD
MONTHS ENDED MONTHS ENDED FROM JUNE 15, 1999
JUNE 30, JUNE 30, (INCEPTION) TO
--------------------------- ---------------------------- JUNE 30, 2005
2005 2004 2005 2004 ------------------
---- ---- ---- ----
Interest income...................$ 2 $ 2 $ 3 $ 5 $ 244
Total expenses.................... 3,409 1,086 4,406 2,707 28,755
------------ ----------- ------------ ------------ --------------
Net loss..........................$ (3,407) $ (1,084) $ (4,403) $ (2,702) $ (28,511)
============ =========== ============ ============ ==============
In June 2005, the Joint Venture entered into a collaboration agreement (the
"SGI Agreement") with Seattle Genetics, Inc. ("SGI"). Under the SGI Agreement,
SGI provided an exclusive worldwide license to its proprietary antibody-drug
conjugate technology (the "ADC Technology") to the Joint Venture. Under the
license, the Joint Venture has the right to use the ADC Technology to link
cell-killing drugs to the Joint Venture's monoclonal antibodies that target
prostate-specific membrane antigen. During the initial research term of the SGI
Agreement, SGI will also provide technical information to the Joint Venture
related to implementation of the licensed technology, which period may be
extended for an additional period upon payment of an additional fee. The Joint
Venture may replace PSMA with another antigen, subject to certain restrictions,
upon payment of an antigen replacement fee. The ADC Technology is based, in
part, on technology licensed by SGI from third parties (the "Licensors"). The
Joint Venture is responsible for research, product development, manufacturing
and commercialization of all products under the SGI Agreement. The Joint Venture
may sub-license the ADC Technology to a third-party to
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manufacture the ADC's for both research and commercial use. The Joint Venture
made a $2.0 million technology access payment to SGI upon execution of the SGI
Agreement and will make additional maintenance payments during the term of the
SGI Agreement. In addition, the Joint Venture will make payments aggregating
$15.0 million, upon the achievement of certain defined milestones and will pay
royalties to SGI and its Licensors, as applicable, on a percentage of net sales,
as defined. In the event that SGI provides materials or services to the Joint
Venture under the SGI Agreement, SGI will receive supply and/or labor cost
payments from the Joint Venture at agreed-upon rates. The Joint Venture's
monoclonal antibody project is currently in the pre-clinical phase of research
and development. All costs incurred by the Joint Venture under the SGI Agreement
during the research and development phase of the project will be expensed in the
period incurred. The SGI Agreement terminates at the later of (a) the tenth
anniversary of the first commercial sale of each licensed product in each
country or (b) the latest date of expiration of patents underlying the licensed
products. The Joint Venture may terminate the SGI Agreement upon advance written
notice to SGI. SGI may terminate the SGI Agreement if the Joint Venture breaches
an SGI in-license that is not cured within a specified time period after written
notice. In addition, either party may terminate the SGI Agreement, upon breach
by the other party that is not cured within a specified time period after
written notice or in the event of bankruptcy of the other party. The ability of
the Joint Venture to comply with the terms of the SGI Agreement will depend on
agreement by the Members regarding work plans and budgets of the Joint Venture
in future years.
3. BRISTOL-MYERS SQUIBB MEDICAL IMAGING, INC.
Effective January 1, 2004, the Company entered into a new manufacturing and
supply agreement with Bristol-Myers Squibb Medical Imaging, Inc. ("BMSMI"),
whereby BMSMI will manufacture, distribute and provide order processing and
customer service for Cytogen relating to Quadramet. Under the terms of the
agreement, Cytogen is obligated to pay at least $4.2 million annually, subject
to future annual price adjustment, through 2008, unless terminated by BMSMI or
Cytogen on two years prior written notice. This agreement will automatically
renew for five successive one-year periods unless terminated by BMSMI or Cytogen
on two years prior written notice. During each of the three month periods ended
June 30, 2005 and 2004 Cytogen incurred $1.0 million of manufacturing costs for
Quadramet, all of which is included in cost of product revenue. During each of
the six month periods ended June 30, 2005 and 2004, Cytogen incurred $2.1
million of manufacturing costs for Quadramet. The Company also pays BMSMI a
variable amount per month for each Quadramet order placed to cover the costs of
customer service which is included in selling, general and administrative
expenses.
The two primary components of Quadramet, particularly Samarium-153 and
EDTMP, are provided to BMSMI by outside suppliers. BMSMI obtains its supply of
Samarium-153 from a sole supplier, and EDTMP from another sole supplier.
Alternative sources for these components may not be readily available, and any
alternate suppliers would have to be identified and qualified, subject to all
applicable regulatory guidelines. If BMSMI cannot obtain sufficient quantities
of these components on commercially reasonable terms, or in a timely manner, it
would be unable to manufacture Quadramet on a timely and cost-effective basis.
-12-
4. LAUREATE PHARMA, L.P.
In September 2004, the Company entered into a non-exclusive manufacturing
agreement with Laureate Pharma, L.P. pursuant to which Laureate shall
manufacture ProstaScint and its primary raw materials for Cytogen in Laureate's
Princeton, New Jersey facility. Laureate is the sole manufacturer of ProstaScint
and its antibodies. The agreement will terminate, unless terminated earlier
pursuant to its terms, upon Laureate's completion of the specified production
campaign for ProstaScint and shipment of the resulting products from Laureate's
facility. Under the terms of the agreement, the Company is obligated to pay at
least an aggregate of $5.1 million through 2006. Approximately $4.1 million has
been incurred under this agreement through June 30, 2005, and is recorded as
inventory in the accompanying balance sheet as of June 30, 2005. Of this amount,
approximately $1.1 million and $1.8 million were recorded during the three and
six month periods ended June 30, 2005.
5. THE DOW CHEMICAL COMPANY
On May 6, 2005, the Company entered into a license agreement with The Dow
Chemical Company to create a targeted oncology product designed to treat
prostate and other cancers. The agreement applies proprietary MeO-DOTA
bifunctional chelant technology from Dowpharma to radiolabel Cytogen's PSMA
antibody with a therapeutic radionuclide. Under the agreement, proprietary
chelation technology and other capabilities, provided through ChelaMedSM
radiopharmaceutical services from Dowpharma, will be used to attach a
therapeutic radioisotope to the same murine monoclonal antibody utilized in
Cytogen's ProstaScint molecular imaging agent which is called 7E11-C5.3 (or
7E11). The 7E11 antibody was excluded from the PSMA technology licensed to the
Joint Venture. As a result of the agreement, Cytogen is obligated to pay a
minimal license fee and aggregate future milestone payments of $1.9 million for
each licensed product and royalties based on sales of related products, if any.
Unless terminated earlier, the Dow agreement terminates at the later of (a) the
tenth anniversary of the date of first commercial sale for each licensed product
or (b) the expiration of the last to expire valid claim that would be infringed
by the sale of the licensed product. The Company may terminate the license
agreement with Dow on 90 days written notice.
6. INCREASE IN AUTHORIZED COMMON STOCK
On June 14, 2005, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the total authorized shares
of common stock of the Company from 25,000,000 to 50,000,000 shares.
7. SALE OF COMMON STOCK AND WARRANTS
On July 19, 2005, the Company announced that it entered into a Securities
Purchase Agreement (the "Securities Purchase Agreement") with certain
institutional investors for the sale of 3,104,380 shares of its common stock and
776,096 warrants (the "Warrants") to purchase shares of its common stock having
an exercise price of $6.00 per share, through a registered direct offering. In
exchange for $4.50, the purchasers received one share of common stock and .25
warrants to purchase common stock. These warrants are exercisable for ten years,
beginning six months after their issuance. The transaction provided gross
proceeds of approximately $14.0
-13-
million to Cytogen before deducting costs associated with the offering. The
transaction closed on July 20, 2005 and August 2, 2005. There was no placement
agent in this transaction.
The shares of common stock and the shares of common stock underlying the
Warrants offered by the Company in this transaction will be registered upon
issuance under the Company's existing shelf Registration Statement (referred to
below). The Company is not listing the Warrants on an exchange or any trading
system and does not expect that a trading market for the Warrants will develop.
8. PROSTAGEN MILESTONE PAYMENT
Pursuant to a Stock Exchange Agreement (the "Prostagen Agreement") related
to the Company's acquisition of Prostagen Inc. ("Prostagen") in 1999, as amended
in May 2002, August 2002, and November 2004, the Company agreed to issue up an
additional $1.5 million worth of Cytogen common stock to the shareholders and
debtholders of Prostagen (the "Prostagen Partners"), if certain milestones are
achieved in the PSMA development programs. During the second quarter of 2005,
the Company recorded a $500,000 charge to research and development expense upon
the achievement of certain milestone related to PSMA program as specified in the
Prostagen Agreement with the corresponding amount recorded in Common Stock To Be
Issued in the accompanying consolidated balance sheets. 92,799 shares of Cytogen
common stock will be issued in the third quarter of 2005 related to this
milestone. The remaining $1.0 million of future milestone payment, if any, will
be paid in Cytogen common stock upon the achievement of a certain milestone in
the PSMA development programs.
-14-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements regarding future events and our future results are
based on current expectations, estimates, forecasts, and projections and the
beliefs and assumptions of our management including, without limitation, our
expectations regarding results of operations, selling, general and
administrative expenses, research and development expenses and the sufficiency
of our cash for future operations. Forward-looking statements may be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"estimate," "anticipate," "continue," or similar terms, variations of such terms
or the negative of those terms. These forward-looking statements include the
impact of SFAS No. 123(R), additional funding and development of the PSMA
technologies, growth and market penetration for Quadramet and ProstaScint,
revenues, if any, from our joint venture with Progenics Pharmaceuticals, Inc.,
increased expenses resulting from our sales force and marketing expansion,
including sales and marketing expenses for ProstaScint and Quadramet, the
sufficiency of our capital resources and supply of products for sale, the
continued cooperation of our contractual and collaborative partners, our need
for additional capital and other statements included in this Quarterly Report on
Form 10-Q that are not historical facts. Such forward-looking statements involve
a number of risks and uncertainties and investors are cautioned not to put any
undue reliance on any forward-looking statement. We cannot guarantee that we
will actually achieve the plans, intentions or expectations disclosed in any
such forward-looking statements. Factors that could cause actual results to
differ materially, include, market acceptance of our products, the results of
our clinical trials, our ability to hire and retain employees, economic and
market conditions generally, our receipt of requisite regulatory approvals for
our products and product candidates, the continued cooperation of our marketing
and other collaborative and strategic partners, our ability to protect our
intellectual property, and the other risks identified under the caption
"Additional Factors That May Affect Future Results" in our Annual Report on Form
10-K for the year ended December 31, 2004, as amended, and those under the
caption "Risk Factors," as included in certain of our other filings, from time
to time, with the Securities and Exchange Commission.
Any forward-looking statements made by us do not reflect the potential
impact of any future acquisitions, mergers, dispositions, joint ventures or
investments we may make. We do not assume, and specifically disclaim, any
obligation to update any forward-looking statements, and these statements
represent our current outlook only as of the date given.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes thereto contained
elsewhere herein, as well as in our Annual Report on Form 10-K for the year
ended December 31, 2004, as amended, and from time to time in our other filings
with the Securities and Exchange Commission.
-15-
OVERVIEW
Founded in 1980, Cytogen Corporation of Princeton, NJ is a product-driven
biopharmaceutical company that develops and commercializes innovative molecules
that can be used to build leading franchises. Our marketed products include
Quadramet(R) (samarium Sm-153 lexidronam injection) and ProstaScint(R) (capromab
pendetide) kit for the preparation of Indium In-111 capromab pendetide in the
United States. We also have exclusive United States marketing rights to
Combidex(R) (ferumoxtran-10) for all applications, and the exclusive right to
market and sell ferumoxytol (formerly Code 7228) for oncology applications in
the United States. We are also developing therapeutics targeting
prostate-specific membrane antigen (PSMA), a protein highly expressed on the
surface of prostate cancer cells and the neovasculature of solid tumors. Full
prescribing information for our products is available at www.cytogen.com or by
calling 1-800-833-3533.
SIGNIFICANT EVENTS IN 2005
FDA COMMITTEE VOTES NOT TO RECOMMEND APPROVAL OF PROPOSED BROAD INDICATION FOR
COMBIDEX
On March 3, 2005, the FDA's Oncologic Drugs Advisory Committee voted to not
recommend approval of the proposed broad indication for Combidex.
ADVANCED MAGNETICS RECEIVES APPROVABLE LETTER FOR COMBIDEX
On March 24, 2005, we announced that Advanced Magnetics, Inc., the
developer of Combidex(R) which is exclusively licensed to Cytogen for marketing
in the United States, had informed Cytogen that Advanced Magnetics received an
approvable letter from the FDA for Combidex, subject to certain conditions.
COLLABORATION WITH THE DOW CHEMICAL COMPANY TO DEVELOP PSMA ANTIBODY FOR
TREATMENT OF CANCER
On May 6, 2005, we announced that we had entered into a collaboration with
The Dow Chemical Company to create a targeted oncology product designed to treat
prostate and other cancers. The agreement applies proprietary MeO-DOTA
bifunctional chelant technology from Dowpharma to radiolabel Cytogen's
prostate-specific membrane antigen (PSMA) antibody with a therapeutic
radionuclide. PSMA is a protein highly expressed on the surface of prostate
cancer cells and the neovasculature of many solid tumors. Under the agreement,
proprietary chelation technology and other capabilities, provided through
ChelaMedSM radiopharmaceutical services from Dowpharma, will be used to attach a
therapeutic radioisotope to the same murine monoclonal antibody utilized in
Cytogen's ProstaScint(R) (capromab pendetide) molecular imaging agent. This
antibody, called 7E11-C5.3 (or 7E11), is directed against an intracellular
epitope of PSMA. Dowpharma's MeO-DOTA bifunctional chelant will be utilized to
attach the beta emitting radionuclide lutetium-177 as a payload to the 7E11
antibody, enabling targeted delivery of this cytotoxic agent. The 7E11 antibody
was excluded from the PSMA technology licensed to our PSMA joint venture. We
intend to develop the resulting innovative molecule for the treatment of various
cancers, initially in prostate, that express the PSMA marker.
-16-
CYTOGEN AND PROGENICS APPROVE 2005 WORK PLAN AND BUDGET FOR JOINT VENTURE
On June 6, 2005, we and Progenics Pharmaceuticals, Inc. agreed on a work
plan and annual budget for 2005 for our PSMA joint venture.
SALE OF COMMON STOCK AND WARRANTS
On July 19, 2005, we announced that we entered into a Securities Purchase
Agreement with certain institutional investors for the sale of 3,104,380 shares
of our common stock and 776,096 warrants to purchase shares of our common stock
having an exercise price of $6.00 per share, through a registered direct
offering. In exchange for $4.50, the purchasers received one share of common
stock and .25 warrants to purchase common stock. These warrants are exercisable
for ten years, beginning six months after their issuance. The transaction
provided gross proceeds of approximately $14.0 million to us before deducting
costs associated with the offering. The transaction closed on July 20, 2005 and
August 2, 2005. There was no placement agent in this transaction.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
REVENUES
INCREASE/(DECREASE)
2005 2004 $ %
---- ---- --------- ---------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Quadramet.................... $ 2,153 $ 1,616 $ 537 33%
ProstaScint.................. 1,924 2,312 (388) (17)%
License and Contract......... 79 24 55 229%
-------- --------- --------
$ 4,156 $ 3,952 $ 204 5%
======== ========= ========
Total revenues for the second quarter of 2005 were $4.2 million compared to
$4.0 million for the same period in 2004. Product revenues accounted for 98% and
99% of total revenues for the second quarters of each of 2005 and 2004,
respectively. License and contract revenues accounted for the remainder of
revenues.
QUADRAMET. Quadramet sales were $2.2 million for the second quarter of
2005, compared to $1.6 million in the second quarter of 2004. Quadramet sales
accounted for 53% and 41% of product revenues for the second quarters of each of
2005 and 2004, respectively. We believe such increase was due, in part, to
increased demand associated with our focused marketing programs. We have the
right to market Quadramet in North America and Latin America. Currently, we
market Quadramet only in the United States. We believe that the future growth
and market penetration of Quadramet is dependent upon, among other things: (i)
distinguishing the physical properties of Quadramet from first-generation agents
within its class, (ii) empowering and marketing to key prescribing audiences,
(iii) broadening palliative use within label beyond prostate cancer to include
breast, lung, multiple myeloma, (iv) evaluating the role of Quadramet in
combination with other commonly used oncology agents, and (v)
-17-
expanding clinical development to demonstrate the potential tumoricidal versus
palliative attributes of Quadramet. We cannotprovide any assurance that we will
be able to successfully market Quadramet or that Quadramet will achieve greater
market penetration on a timely basis or result in significant revenues for us.
PROSTASCINT. ProstaScint sales were $1.9 million for the second quarter of
2005, compared to $2.3 million in the second quarter of 2004. ProstaScint sales
accounted for 47% and 59% of product revenues for the second quarters of each of
2005 and 2004, respectively. We believe that ProstaScint sales have been
consistent, except for the increased purchases by distributors in the second
quarter of 2004 associated with the implementation of a price increase for
ProstaScint in late June 2004. We believe that future growth and market
penetration of ProstaScint is dependent upon, among other things, (i) improving
image quality through fusion technology, (ii) validating the antigen targeted by
ProstaScint as an independent prognostic factor, (iii) the publication and
presentation of outcomes data, (iv) development of image-guided applications
including brachytherapy, intensity modulated radiation therapy, surgery, and
cryotherapy, and (v) expanding clinical development to demonstrate the potential
for ProstaScint to monitor response to cytotoxic therapies and image other
cancers. We cannot provide any assurance that we will be able to successfully
market ProstaScint, or that ProstaScint will achieve greater market penetration
on a timely basis or result in significant revenues for us.
LICENSE AND CONTRACT REVENUES. License and contract revenues were $79,000
and $24,000 for the second quarters of 2005 and 2004, respectively. During the
second quarter of 2005, we recognized $78,000 of contract revenues compared to
$15,000 in the second quarter of 2004 for limited research and development
services provided by us to the PSMA Development Company LLC, our joint venture
with Progenics. The level of future revenues for the remainder of 2005, if any,
for contract services provided to the joint venture may vary and will depend
upon the extent of research and development services required by the joint
venture.
OPERATING EXPENSES
INCREASE/(DECREASE)
----------------------
2005 2004 $ %
---- ---- --------- ----------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Cost of product revenue................ $ 2,251 $ 2,396 $ (145) (6)%
Selling, general and administrative.... 6,692 4,914 1,778 36%
Research and development............... 1,362 541 821 152%
Equity in loss of joint venture........ 1,704 542 1,162 214%
-------- -------- -------
$ 12,009 $ 8,393 $ 3,616 43%
======== ======== =======
Total operating expenses for the second quarter of 2005 were $12.0 million
compared to $8.4 million in the same quarter of 2004.
COST OF PRODUCT REVENUE. Cost of product revenue for the second quarters of
2005 and 2004 were $2.3 million and $2.4 million, respectively, and primarily
reflects manufacturing costs for ProstaScint and Quadramet, royalties on our
sales of products and amortization of the up-front payment to Berlex
Laboratories to reacquire the marketing rights to Quadramet in 2003.
-18-
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the second quarter of 2005 were $6.7 million compared to $4.9
million in the same period of 2004. The increase from the prior year period is
primarily driven by the expanded investment for the commercial support of both
Quadramet and ProstaScint, including the implementation of new marketing
initiatives and expansion of our sales force which was substantially completed
in January 2005.
RESEARCH AND DEVELOPMENT. Research and development expenses for the second
quarter of 2005 were $1.4 million compared to $541,000 in the same period of
2004. The increase from the prior year period is primarily driven by new
clinical development initiatives for both Quadramet and ProstaScint and a
$500,000 charge in the second quarter of 2005 for a non-cash milestone
obligation incurred related to the progress of PSMA development programs and the
preclinical development costs associated with our radiolabeled therapeutic
program to attach the therapeutic radionuclide lutetium-177 as a payload to the
7E11 monoclonal antibody utilized in ProstaScint. The increase is partially
offset by savings from the closure of our AxCell Biosciences facility in the
fourth quarter of 2004. During the second quarter of 2005, we incurred $6,000 in
expenses relating to AxCell's operations compared to $167,000 in the same period
of 2004. Research projects through academic, governmental and corporate
collaborators to be supported and additional applications for the intellectual
property and technology at AxCell are being pursued.
EQUITY IN LOSS OF JOINT VENTURE. Our share of the loss of the PSMA
Development Company LLC, our joint venture with Progenics, was $1.7 million and
$542,000 during the second quarters of 2005 and 2004, respectively. Such amounts
represented 50% of the joint venture's operating losses. We equally share
ownership and costs of the joint venture with Progenics and account for the
joint venture using the equity method of accounting. The increase over the prior
year period is primarily due to our share of the $2.0 million upfront fee
incurred by the joint venture to license proprietary antibody-drug conjugate
technology from Seattle Genetics, Inc. for use with the joint venture's
antibodies targeting PSMA. On June 6, 2005, we and Progenics agreed on a work
plan and annual budget for the joint venture for 2005. In 2005, we and Progenics
each expect to provide up to $5.7 million in funding for the development of the
PSMA technologies through the joint venture. Each member of the joint venture
has funded $1.6 million as of June 30, 2005. We and Progenics have not committed
to fund the joint venture beyond December 31, 2005 at this time, except for
obligations under existing contractual commitments as of that date. We may incur
significant and increasing costs in the future to fund our share of the
development costs of the joint venture, although we cannot provide any assurance
that any further agreements between us and Progenics will be reached regarding
the joint venture.
The joint venture's work plan and budget for 2005 includes funding to be
made by the joint venture in accordance with a collaboration agreement (the "SGI
Agreement") with Seattle Genetics, Inc. ("SGI"), commencing in June 2005. Under
the SGI Agreement, SGI provided an exclusive worldwide license to its
proprietary antibody-drug conjugate technology (the "ADC Technology") to the
joint venture. Under the license, the joint venture has the right to use the ADC
Technology to link cell-killing drugs to the joint venture's monoclonal
antibodies that targets prostate-specific membrane antigen. During the initial
research term of the Agreement, SGI will also provide technical information to
the joint venture related to implementation of the licensed technology, which
period may be extended for an additional period upon payment of an
-19-
additional fee. The joint venture may replace PSMA with another antigen, subject
to certain restrictions, upon payment of an antigen replacement fee. The ADC
Technology is based, in part, on technology licensed by SGI from third parties.
The joint venture is responsible for research, product development,
manufacturing and commercialization of all products under the SGI Agreement. The
joint venture may sub-license the ADC Technology to a third-party to manufacture
the ADC's for both research and commercial use. The joint venture made a $2.0
million technology access payment to SGI, upon execution of the SGI Agreement
during June 2005, following a capital contribution by the members. The SGI
Agreement requires the joint venture to make maintenance payments during the
term of the SGI Agreement, aggregate payments of $15.0 million upon the
achievement of certain defined milestones, and royalties, on a percentage of net
sales, as defined, to SGI and its third party licensors. In the event that SGI
provides materials or services to the joint venture under the SGI Agreement, SGI
will receive supply and/or labor cost payments from the joint venture at agreed
upon rates. Unless terminated earlier, the SGI Agreement terminates at the later
of (a) the tenth anniversary of the first commercial sale of each licensed
product in each country or (b) the latest date of expiration of patents
underlying the licensed products. The ability of the joint venture to comply
with the terms of the SGI Agreement will depend on agreement by the members
regarding work plans and budgets of the joint venture in future years.
INTEREST INCOME/EXPENSE. Interest income for the second quarter of 2005 was
$154,000 compared to $106,000 in the same period of 2004. The increase in 2005
from the prior year period was due to higher average yield on cash balances in
2005. Interest expense for the second quarter of 2005 was $42,000 compared to
$49,000 in the same period in 2004. Interest expense includes interest on
outstanding debt and finance charges related to various equipment leases that
are accounted for as capital leases.
NET LOSS. Net loss for the second quarter of 2005 was $7.7 million compared
to $4.4 million reported in the second quarter of 2004. The basic and diluted
net loss per share for the second quarter of 2005 was $0.50 based on 15.5
million weighted average common shares outstanding, compared to a basic and
diluted net loss per share of $0.30 based on 14.8 million weighted average
common shares outstanding for the same period in 2004.
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
REVENUES
INCREASE/(DECREASE)
-------------------
2005 2004 $ %
---- ---- --------- --------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Quadramet.................................... $ 4,207 $ 3,470 $ 737 21%
ProstaScint.................................. 3,823 4,039 (216) (5)%
NMP22 BladderChek............................ -- 1 (1) (100)%
License and Contract......................... 120 43 77 179%
------- ------- --------
$ 8,150 $ 7,553 $ 597 8%
======= ======= ========
-20-
Total revenues for the first half of 2005 were $8.2 million compared to
$7.6 million for the same period in 2004. Product revenues accounted for 99% of
total revenues for the first half of each of 2005 and 2004. License and contract
revenues accounted for the remainder of revenues.
QUADRAMET. Cytogen recorded Quadramet sales of $4.2 million for the first
half of 2005 compared to $3.5 million of Quadramet sales during the first half
of 2004. Quadramet sales accounted for 52% and 46% of product revenues for such
periods, respectively. We have the right to market Quadramet in North America
and Latin America. Currently, we market Quadramet only in the United States. We
believe that the future growth and market penetration of Quadramet is dependent
upon, among other things: (i) distinguishing the physical properties of
Quadramet from earlier generation agents within its class, (ii) empowering and
marketing to key prescribing audiences, (iii) broadening palliative use within
label beyond prostate cancer to include breast, lung, multiple myeloma, (iv)
evaluating the role of Quadramet in combination with other commonly used
oncology agents, and (v) expanding clinical development to demonstrate the
potential tumoricidal versus palliative attributes of Quadramet. We cannot
provide any assurance that we will be able to successfully market Quadramet or
that Quadramet will achieve greater market penetration on a timely basis or
result in significant revenues for us.
PROSTASCINT. ProstaScint sales were $3.8 million for the first half of
2005, a decrease of $216,000 from $4.0 million in the first half of 2004. Sales
of ProstaScint accounted for 48% and 54% of product revenues for such periods,
respectively. We believe that ProstaScint sales have been consistent, except for
the increased purchases by distributors in the second quarter of 2004 associated
with the implementation of a price increase for ProstaScint in late June 2004.
We believe that future growth and market penetration of ProstaScint is dependent
upon, among other things, (i) improving image quality through fusion technology,
(ii) validating the antigen targeted by ProstaScint as an independent prognostic
factor, (iii) the publication and presentation of outcomes data, (iv)
development of image-guided applications including brachytherapy, intensity
modulated radiation therapy, surgery, and cryotherapy, and (v) expanding
clinical development to demonstrate the potential for ProstaScint to monitor
response to cytotoxic therapies and image other cancers. We cannot provide any
assurance that we will be able to successfully market ProstaScint, or that
ProstaScint will achieve greater market penetration on a timely basis or result
in significant revenues for us.
NMP22 BLADDERCHEK. There were no sales of NMP22 BladderChek during the
first half of 2005 compared to $1,000 in the same period in 2004. Effective
December 31, 2004, we stopped selling NMP22 BladderChek.
LICENSE AND CONTRACT REVENUES. License and contract revenues were $120,000
and $43,000 for the first half of 2005 and 2004, respectively. During the first
half of 2005, we recognized $119,000 of contract revenues compared to $28,000 in
the first half of 2004 for limited research and development services provided by
us to the PSMA Development Company LLC, our joint venture with Progenics. We
expect that the level of future revenues for the remainder of 2005, if any, for
contract services provided to the joint venture may vary and will depend upon
the extent of research and development services required by the joint venture.
-21-
OPERATING EXPENSES
INCREASE/(DECREASE)
-------------------
2005 2004 $ %
---- ---- -------- ----------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Cost of product revenues..................... $ 4,678 $ 4,795 $ (117) (2)%
Selling, general and administrative.......... 13,716 8,805 4,911 56%
Research and development..................... 2,101 1,345 756 56%
Equity in loss of joint venture.............. 2,202 1,351 851 63%
-------- -------- -------
$ 22,697 $ 16,296 $ 6,401 39%
======== ======== =======
Total operating expenses for the first half of 2005 were $22.7 million
compared to $16.3 million in the same period of 2004.
COST OF PRODUCT REVENUES. Cost of product revenues for the first half of
2005 were $4.7 million compared to $4.8 million in the same period of 2004 and
primarily reflects manufacturing costs for ProstaScint and Quadramet, royalties
on our sales of products and amortization of the up-front payment to Berlex
Laboratories to reacquire the marketing rights to Quadramet in 2003.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the first half of 2005 were $13.7 million compared to $8.8 million
in the same period of 2004. The increase from the prior year period is primarily
driven by the expanded investment for the commercial support of both Quadramet
and ProstaScint, including the implementation of new marketing initiatives and
expansion of our sales force which was substantially completed in January 2005.
RESEARCH AND DEVELOPMENT. Research and development expenses for the first
half of 2005 were $2.1 million compared to $1.3 million in the same period of
2004. The increase from the prior year period is primarily driven by new
clinical development initiatives for both Quadramet and ProstaScint and a
$500,000 charge in the second quarter of 2005 for a non-cash milestone
obligation incurred related to the progress of PSMA development programs and the
preclinical development costs associated with our radiolabeled therapeutic
program to attach the therapeutic radionuclide lutetium-177 as a payload to the
7E11 monoclonal antibody utilized in ProstaScint. The increase is partially
offset by savings from the closure of our AxCell Biosciences facility in the
fourth quarter of 2004. During the first half of 2005 and 2004, we incurred
$12,000 and $418,000, respectively, in expenses relating to AxCell's operations.
EQUITY IN LOSS OF JOINT VENTURE. Our share of the loss of the PSMA
Development Company LLC, our joint venture with Progenics, was $2.2 million
during the first half of 2005 compared to $1.4 million in the same period of
2004 and represented 50% of the joint venture's operating losses. We equally
share ownership and costs of the joint venture with Progenics and account for
the joint venture using the equity method of accounting. The increase over the
prior year period is primarily due to our share of the $2.0 million upfront fee
incurred by the joint venture to license proprietary antibody-drug conjugate
technology from Seattle Genetics, Inc. for use with the joint venture's
antibodies targeting PSMA. On June 6, 2005, we and Progenics
-22-
agreed on a work plan and annual budget for the joint venture for 2005. In 2005,
we and Progenics each expect to provide up to $5.7 million in funding for the
development of the PSMA technologies through the joint venture. Each member of
the joint venture has funded $1.6 million as of June 30, 2005. We and Progenics
have not committed to fund the joint venture beyond December 31, 2005 at this
time, except for obligations under existing contractual commitments as of that
date. We may incur significant and increasing costs in the future to fund our
share of the development costs of the joint venture, although we cannot provide
any assurance that any further agreements between us and Progenics will be
reached regarding the joint venture.
The joint venture's work plan and budget for 2005 includes funding to be
made by the joint venture in accordance with a collaboration agreement (the "SGI
Agreement") with Seattle Genetics, Inc. ("SGI"), commencing in June 2005. Under
the SGI Agreement, SGI provided an exclusive worldwide license to its
proprietary antibody-drug conjugate technology (the "ADC Technology") to the
joint venture. Under the license, the joint venture has the right to use the ADC
Technology to link cell-killing drugs to the joint venture's monoclonal
antibodies that targets prostate-specific membrane antigen. During the initial
research term of the Agreement, SGI will also provide technical information to
the joint venture related to implementation of the licensed technology, which
period may be extended for an additional period upon payment of an additional
fee. The joint venture may replace PSMA with another antigen, subject to certain
restrictions, upon payment of an antigen replacement fee. The ADC Technology is
based, in part, on technology licensed by SGI from third parties. The joint
venture is responsible for research, product development, manufacturing and
commercialization of all products under the SGI Agreement. The joint venture may
sub-license the ADC Technology to a third-party to manufacture the ADC's for
both research and commercial use. The joint venture made a $2.0 million
technology access payment to SGI, upon execution of the SGI Agreement during
June 2005, following a capital contribution by the members. The SGI Agreement
requires the joint venture to make maintenance payments during the term of the
SGI Agreement, aggregate payments of $15.0 million upon the achievement of
certain defined milestones, and royalties, on a percentage of net sales, as
defined, to SGI and its third party licensors. In the event that SGI provides
materials or services to the joint venture under the SGI Agreement, SGI will
receive supply and/or labor cost payments from the joint venture at agreed upon
rates. Unless terminated earlier, the SGI Agreement terminates at the later of
(a) the tenth anniversary of the first commercial sale of each licensed product
in each country or (b) the latest date of expiration of patents underlying the
licensed products. The ability of the joint venture to comply with the terms of
the SGI Agreement will depend on agreement by the members regarding work plans
and budgets of the joint venture in future years.
INTEREST INCOME/EXPENSE. Interest income for the first half of 2005 was
$297,000 compared to $170,000 in the same period of 2004. The increase in 2005
from the prior year period was due to a higher average yield on cash balances in
2005. Interest expense was $84,000 and $93,000 for the first half of 2005 and
2004, respectively. Interest expense includes interest on outstanding debt and
finance charges related to various equipment leases that are accounted for as
capital leases.
NET LOSS. Net loss for the first half of 2005 was $14.3 million compared to
$8.7 million reported in the first half of 2004. The basic and diluted net loss
per share for the first half of 2005 was $0.92 based on 15.5 million weighted
average common shares outstanding, compared
-23-
to a basic and diluted net loss per share of $0.63 based on 13.9 million
weighted average common shares outstanding for the same period in 2004.
COMMITMENTS
We have entered into various contractual and commercial commitments. The
following table summarizes our obligations with respect to these commitments as
of June 30, 2005:
LESS
THAN 1 TO 3 4 TO 5 MORE THAN
1 YEAR YEARS YEARS 5 YEARS TOTAL
--------- -------- -------- ----------- -----------
(ALL AMOUNTS IN THOUSANDS)
Long-term debt(1).................................. $ 2,300 $ -- $ -- $ -- $ 2,300
Capital lease obligations.......................... 18 38 -- -- 56
Facility leases.................................... 338 451 -- -- 789
Research and development and
other obligations............................... 159 162 151 588 1,060
Manufacturing contracts(2)......................... 5,410 4,401 -- -- 9,811
Capital contribution to joint venture(3)........... 4,100 -- -- -- 4,100
Minimum royalty payments(4)........................ 1,077 2,000 2,000 3,333 8,410
------- -------- -------- ------- --------
Total........................................ $13,402 $ 7,052 $ 2,151 $ 3,921 $ 26,526
======= ======== ======== ======= ========
(1) In August 1998, we received $2.0 million from Elan Corporation, plc in
exchange for a convertible promissory note. The note is convertible
into shares of our common stock at $28 per share, subject to
adjustments, and matures in August 2005. The note bears annual
interest of 7%, compounded semiannually, however, such interest was
not payable in cash but was added to the principal of the note through
August 2000. For subsequent periods, interest is payable in cash. The
note contains certain non-financial covenants, with which we were in
compliance as of June 30, 2005.
(2) Effective January 1, 2004, we entered into a new manufacturing and
supply agreement with BMSMI for QUADRAMET whereby BMSMI manufactures,
distributes and provides order processing and customer services for us
relating to QUADRAMET. Under the terms of our agreement, we are
obligated to pay at least $4.2 million annually, subject to future
annual price adjustment, through 2008, unless terminated by BMSMI or
us on a two year prior written notice. This agreement will
automatically renew for five successive one-year periods unless
terminated by BMSMI or us on a two-year prior written notice.
Accordingly, we have not included commitments beyond June 30, 2007.
Additionally, in September 2004, we entered into a non-exclusive
manufacturing agreement with Laureate Pharma, L.P. pursuant to which
Laureate shall manufacture ProstaScint for us in its Princeton, New
Jersey facility. The agreement will terminate, unless earlier
terminated pursuant to its terms, upon Laureate's completion of the
production campaign for PROSTASCINT and shipment of the resulting
products from Laureate's facility. Under the terms of the agreement,
we are obligated to pay at least an aggregate of $5.1 million through
2006, of which approximately $4.1 million was incurred through June
30, 2005. We expect that the agreement will provide us with a
sufficient supply of ProstaScint to satisfy our commercial
requirements for approximately the next four years, based upon current
sales levels. In addition, we believe the agreement will provide
sufficient supply of 7E11 required for initial clinical development of
our therapeutic program.
(3) On June 6, 2005, we and Progenics agreed on a work plan and annual
budget for the joint venture for 2005. In 2005, we have each funded
$1.6 million as of June 30, 2005. We may incur significant and
increasing costs in the future to fund our share of the development
costs from the joint venture, although we cannot be
-24-
sure that any further agreements between us and Progenics will be
reached regarding the joint venture. The joint venture's work plan and
budget for 2005 includes funding to be made by the joint venture in
accordance with the SGI Agreement with SGI, commencing in June 2005.
The joint venture made a $2.0 million technology access payment to
SGI, upon execution of the SGI Agreement during June 2005, following a
capital contribution by the members. The SGI Agreement requires the
joint venture to make maintenance payments during the term of the SGI
Agreement, aggregate payments of $15.0 million upon the achievement of
certain defined milestones, and royalties, on a percentage of net
sales, as defined, to SGI and its licensors. In the event that SGI
provides materials or services to the joint venture under the SGI
Agreement, SGI will receive supply and/or labor cost payments from the
joint venture at agreed upon rates. The ability of the joint venture
to comply with the terms of the SGI Agreement will depend on agreement
by the members regarding work plans and budgets of the joint venture
in future years.
(4) We acquired an exclusive license from The Dow Chemical Company for
QUADRAMET for the treatment of osteoblastic bone metastases in certain
territories. The agreement requires us to pay Dow royalties based on a
percentage of net sales of QUADRAMET, or a guaranteed contractual
minimum payment, whichever is greater, and future payments upon
achievement of certain milestones. Future annual minimum royalties due
to Dow are $1.0 million per year in 2005 through 2012 and $833,000 in
2013.
In addition to the above, we are obligated to make certain royalty payments
based on sales of the related product and certain milestone payments if our
collaborative partners achieve specific development milestones or commercial
milestones.
LIQUIDITY AND CAPITAL RESOURCES
CONDENSED STATEMENT OF CASH FLOWS:
JUNE 30, 2005
--------------------------
(ALL AMOUNTS IN THOUSANDS)
Net loss.......................................... $ (14,334)
Adjustments to reconcile net loss to net cash
used in operating activities.................. (952)
-----------
Net cash used in operating activities............. (15,286)
Net cash provided by investing activities......... 22,564
Net cash provided by financing activities......... 208
-----------
Net increase in cash and cash equivalents......... $ 7,486
===========
OVERVIEW
Our cash and cash equivalents were $20.5 million as of June 30, 2005,
compared to $13.0 million as of December 31, 2004. As of June 30, 2005, our
total cash, cash equivalents and short-term investments was $20.5 million
compared to $35.8 million as of December 31, 2004. The decrease in cash, cash
equivalents and short term investments from the December 31, 2004 balance was
primarily due to the build-up of ProstaScint inventory and to increased
operating expenditures in 2005, including costs to promote and support our
oncology products and to expand our internal sales force, new clinical
development initiatives for both Quadramet and ProstaScint and funding for the
PSMA Development Company joint venture. During the first half of 2005 and 2004,
net cash used for operating activities was $15.3 million and $8.9 million,
respectively. In 2005, we expect operating expenditures to increase over 2004
levels.
Historically, our primary sources of cash have been proceeds from the
issuance and sale of our stock through public offerings and private placements,
product related revenues, revenues
-25-
from contract research services, fees paid under license agreements and interest
earned on cash and short-term investments.
On July 19, 2005, we announced that we entered into a Securities Purchase
Agreement with certain institutional investors for the sale of 3,104,380 shares
of its common stock and 776,096 warrants (the "Warrants") to purchase shares of
its common stock having an exercise price of $6.00 per share, through a
registered direct offering. In exchange for $4.50, the purchasers received one
share of common stock and .25 warrants to purchase common stock. These warrants
are exercisable for ten years, beginning six months after their issuance. The
transaction provided gross proceeds of approximately $14.0 million to us before
deducting costs associated with the offering. The transaction closed on July 20,
2005 and August 2, 2005. There was no placement agent in this transaction. The
shares of common stock and the shares of common stock underlying the Warrants
offered by us in this transaction will be registered upon issuance under the
Company's existing shelf Registration Statement (referred to below). We are not
listing the Warrants on an exchange or any trading system and do not expect that
a trading market for the Warrants will develop. On November 5, 2004, we filed a
registration statement (File No. 333-120262) (the "Registration Statement") on
Form S-3 with the Securities and Exchange Commission (the "Commission") relating
to the public offering pursuant to Rule 415 under the Securities Act of 1933, as
amended, of up to an aggregate of $70,000,000 of debt securities, common stock,
preferred stock, warrants and units of the Company. The Commission declared the
Registration Statement effective on November 14, 2004.
Our financial objectives are to meet our capital and operating requirements
through revenues from existing products and licensing arrangements. To achieve
these objectives, we may enter into research and development partnerships and
acquire, in-license and develop other technologies, products or services.
Certain of these strategies may require payments by us in either cash or stock
in addition to the costs associated with developing and marketing a product or
technology. However, we believe that, if successful, such strategies may
increase long-term revenues. There can be no assurance as to the success of such
strategies or that resulting funds will be sufficient to meet cash requirements
until product revenues are sufficient to cover operating expenses, if ever. To
fund these strategic and operating activities, we may sell equity, debt or other
securities as market conditions permit or enter into credit facilities.
OTHER LIQUIDITY EVENTS
In September 2004, we entered into a non-exclusive manufacturing agreement
with Laureate Pharma, L.P. pursuant to which Laureate is manufacturing
ProstaScint for us in its Princeton, New Jersey facility. Our agreement will
terminate, unless terminated earlier pursuant to its terms, upon Laureate's
completion of the production campaign and shipment of the resulting products
from Laureate's facility. Under the terms of the agreement, we are obligated to
pay at least an aggregate of $5.1 million through 2006. Approximately $4.1
million has been incurred under this agreement through June 30, 2005, and is
recorded as inventory in the accompanying balance sheet as of June 30, 2005. Of
this amount, approximately $1.8 million was recorded during the first half of
2005. We expect that the agreement will provide us with a sufficient supply of
ProstaScint to satisfy our commercial requirements for approximately the next
four years, based upon current sales levels. In addition, we believe the
agreement will provide sufficient supply of 7E11 required for initial clinical
development of our therapeutic
-26-
program. In October 2004, Laureate was acquired by Safeguard Scientifics, Inc.
Laureate has continued to operate as a full service contract manufacturing
organization and we have not experienced any disruption in Laureate's
performance of its obligations to produce ProstaScint.
Effective January 1, 2004, we entered into a new manufacturing and supply
agreement with BMSMI whereby BMSMI manufactures, distributes and provides order
processing and customer services for us relating to Quadramet. Under the terms
of the new agreement, we are obligated to pay at least $4.2 million annually,
subject to future annual price adjustment, through 2008, unless terminated by
BMSMI or us on two years prior written notice. During the first half of 2005, we
incurred $2.1 million of manufacturing costs for Quadramet. This agreement will
automatically renew for five successive one-year periods unless terminated by
BMSMI or us on a two year prior written notice. We also pay BMSMI a variable
amount per month for each Quadramet order placed to cover the costs of customer
service. In addition, we expect our Quadramet sales and marketing expenses to
increase in 2005.
Beginning in December 2001, we began to equally share the costs of the
joint venture with Progenics. On June 6, 2005, we and Progenics agreed on a work
plan and annual budget for the Joint Venture for 2005. In 2005, we and Progenics
each expect to provide up to $5.7 million in funding for the development of the
PSMA technologies through the Joint Venture. Each member of the joint venture
has funded $1.6 million as of June 30, 2005. The joint venture's work plan and
budget for 2005 includes funding to be made by the joint venture in accordance
with the SGI Agreement with SGI, commencing in June 2005. The joint venture made
a $2.0 million technology access payment to SGI, upon execution of the SGI
Agreement during June 2005, following a capital contribution by the members. The
SGI Agreement requires the joint venture to make maintenance payments during the
term of the SGI Agreement, aggregate payments of $15.0 million upon the
achievement of certain defined milestones, and royalties, on a percentage of net
sales, as defined, to SGI and its licensors. In the event that SGI provides
materials or services to the joint venture under the SGI Agreement, SGI will
receive supply and/or labor cost payments from the joint venture at agreed upon
rates. The ability of the joint venture to comply with the terms of the SGI
Agreement will depend on agreement by the members regarding work plans and
budgets of the joint venture in future years. We and Progenics have not
committed to fund the Joint Venture beyond December 31, 2005 at this time,
except for obligations under existing contractual commitments as of that date.
We may incur significant and increasing costs in the future to fund our share of
the development costs from the joint venture although we cannot provide any
assurance that any further agreements between us and Progenics will be reached
regarding the joint venture. Any funding amount in subsequent periods may vary
dependent upon, among other things, the results of the clinical trials and
research and development activities, competitive and technological developments,
and market opportunities. If no agreement is reached with Progenics, we also may
have commitments for certain wind down costs under third party agreements with
the joint venture.
We acquired an exclusive license from The Dow Chemical Company for
Quadramet for the treatment of osteoblastic bone metastases in certain
territories. The agreement requires us to pay Dow royalties based on a
percentage of net sales of Quadramet, or a guaranteed contractual minimum
payment, whichever is greater, and future payments upon achievement of certain
milestones. Future annual minimum royalties due to Dow are $1.0 million per year
in 2005 through 2012 and $833,000 in 2013.
-27-
On May 6, 2005, we entered into a license agreement with The Dow Chemical
Company to create a targeted oncology product designed to treat prostate and
other cancers. The agreement applies proprietary MeO-DOTA bifunctional chelant
technology from Dowpharma to radiolabel our PSMA antibody with a therapeutic
radionuclide. Under the agreement, proprietary chelation technology and other
capabilities, provided through ChelaMedSM radiopharmaceutical services from
Dowpharma, will be used to attach a therapeutic radioisotope to the 7E11
monoclonal antibody utilized in our ProstaScint molecular imaging agent. As a
result of the agreement, we are obligated to pay a minimal license fee and
aggregate future milestone payments of $1.9 million for each licensed product
and royalties based on sales of related products, if any. Unless terminated
earlier, the Dow Agreement terminates at the later of (a) the tenth anniversary
of the date of first commercial sale for each licensed product or (b) the
expiration of the last to expire valid claim that would be infringed by the sale
of the licensed product. We may terminate the license agreement with Dow on 90
days written notice.
We have incurred negative cash flows from operations since our inception,
and have expended, and expect to continue to expend in the future, substantial
funds to implement our planned product development efforts, including
acquisition of products and complementary technologies, research and
development, clinical studies and regulatory activities, and to further our
marketing and sales programs. We expect that our existing capital resources,
along with the $14 million gross proceeds from the July 2005 financing, should
be adequate to fund our operations and commitments at least into mid-2006. We
cannot assure you that our business or operations will not change in a manner
that would consume available resources more rapidly than anticipated. We expect
that we will have additional requirements for debt or equity capital,
irrespective of whether and when we reach profitability, for further product
development costs, product and technology acquisition costs, and working
capital.
Our future capital requirements and the adequacy of available funds will
depend on numerous factors, including: (i) the successful commercialization of
our products; (ii) the costs associated with the acquisition of complementary
products and technologies; (iii) progress in our product development efforts and
the magnitude and scope of such efforts; (iv) progress with clinical trials; (v)
progress with regulatory affairs activities; (vi) the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights; (vii) competing technological and market developments; and
(viii) the expansion of strategic alliances for the sales, marketing,
manufacturing and distribution of our products. To the extent that the currently
available funds and revenues are insufficient to meet current or planned
operating requirements, we will be required to obtain additional funds through
equity or debt financing, strategic alliances with corporate partners and
others, or through other sources. There can be no assurance that the financial
sources described above will be available when needed or at terms commercially
acceptable to us. If adequate funds are not available, we may be required to
delay, further scale back or eliminate certain aspects of our operations or
attempt to obtain funds through arrangements with collaborative partners or
others that may require us to relinquish rights to certain of our technologies,
product candidates, products or potential markets. If adequate funds are not
available, our business, financial condition and results of operations will be
materially and adversely affected.
-28-
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 to our Consolidated Financial Statements in our
Annual Report on Form 10-K for the year ended December 31, 2004, as amended,
includes a summary of our significant accounting policies and methods used in
the preparation of our Consolidated Financial Statements. The following is a
brief discussion of the more significant accounting policies and methods used by
us. The preparation of our Consolidated Financial Statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our actual results could differ materially from
those estimates.
REVENUE RECOGNITION
Product revenues include product sales by us to our customers. Product
sales are recognized when the customer takes ownership of the products and
assumes risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an agreement exists and the sales price is fixed and
determinable. Product returns are accepted under limited circumstances and are
estimated based upon historical experience. We may provide rebates and volume
discounts to our customers from time to time. Such rebates and discounts are
recorded as a reduction of product sales when earned by the customer.
License and contract revenues include milestone payments and fees under
collaborative agreements with third parties, revenues from research services,
and revenues from other miscellaneous sources.
In 2003, Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB
104") replaced Staff Accounting Bulletin No. 101, "Revenue Recognition In
Financial Statements" ("SAB 101"), which the Company adopted in 2000. The
provisions related to non-refundable, up-front license fees were unchanged in
SAB 104 compared to SAB 101. Accordingly, we defer up-front license fees and
recognize them over the estimated performance period of the related agreement,
when we have continuing involvement. Since the term of the performance periods
is subject to management's estimates, future revenues to be recognized could be
affected by changes in such estimates.
ACCOUNTS RECEIVABLE
Our accounts receivable balances are net of an estimated allowance for
uncollectible accounts. We continuously monitor collections and payments from
our customers and maintain an allowance for uncollectible accounts based upon
our historical experience and any specific customer collection issues that we
have identified. While we believe our reserve estimate to be appropriate, we may
find it necessary to adjust our allowance for uncollectible accounts if the
future bad debt expense exceeds our estimated reserve. We are subject to
concentration risks as a limited number of our customers provide a high percent
of total revenues, and corresponding receivables.
-29-
INVENTORIES
Inventories are stated at the lower of cost or market, as determined using
the first-in, first-out method, which most closely reflects the physical flow of
our inventories. Our products and raw materials are subject to expiration
dating. We regularly review quantities on hand to determine the need for
reserves for excess and obsolete inventories based primarily on our estimated
forecast of product sales. Our estimate of future product demand may prove to be
inaccurate, in which case we may have understated or overstated our reserve for
excess and obsolete inventories.
CARRYING VALUE OF FIXED AND INTANGIBLE ASSETS
Our fixed assets and certain of our acquired rights to market our products
have been recorded at cost and are being amortized on a straight-line basis over
the estimated useful life of those assets. If indicators of impairment exist, we
assess the recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered through undiscounted
future operating cash flows. If impairment is indicated, we measure the amount
of such impairment by comparing the carrying value of the assets to the present
value of the expected future cash flows associated with the use of the asset.
Adverse changes regarding future cash flows to be received from long-lived
assets could indicate that an impairment exists, and would require the write
down of the carrying value of the impaired asset at that time.
RECENT ACCOUNTING PRONOUNCEMENTS
ABNORMAL INVENTORY COSTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"), to clarify that abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage) should be recognized as current period charges, and that fixed
production overheads should be allocated to inventory based on the normal
capacity of production facilities. This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Accordingly,
we will adopt SFAS No. 151 in our fiscal year beginning January 1, 2006. We are
currently evaluating the impact of adopting this statement.
SHARE-BASED PAYMENT
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment",
which revised SFAS No. 123 and superseded APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS No. 123(R) requires that companies recognize
compensation expense associated with grants of stock options and other equity
instruments to employees in the financial statements effective as of the first
interim or annual reporting period that begins after June 15, 2005. In April
2005, the SEC announced the adoption of a new rule allowing companies to
implement SFAS No. 123(R) at the beginning of their next fiscal year that begins
after June 15, 2005. Compensation cost will be measured based on the fair value
of the instrument on the grant date and will be recognized over the vesting
period. This pronouncement applies to all grants
-30-
after the effective date and to the unvested portion of stock options
outstanding as of the effective date. SFAS No. 123(R) eliminates the ability to
account for such transactions using the intrinsic method currently used by us.
SFAS No. 123(R) also requires that companies recognize compensation expense
associated with purchases of shares of common stock by employees at a discount
to market value under employee stock purchase plans that meet certain criteria.
Accordingly, we will adopt SFAS No. 123(R) in the fiscal year beginning January
1, 2006. Although management has not yet determined the impact of the adoption
of this standard, it is expected to have a material effect on our consolidated
financial statements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have operations subject to risks of foreign currency
fluctuations, nor do we use derivative financial instruments in our operations.
Our exposure to market risk is principally confined to interest rate
sensitivity. Our cash equivalents and short-term investments are conservative in
nature, with a focus on preservation of capital. Due to the short-term nature of
our investments and our investment policies and procedures, we have determined
that the risks associated with interest rate fluctuations related to these
financial instruments are not material to our business. As of June 30, 2005, we
had $2.3 million of debt outstanding with a fixed interest rate of 7%. We do not
have exposure to market risks associated with changes in interest rates, as we
have no variable interest rate debt outstanding. However, downward changes in
interest rates could expose us to market risk associated with any fixed interest
rate debt.
ITEM 4 - CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and
chief financial officer, evaluated the effectiveness of our disclosure controls
and procedures as of June 30, 2005. The term "disclosure controls and
procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Securities Exchange Act of 1934 is accumulated and
communicated to the company's management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applied its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on this evaluation, our chief executive officer and chief financial
officer concluded that, as of June 30, 2005, our disclosure controls and
procedures were effective.
-31-
(2) Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended as of June 30, 2005 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
-32-
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 14, 2005, we held our annual meeting of stockholders to: (i) elect
nine directors; (ii) consider and vote upon a proposal to approve an amendment
to the Company's Certificate of Incorporation to increase the total authorized
shares of common stock, $0.01 par value per share, of the Company from
25,000,000 to 50,000,000; and (iii) transact such other business as may come
before the meeting.
There were represented at the our annual meeting, either in person or by
proxy, 14,500,670 shares of our common stock out of a total number of 15,571,688
shares of common stock issued and outstanding and entitled to vote at the
meeting.
The following tables set forth information regarding the number of votes
cast for, withheld, abstentions and broker non-votes, with respect to each
matter presented at the meeting.
(i) Election of Directors:
Broker Non-
Nominees For Withheld Abstentions Votes
---------------------------- --------------- ---------------- --------------- -----------------
John E. Bagalay, Jr. 12,283,163 2,217,507 N/A N/A
Michael D. Becker 12,814,980 1,685,690 N/A N/A
Allen Bloom 12,818,453 1,682,217 N/A N/A
Stephen K. Carter 12,780,677 1,719,993 N/A N/A
James A. Grigsby 12,749,748 1,750,922 N/A N/A
Dennis H. Langer 12,817,960 1,682,710 N/A N/A
Robert F. Hendrickson 12,799,781 1,720,879 N/A N/A
Kevin G. Lokay 12,818,490 1,682,180 N/A N/A
Joseph A. Mollica 12,815,962 1,684,708 N/A N/A
(ii) Proposal to approve an amendment to the Company's Certificate of
Incorporation:
Broker Non-
For Against Abstentions Votes
------------------- --------------- ------------- -------------
11,951,000 916,347 1,633,323 0
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ITEM 6. EXHIBITS.
Exhibit No. Description
----------- -----------
3.1 Certificate of Amendment to the Restated Certificate
of Incorporation dated June 15, 2005. Filed herewith.
31.1 Certification of President and Chief Executive Officer
pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Filed herewith.
31.2 Certification of Senior Vice President and Chief
Financial Officer pursuant to Rule 13a-14(a) or 15d-14
(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
32.1 Certification of President and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. Filed herewith.
32.2 Certification of Senior Vice President and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002. Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CYTOGEN CORPORATION
Date: August 9, 2005 By:/s/ Michael D. Becker
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Michael D. Becker
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 9, 2005 By:/s/ Christopher P. Schnittker
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Christopher P. Schnittker
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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