UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2006
OR
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File No. 0-16132
CELGENE CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 22-2711928
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(State or other jurisdiction of (I.R.S. Employer Identification)
incorporation or organization)
86 MORRIS AVENUE
SUMMIT, NEW JERSEY 07901
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(Address of principal executive offices) (Zip Code)
(908) 673-9000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes |X| No |_|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes |_| No |X|
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer or a
non-accelerated filer (as defined in 12b-2 of the Act).
Large accelerated |X| Accelerated |_| Non-accelerated |_|
Indicate by check mark whether the registrant is a shell company (as
defined in 12b-2 of the Act).
Yes |_| No |X|
The aggregate market value of voting stock held by non-affiliates of the
registrant on June 30, 2006, the last business day of the registrant's most
recently completed second quarter, was $16,617,642,008 based on the last
reported sale price of the registrant's Common Stock on the NASDAQ Global Select
Market on that date. There were 377,552,772 shares of Common Stock outstanding
as of February 22, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended
December 31, 2006. The proxy statement is incorporated herein by reference
into the following parts of the Form 10K:
Part III, Item 10, Directors, Executive Officers and Corporate Governance;
Part III, Item 11, Executive Compensation;
Part III, Item 12, Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters;
Part III, Item 13, Certain Relationships and Related Transactions, and
Director Independence;
Part III, Item 14, Principal Accountant Fees and Services.
CELGENE CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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ITEM NO. PAGE
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Part I
1. Business 1
1A. Risk Factors 18
1B. Unresolved Staff Comments 33
2. Properties 33
3. Legal Proceedings 34
4. Submission of Matters to a Vote of
Security Holders 35
Part II
5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 36
6. Selected Financial Data 38
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 39
7A. Quantitative and Qualitative Disclosures About Market Risk 57
8. Financial Statements and Supplementary Data 60
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 60
9A. Controls and Procedures 60
9B. Other Information 64
Part III
10. Directors, Executive Officers and Corporate Governance
Registrant 64
11. Executive Compensation 64
12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters 64
13. Certain Relationships and Related Transactions,
and Director Independence 64
14. Principal Accountant Fees and Services 64
Part IV
15. Exhibits and Financial Statement Schedules 65
Signatures 72
PART I
ITEM 1. BUSINESS
We are a global biopharmaceutical company primarily engaged in the discovery,
development and commercialization of innovative therapies designed to treat
cancer and immune-inflammatory related diseases. Our lead products are:
REVLIMID(R) (lenalidomide), which was approved by the U.S. Food and Drug
Administration, or FDA, in June 2006 for treatment in combination with
dexamethasone for multiple myeloma patients who have received at least one prior
therapy and, in December 2005 for treatment of patients with
transfusion-dependent anemia due to low- or intermediate-1-risk myelodysplastic
syndromes, or MDS, associated with a deletion 5q cytogenetic abnormality with or
without additional cytogenetic abnormalities; and, THALOMID(R) (thalidomide),
which gained FDA approval in May 2006 for treatment in combination with
dexamethasone of newly diagnosed multiple myeloma patients and which is also
approved for the treatment and suppression of cutaneous manifestations of
erythema nodosum leprosum, or ENL, an inflammatory complication of leprosy. The
sales growth of REVLIMID(R) and THALOMID(R) has enabled us to make substantial
investments and advancements in our product pipeline as well as in our
commercial capabilities. Our broad portfolio of drug candidates in our product
pipeline includes IMiDs(R) compounds, which are proprietary to us and have
demonstrated certain immunomodulatory and other biologically important
properties. We believe that the commercial potential of REVLIMID(R) and
THALOMID(R), the depth of our product pipeline, near-term regulatory activities,
geographic/international market expansion and clinical data reported both at
major medical conferences and in peer-reviewed publications provide the
catalysts for continued growth.
We are dedicated to innovative research and development designed to bring new
therapies to market. We are involved in research in several scientific areas
that may deliver proprietary next-generation therapies, such as intracellular
signaling, immunomodulation and placental stem cell research. The therapies
(drugs and cell therapies) we develop are designed to treat life-threatening
diseases or chronic debilitating conditions where patients are poorly served by
current therapies. Building on our growing knowledge of the biology underlying
hematological and solid tumor cancers and immune-inflammatory diseases, we are
investing in a range of innovative therapeutic programs that are investigating
ways to treat chronically managed diseases by targeting the disease source
through multiple mechanisms of action.
For the year ended December 31, 2006, we had total revenues and net income of
$898.9 million and $69.0 million, respectively. At December 31, 2006, we had an
accumulated deficit of $101.8 million.
ACQUISITIONS
In December 2002, we acquired Anthrogenesis Corp., d/b/a Celgene Cellular
Therapeutics, a privately held New Jersey-based biotherapeutics company and cord
blood banking business, which is developing the technology for the recovery of
stem cells from human placental tissues following the completion of full-term,
successful pregnancies. Celgene Cellular Therapeutics, or CCT, now operates as a
wholly owned subsidiary of Celgene Corporation.
In October 2004, we acquired all of the outstanding shares of Penn T Limited,
the UK-based global supplier of THALOMID(R). This acquisition expanded our
corporate capabilities and enabled us to control manufacturing for THALOMID(R)
worldwide. Through manufacturing contracts acquired in this purchase, we also
increased our participation in the potential growth of THALOMID(R) revenues in
key international markets.
1
In December 2006, we purchased an active pharmaceutical ingredient, or API,
manufacturing facility from Siegfried Ltd. and Siegfried Dienste AG (together
"Siegfried") located in Zofingen, Switzerland. The manufacturing facility has
the capability to produce multiple drug substances and initially will be used to
produce REVLIMID(R) API to supply global markets. The facility may also be used
to produce drug substance for our future drugs and drug candidates. This asset
acquisition expands our manufacturing capabilities and furthers our objective to
strategically control the production of REVLIMID(R) worldwide.
COMMERCIAL STAGE PROGRAMS
Our commercial programs include pharmaceutical product sales of REVLIMID(R),
THALOMID(R), ALKERAN(R) and sales of FOCALIN(TM) to Novartis Pharma AG, or
Novartis; a licensing agreement with Novartis which entitles us to royalties on
FOCALIN XR(TM) and the entire RITALIN(R) family of drugs; a licensing and
product supply agreement with Pharmion Corporation for its sales of thalidomide;
and sales of bio-therapeutic products and services through our Cellular
Therapeutics subsidiary.
REVLIMID(R) (LENALIDOMIDE): REVLIMID(R) is an oral immunomodulatory drug
approved by the FDA for treatment in combination with dexamethasone for multiple
myeloma patients who have received at least one prior therapy. Multiple myeloma
is the second most common blood cancer in the United States affecting
approximately 50,000 people. About 14,600 new cases of multiple myeloma are
diagnosed each year and about 12,000 Americans are expected to die each year of
multiple myeloma. REVLIMID(R) is also approved for treatment of patients with
transfusion-dependent anemia due to low- or intermediate-1-risk MDS, associated
with a deletion 5q cytogenetic abnormality with or without additional
cytogenetic abnormalities. REVLIMID(R) is distributed primarily through
contracted pharmacies under the RevAssist(R) program, which is a proprietary
risk-management distribution program tailored specifically to help ensure to the
maximum extent possible the safe use of REVLIMID(R).
REVLIMID(R) continues to be evaluated in clinical trials as a potential
treatment for hematological cancers that affect more than 1,000,000 patients
worldwide. There are more than 75 clinical trials currently evaluating
REVLIMID(R) either alone or in combination with one or more other therapies in
the treatment of a broad range of debilitating diseases, including multiple
myeloma, MDS, chronic lymphocytic leukemia, or CLL, non-Hodgkin's lymphoma, or
NHL, other hematological and solid tumor cancers and other inflammatory and
immunological diseases. The most advanced of these studies include Phase III and
Phase II trials evaluating REVLIMID(R) across a broad range of hematological
cancers, including multiple myeloma, MDS, CLL and NHL.
Current efforts directed towards gaining additional regulatory approvals of
REVLIMID(R) include our Marketing Authorization Application, or MAA, currently
under review by the European Medicines Agency, or EMEA, submitted in February
2006 for treatment of patients with relapsed or refractory multiple myeloma and
in October 2005 for the treatment of patients with low- to intermediate-1-risk
MDS associated with a deletion 5q cytogenetic abnormality with or without
additional abnormalities. REVLIMID(R) has been designated as an Orphan Medicinal
Product in the European Union, or EU, for the treatment of multiple myeloma and
MDS. Also, REVLIMID received orphan drug designation from the FDA for the
treatment of CLL. REVLIMID(R) is currently being made available to patients in
the EU under a Named Patient Program, or NPP, which is a compassionate use
program where specially trained doctors can prescribe REVLIMID(R) to patients
suffering from either of the two indications accepted by the EMEA for review.
THALOMID(R) (THALIDOMIDE): THALOMID(R) was approved by the FDA in May 2006 in
combination with dexamethasone for the treatment of newly diagnosed multiple
myeloma. THALOMID(R) had been previously approved, since July 1998, for the
acute treatment of cutaneous manifestations of moderate to severe ENL and as
maintenance therapy for prevention and suppression of the cutaneous
manifestation of
2
ENL recurrence. ENL is an inflammatory complication of leprosy and although
leprosy is relatively rare in the United States, the disease afflicts millions
worldwide. ENL occurs in about 30% of leprosy patients and is characterized by
skin lesions, acute inflammation, fever and anorexia.
We developed S.T.E.P.S.(R), or "SYSTEM FOR THALIDOMIDE EDUCATION AND PRESCRIBING
SAFETY," which is a proprietary strategic comprehensive education and
risk-management distribution program with the objective of providing for the
safe and appropriate distribution and use of THALOMID(R). Among other things,
S.T.E.P.S.(R) requires prescribers, patients and dispensing pharmacies to
participate in a registry and an order cannot be filled unless the physician,
patient and pharmacy have been registered, trained and meet all qualification
criteria. Through the use of our S.T.E.P.S. program, more than 150,000 U.S.
patients have accessed the clinical benefit of THALOMID(R) since its market
introduction in September 1998.
ALKERAN(R): In March 2003, we entered into a supply and distribution agreement
with GlaxoSmithKline, or GSK, to distribute, promote and sell ALKERAN(R)
(melphalan) in all dosage forms in the United States under the Celgene label.
ALKERAN(R) is approved by the FDA for the palliative treatment of multiple
myeloma and of carcinoma of the ovary. ALKERAN(R) use in combination with other
therapies for the treatment of hematological diseases continues to grow, driven
by clinical data reported at major medical conferences around the world. Under
the terms of the agreement, we purchase ALKERAN(R) tablets and ALKERAN(R) for
injection from GSK and distribute the products in the United States under the
Celgene label. The agreement requires us to purchase certain minimum quantities
of ALKERAN(R) each year under a take-or-pay arrangement. The agreement has been
extended through March 31, 2009.
RITALIN(R) FAMILY OF DRUGS: In April 2000, we licensed to Novartis the worldwide
rights (excluding Canada) to FOCALIN(TM) and FOCALIN XR(TM), the extended
release version, in exchange for milestone payments, a product supply agreement
under which we sell FOCALIN(TM) exclusively to Novartis and royalties on FOCALIN
XR(TM) and the entire RITALIN(R) family of drugs. We have retained the exclusive
commercial rights to FOCALIN(TM) and FOCALIN XR(TM) for oncology-related
disorders. FOCALIN(TM) was approved by the FDA in November 2001 for the
treatment of attention deficit hyperactivity disorder, or ADHD, in children and
adolescents and FOCALIN XR(TM) was later approved by the FDA in May 2005 for the
treatment of ADHD in adults, adolescents and children.
We developed FOCALIN(TM), which is formulated by isolating the active d-isomer
of methylphenidate using advanced single-isomer chemistry technology (isomers
are any of two or more chemical substances that are composed of the same
elements in the same proportions but can differ in properties because of
differences in the arrangement of atoms). FOCALIN(TM), which provides favorable
tolerability and dosing flexibility at half the dose of RITALIN(R), contains
only the more active isomer responsible for the effective management of the
symptoms of ADHD.
PRECLINICAL- AND CLINICAL-STAGE PIPELINE:
Our preclinical- and clinical-stage pipeline of new drug candidates, in addition
to our cell therapies, is highlighted by multiple classes of small molecule,
orally administered therapeutic agents designed to selectively regulate
disease-associated genes and proteins. The drug candidates in our pipeline are
at various stages of preclinical and clinical development. Successful results in
preclinical or Phase I/II clinical studies may not be an accurate predictor of
the ultimate safety or effectiveness of a drug candidate.
3
o PHASE I CLINICAL TRIALS
If the FDA allows a request to initiate clinical investigations of a new
drug candidate to become effective, Phase I human clinical trials can
begin. These tests usually involve between 20 and 80 healthy volunteers or
patients. The tests study a drug's safety profile, and may include
preliminary determination of a drug candidate's safe dosage range. The
Phase I clinical studies also determine how a drug is absorbed,
distributed, metabolized and excreted by the body, and the duration of its
action.
o PHASE II CLINICAL TRIALS
In Phase II clinical trials, studies are conducted on a limited number of
patients with the targeted disease. An initial evaluation of the drug's
effectiveness on patients is performed and additional information on the
drug's safety and dosage range is obtained.
o PHASE III CLINICAL TRIALS
This phase typically includes controlled multi-center trials and involves
a larger target patient population to ensure that study results are
statistically significant. During the Phase III clinical trials,
physicians monitor patients to determine efficacy and to gather further
information on safety.
IMIDS(R): IMiDs(R) compounds are proprietary novel small molecule, orally
available compounds that modulate the immune system and other biologically
important targets through multiple mechanisms of action. We have marketed
REVLIMID(R) (CC-5013) and have advanced two other IMiDs(R) compounds into
clinical development, CC-4047 and CC-11006. Additional compounds, including
CC-10015, are in preclinical development.
Our IMiDs(R) compounds are covered by an extensive and comprehensive
intellectual property estate of U.S. and foreign-issued patents and pending
patent applications including composition-of-matter, use and other patents and
patent applications.
CC-4047: is one of the most potent IMiDs(R) compounds that we are
developing. We are evaluating Phase II trials to determine CC-4047's
potential efficacy as an oral therapy for a range of oncology and
potentially non-oncology uses, including myelofibrosis, multiple myeloma
and solid tumor cancers. CC-4047 and REVLIMID(R) have different activity
profiles, leading us to evaluate CC-4047 in additional indications.
CC-11006: is another molecule with activities distinct from those of
REVLIMID(R) and CC-4047. Following successful completion of Phase I human
clinical trials, we are currently evaluating conditions where this profile
will have best therapeutic application including MDS.
ORAL ANTI-INFLAMMATORY AGENTS: Our anti-inflammatory program is focused on
providing an oral approach for treating chronic inflammatory diseases. CC-10004,
our lead investigational drug in this class, is an orally available small
molecule that inhibits PDE-4, resulting in the inhibition of multiple
pro-inflammatory mediators, including TNF-(alpha). Early stage studies in
healthy human volunteers found CC-10004 to be safe and well-tolerated with good
bioavailability and pharmacokinetics. Based upon promising results from a pilot
study in psoriasis, CC-10004 is currently under evaluation in Phase II
proof-of-principle clinical trials for psoriasis and psoriatic arthritis to
position this candidate for subsequent trials in a number of chronic
inflammatory diseases.
4
ANTI-PROLIFERATIVES: CC-8490 has completed Phase I clinical trials in
glioblastoma, an aggressive form of brain cancer, and is positioned for
potential subsequent studies. A follow-on compound in the same class,
CC-0227113, which has broad anti-tumor activity, is at the preclinical stage of
development.
KINASE INHIBITORS: Celgene Research San Diego has generated valuable
intellectual property in the identification of kinases that regulate pathways
critical in inflammation and oncology. The Celgene kinase inhibitor platform
includes inhibitors of the c-Jun N-terminal kinase, or JNK, pathway, and
inhibitors of the NFkB pathway. The JNK inhibitor, CC-401, has successfully
completed a Phase I trial in healthy volunteers and in acute myelogenous
leukemia, or AML, patients to determine safety and tolerability. Our next JNK
inhibitor, CC-930, is in pre-clinical development, advancing toward clinical
testing.
LIGASE INHIBITORS: Celgene Research San Diego has played an early role in
defining the ligases that regulate the degradation of intracellular proteins.
These ligases, as a class of targets, have broad potential for drug discovery in
oncology. By identifying drug targets and compounds that regulate ligase
pathways, we are addressing the potential to develop an important new class of
anti-cancer and anti-inflammatory therapeutics.
PLEIOTROPIC PATHWAY MODIFIERS: Based upon observations Celgene has made about
the effect of therapeutics to modify multiple intracellular signaling pathways
in distinct cell types, we have identified a new class of molecules that impact
activity of several key pathways of therapeutic relevance. The first of these,
CC-16057, has moved into preclinical development for inflammatory conditions.
STEM CELLS: At Celgene Cellular Therapeutics we are researching stem cells
derived from the human placenta as well as from the umbilical cord. CCT is our
state-of-the-art research and development division dedicated to fulfilling the
promise of cellular technologies by developing cutting-edge products and
therapies that will significantly benefit patients. Our goal is to develop
proprietary cell therapy products for the treatment of autoimmune diseases and
cancer.
Stem cell based therapies offer the potential to provide disease-modifying
outcomes for serious diseases which today lack adequate therapy. We have
developed proprietary technology for collecting, processing, and storing
placental stem cells with potentially broad therapeutic applications in cancer,
autoimmune, cardiovascular, neurological and other diseases. Our studies of the
placenta indicate that it is a rich source of potential products with biological
activity and therapeutic promise.
In December 2006, CCT submitted an IND for our human placental derived stem
cell, or HPDSC, product. The initial study will be conducted in patients with
certain malignant hematological diseases and other non-malignant disorders. We
also maintain an IND with the FDA for a trial with cord blood in sickle cell
anemia. Additional pre-clinical research to define further the potential of
placental derived stem cells, most specifically our first placental derived
adherent cell product PDA-001, and to characterize other placental-derived
products is continuing.
5
CELGENE PRODUCT OVERVIEW
The U.S. commercial status of REVLIMID(R), THALOMID(R), ALKERAN(R), Ritalin(R) /
FOCALIN(TM) and the target disease indications and the development of our
leading drug candidates are outlined in the following table:
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DISEASE
PRODUCT INDICATION COLLABORATOR STATUS
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THALOMID(R) ENL Marketed.
Multiple Myeloma Marketed in newly diagnosed
multiple myeloma.
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ALKERAN(R) Multiple Myeloma & Ovarian GlaxoSmithKline Marketed.
Cancer
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RITALIN(R) / FOCALIN(TM)
Focalin(TM) ADHD Novartis Marketed.
Focalin XR(TM) ADHD in patients aged 6 Novartis Marketed.
years and older
Ritalin LA(R) ADHD Novartis Marketed.
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IMIDS(R) COMPOUNDS:
REVLIMID(R) Multiple Myeloma Marketed in previously treated
multiple myeloma.
Multiple Myeloma Newly diagnosed Pivotal Phase III
trials ongoing.
Multiple Myeloma Southwest Oncology Group Phase III trial.
("SWOG")
Multiple Myeloma Eastern Cooperative Phase III trial.
Oncology Group ("ECOG") -
E4A03
Myelodysplastic Syndromes Marketed in del 5q MDS.
Myelodysplastic Syndromes Phase III trial in del 5q MDS
on-going.
Myelodysplastic Syndromes Phase II trials in non-del 5q MDS
completed and Phase III planned.
6
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DISEASE
PRODUCT INDICATION COLLABORATOR STATUS
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REVLIMID(R) Chronic Lymphocytic Leukemia Phase II trials ongoing and Phase
(CLL) III SPA planned.
Non-Hodgkins Lymphoma (NHL) Phase II trials ongoing and Phase
III SPA planned.
Solid Tumor Cancers Phase I/II trials ongoing and
expanded. Additional trials
planned.
CC-4047 Solid Tumor Cancers Phase II trial planned.
Myelofibrosis Phase II trial ongoing.
Hemoglobinopathies Phase II trial planned.
Multiple Myeloma Phase II trial planned.
CC-11006 Hematological Malignances Phase I/II trials planned.
CC-10015 Inflammatory Diseases Pre-clinical studies ongoing.
CC-13097 Inflammatory Diseases Pre-clinical studies ongoing.
CC-15965 Inflammatory Diseases Pre-clinical studies ongoing.
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ORAL ANTI-INFLAMMATORY:
CC-10004 Psoriasis Phase II trial ongoing.
Psoriatic Arthritis Phase II trial ongoing.
CC-11050 Inflammatory Diseases Phase I trial underway.
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ANTI-PROLIFERATIVES:
CC-8490 Cancer Phase I trials completed
CC-0227113 Cancer Preclinical studies ongoing.
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KINASE INHIBITORS:
JNK 401 Acute Myelogenous Leukemia Phase I/II trial ongoing.
(AML)
JNK 930 Fibrotic Diseases Preclinical studies ongoing.
7
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DISEASE
PRODUCT INDICATION COLLABORATOR STATUS
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LIGASE INHIBITORS:
Ligase Inhibitors Cancer Preclinical Studies ongoing.
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STEM CELL:
Lifebank USA(TM) Stem Cell Banking Marketed.
BIOVANCE(TM) and
Acelagraft(TM) Wound Covering Marketed.
HPDSC: Transplants Hematological Disorders Phase I trials planned.
PDA-001 Autoimmune/Cancer Preclinical Studies ongoing.
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Two REVLIMID(R) Marketing Authorization Applications, or MAAs, are being
evaluated by the European Medicines Agency, or EMEA. One seeks approval to
market REVLIMID(R) for the treatment of previously treated multiple myeloma
patients and the other for the treatment of transfusion dependent anemia in
patients who have MDS with the 5q chromosomal deletion. Swissmedic, the Swiss
Agency for Therapeutic Products, also is evaluating two REVLIMID(R) MAAs for the
treatment of previously treated multiple myeloma patients and for the treatment
of transfusion dependent anemia in patients who have MDS with the 5q chromosomal
deletion, respectively. Additionally, the Therapeutic Goods Administration in
Australia is evaluating an MAA for the treatment of previously treated multiple
myeloma patients.
PATENTS AND PROPRIETARY TECHNOLOGY
Patents and other proprietary rights are important to our business. It is our
policy to seek patent protection for our inventions, and also to rely upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position.
We own or have exclusively licensed at least 134 issued U.S. patents and at
least 211 additional U.S. patent applications are pending. While we have a
policy to seek worldwide patent protection for our inventions, we have foreign
patent rights corresponding to most but not all of our U.S. patents. Further,
although THALOMID(R) is approved for use associated with ENL, we do not have
patent protection relating to the use of THALOMID(R) to treat ENL.
In August 2001, we entered into an agreement, termed the "New Thalidomide
Agreement," with EntreMed, Inc., Children's Medical Center Corporation, or CMCC,
and Bioventure Investments, KFT relating to patents and patent applications
owned by CMCC, which agreement superceded several agreements already in place
between CMCC, EntreMed and us. Pursuant to the New Thalidomide Agreement, CMCC
directly granted to us an exclusive worldwide, royalty-bearing license under the
relevant patents and patent applications relating to thalidomide. Several U.S.
patents have been issued to CMCC in this patent family and certain of these
patents expire in 2013 and 2014. Corresponding foreign patent applications and
additional U.S. patent applications are still pending.
In addition to the New Thalidomide Agreement, we entered into an agreement,
entitled the "New Analog Agreement," with CMCC and EntreMed in December 2002,
pursuant to which we have been granted an exclusive worldwide, royalty-bearing
license to certain CMCC patents and patent applications relating to thalidomide
analogs. The New Analog Agreement was executed in connection with the settlement
of certain pending litigation by and among us, EntreMed and the U.S. Patent and
Trademark Office relating to the allowance of certain CMCC patent applications
covering thalidomide analogs. These patent
8
applications had been licensed exclusively to EntreMed in the field of
thalidomide analogs. In conjunction with the settlement of these suits, we
acquired equity securities in EntreMed, and EntreMed terminated its license
agreements with CMCC relating to thalidomide analogs. In turn, under the New
Analog Agreement, CMCC exclusively licensed to Celgene these patents and patent
applications, which relate to analogs, metabolites, precursors and hydrolysis
products of thalidomide, and stereoisomers thereof. Under the New Analog
Agreement, we are obligated to comply with certain milestones and royalties,
including those for REVLIMID(R) approval and sales.
The New Analog Agreement grants us control over the prosecution and maintenance
of the licensed thalidomide analog patent rights. The New Analog Agreement also
grants us an option to inventions in the field of thalidomide analogs that may
be developed at CMCC in the laboratory of Dr. Robert D'Amato, pursuant to the
terms and conditions of a separate Sponsored Research Agreement negotiated
between CMCC and us.
Under an agreement with The Rockefeller University, pursuant to which we have
made a lump sum payment and issued stock options to The Rockefeller University
and certain inventors, we have obtained certain exclusive rights and licenses to
manufacture, have manufactured, use, offer for sale and sell products that are
based on compounds which were identified in research carried out by The
Rockefeller University and us that have activity associated with TNF(alpha). In
particular, The Rockefeller University identified a method of using thalidomide
and certain thalidomide-like compounds to treat certain symptoms associated with
abnormal concentrations of TNF(alpha), including those manifested in septic
shock, cachexia and HIV infection. In 1995, The Rockefeller University was
issued a U.S. patent which claims such methods. This U.S. patent expires in 2012
and is included in the patent rights exclusively licensed to us under the
agreement with The Rockefeller University. The Rockefeller University did not
seek corresponding patents in any other country.
Our research at Celgene Research San Diego has led us to seek patent protection
for molecular targets and drug discovery technologies, as well as therapeutic
and diagnostic products and processes. More specifically, proprietary technology
has been developed for use in molecular target discovery, the identification of
regulatory pathways in cells, assay design and the discovery and development of
pharmaceutical product candidates. As of December 2006, included in those
inventions described above, our San Diego subsidiary owned, in whole or in part,
40 issued U.S. patents and approximately 45 U.S. patent applications. An
increasing percentage of our San Diego subsidiary's recent patent applications
have been related to potential product candidates or compounds. It also holds
licenses to U.S. patents and U.S. patent applications, some of which are
licensed exclusively or sub-licensed to third parties in connection with
sponsored or collaborative research relationships.
CCT, our cellular therapeutics subsidiary, seeks patent protection for the
collection, processing and uses of mammalian placental and umbilical cord tissue
and placental and umbilical cord stem cells, as well as cells and biomaterials
derived from the placenta. As of December 2006, CCT owned, in whole or in part,
two U.S. patents, and more than 38 U.S. patent applications, including pending
provisional applications, and holds licenses to U.S. patents and U.S. patent
applications, including certain patents and patent applications related to cord
blood collection and storage.
Our success will depend, in part, on our ability to obtain and enforce patents,
protect trade secrets, obtain licenses to technology owned by third parties
where it is necessary to conduct our business without infringing the proprietary
rights of others. The patent positions of pharmaceutical and biotechnology
firms, including ours, can be uncertain and involve complex legal and factual
questions. In addition, the coverage sought in a patent application can be
significantly reduced before the patent is issued. Consequently, we do not know
whether any of our owned or licensed pending patent applications will result in
the issuance of patents or, if any patents are issued, whether they will be
dominated by third-
9
party patent rights, whether they will provide significant proprietary
protection or commercial advantage or whether they will be circumvented, opposed
or infringed upon by others.
Consequently, we do not know whether any of our owned or licensed pending patent
applications, which have not already been allowed, will result in the issuance
of patents or, if any patents are issued, whether they will be dominated by
third-party patent rights, whether they will provide significant proprietary
protection or commercial advantage or whether they will be circumvented, opposed
or infringed by others. Finally, we cannot guarantee that our patents or pending
applications will not be involved in, or be defeated as a result of, opposition
proceedings before a foreign patent office or any interference proceedings
before the U.S. Patent and Trademark Office.
With respect to patents and patent applications we have licensed-in, there can
be no assurance that additional patents will be issued to any of the third
parties from whom we have licensed patent rights, either with respect to
thalidomide or thalidomide analogs, or that, if any new patents are issued, such
patents will not be opposed, challenged, invalidated, infringed or dominated or
provide us with significant proprietary protection or commercial advantage.
Moreover, there can be no assurance that any of the existing licensed patents
will provide us with proprietary protection or commercial advantage. Nor can we
guarantee that these licensed patents will not be either infringed, invalidated
or circumvented by others, or that the relevant agreements will not be
terminated. Any termination of the licenses granted to Celgene by CMCC could
have a material adverse effect on our business, financial condition and results
of operations.
Since patent applications filed in the United States on or before November 28,
2000 are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, we cannot be certain that we, or our licensors, were the first to
make the inventions covered by each of the issued patents or pending patent
applications or that we, or our licensors, were the first to file patent
applications for such inventions. In the event a third party has also filed a
patent for any of our inventions, we, or our licensors, may have to participate
in interference proceedings before the U.S. Patent and Trademark Office to
determine priority of invention, which could result in the loss of a U.S. patent
or loss of any opportunity to secure U.S. patent protection for the invention.
Even if the eventual outcome is favorable to us, such interference proceedings
could result in substantial cost to us.
We are aware of U.S. patents that have been issued to third parties claiming
subject matter relating to the NF[KAPPA]B pathway, including U.S. patents which
could overlap with technology claimed in some of our owned or licensed
NF[KAPPA]B patents or patent applications, and a U.S. patent that has been
asserted against certain pharmaceutical companies. With respect to those patents
that overlap with our applications, we believe that one or more interference
proceedings may be initiated by the U.S. Patent and Trademark Office to
determine priority of invention for this subject matter. While we cannot predict
the outcome of any such proceedings, in the event we do not prevail, we believe
that we can use alternative methods for our NF[KAPPA]B drug discovery program
for which we have issued U.S. patents that are not claimed by the subject matter
of the third-party patents. We are also aware of third-party U.S patents that
relate to the use of certain TNFa inhibitors to treat inflammation or conditions
such as asthma.
We may in the future have to prove that we are not infringing patents or we may
be required to obtain licenses to such patents. However, we do not know whether
such licenses will be available on commercially reasonable terms, or at all.
Prosecution of patent applications and litigation to establish the validity and
scope of patents, to assert patent infringement claims against others and to
defend against patent infringement claims by others can be expensive and
time-consuming. There can be no assurance that, in the event that claims of any
of our owned or licensed patents are challenged by one or more third parties,
any court or patent authority ruling on such challenge will determine that such
patent claims are valid and enforceable. An adverse outcome in such litigation
could cause us to lose exclusivity relating to
10
the subject matter delineated by such patent claims and may have a material
adverse effect on our business. If a third party is found to have rights
covering products or processes used by us, we could be forced to cease using the
products or processes covered by the disputed rights, subject to significant
liabilities to such third party and/or be required to license technologies from
such third party. Also, different countries have different procedures for
obtaining patents, and patents issued by different countries provide different
degrees of protection against the use of a patented invention by others. There
can be no assurance, therefore, that the issuance to us in one country of a
patent covering an invention will be followed by the issuance in other countries
of patents covering the same invention or that any judicial interpretation of
the validity, enforceability or scope of the claims in a patent issued in one
country will be similar to the judicial interpretation given to a corresponding
patent issued in another country. Competitors may choose to file oppositions to
patent applications, which have been deemed allowable by foreign patent
examiners. Furthermore, even if our owned or licensed patents are determined to
be valid and enforceable, there can be no assurance that competitors will not be
able to design around such patents and compete with us using the resulting
alternative technology. Additionally, for these same reasons, we cannot be sure
that patents of a broader scope than ours may be issued and thereby create
freedom to operate issues. If this occurs we may need to reevaluate pursuing
such technology, which is dominated by others' patent rights, or alternatively,
seek a license to practice our own invention, whether or not patented.
We also rely upon unpatented, proprietary and trade secret technology that we
seek to protect, in part, by confidentiality agreements with our collaborative
partners, employees, consultants, outside scientific collaborators, sponsored
researchers and other advisors. There can be no assurance that these agreements
provide meaningful protection or that they will not be breached, that we would
have adequate remedies for any such breach or that our trade secrets,
proprietary know-how and technological advances will not otherwise become known
to others. In addition, there can be no assurance that, despite precautions
taken by us, others have not and will not obtain access to our proprietary
technology or that such technology will not be found to be non-proprietary or
not a trade secret.
GOVERNMENTAL REGULATION
Regulation by governmental authorities in the United States and other countries
is a significant factor in the manufacture and marketing of pharmaceuticals and
in our ongoing research and development activities. Most, if not all, of our
therapeutic products require regulatory approval by governmental agencies prior
to commercialization. In particular, human therapeutic products are subject to
rigorous preclinical testing and clinical trials and other pre-marketing
approval requirements by the FDA and regulatory authorities in other countries.
In the United States, various federal and in some cases state statutes and
regulations also govern or impact upon the manufacturing, testing for safety and
effectiveness, labeling, storage, record-keeping and marketing of such products.
The lengthy process of seeking required approvals, and the continuing need for
compliance with applicable statutes and regulations, require the expenditure of
substantial resources. Regulatory approval, when and if obtained, may be limited
in scope which may significantly limit the indicated uses for which a product
may be marketed. Further, approved drugs, as well as their manufacturers, are
subject to ongoing review and discovery of previously unknown problems with such
products or the manufacturing or quality control procedures used in their
production may result in restrictions on their manufacture, sale or use or in
their withdrawal from the market. Any failure by us, our suppliers of
manufactured drug product, collaborators or licensees to obtain or maintain, or
any delay in obtaining, regulatory approvals could adversely affect the
marketing of our products and our ability to receive product revenue, license
revenue or profit sharing payments.
The activities required before a pharmaceutical may be marketed in the United
States begin with preclinical testing not involving human subjects. Preclinical
tests include laboratory evaluation of a product candidate's chemistry and its
biological activities and the conduct of animal studies to assess the
11
potential safety and efficacy of a product candidate and its formulations. The
results of these studies must be submitted to the FDA as part of an
investigational new drug application, or IND, which must be reviewed by the FDA
primarily for safety considerations before proposed clinical trials in humans
can begin.
Typically, clinical trials involve a three-phase process. In Phase I, clinical
trials are generally conducted with a small number of individuals, usually
healthy human volunteers, to determine the early safety and tolerability profile
and the pattern of drug distribution and metabolism within the body. If the
Phase I trials are satisfactory, Phase II clinical trials are conducted with
groups of patients in order to determine preliminary efficacy, dosing regimes
and expanded evidence of safety. In Phase III, large-scale, multi-center,
adequately enrolled and typically controlled comparative clinical trials are
conducted with patients in an effort to provide enough data for the statistical
proof of efficacy and safety required by the FDA and others for marketing
approval. In some limited circumstances, Phase III clinical trials may be
modified to allow the evaluation of safety and efficacy based upon (i)
comparisons with approved drugs, (ii) comparison with the historical progression
of the disease in untreated patients, or (iii) the use of surrogate markers,
together with a commitment for post-approval studies. In some cases, as a
condition for New Drug Application, or NDA, approval, further studies (Phase IV)
are required to provide additional information concerning the drug. The FDA
requires monitoring of all aspects of clinical trials, and reports of all
adverse events must be made to the agency before drug approval. After drug
approval, we have ongoing reporting obligations concerning adverse reactions
associated with the drug, including expedited reports for serious and unexpected
adverse events. Additionally, we may have limited control over studies conducted
with our proprietary compounds if such studies are performed by others (e.g.,
cooperative groups and the like).
The results of the preclinical testing and clinical trials are submitted to the
FDA as part of an NDA for evaluation to determine if the product is sufficiently
safe and effective for approval to commence commercial sales. In responding to
an NDA, the FDA may grant marketing approval, request additional information or
deny the application if it determines that the application does not satisfy its
regulatory approval criteria. When an NDA is approved, the NDA holder must a)
employ a system for obtaining reports of experience and side effects associated
with the drug and make appropriate submissions to the FDA and b) timely advise
the FDA if any marketed drug fails to adhere to specifications established by
the NDA internal manufacturing procedures.
Pursuant to the Orphan Drug Act, a sponsor may request that the FDA designate a
drug intended to treat a "rare disease or condition" as an "orphan drug." A rare
disease or condition is defined as one which affects less than 200,000 people in
the United States, or which affects more than 200,000 people, but for which the
cost of developing and making available the drug is not expected to be recovered
from sales of the drug in the United States. Upon the approval of the first NDA
for a drug designated as an orphan drug for a specified indication, the sponsor
of that NDA is entitled to exclusive marketing rights in the United States for
such drug for that indication for seven years unless the sponsor cannot assure
the availability of sufficient quantities of the drug to meet the needs of
persons with the disease. However, orphan drug status is particular to the
approved indication and does not prevent another company, such as a generic
competitor, from seeking approval of other labeled indications. The period of
orphan drug exclusivity is concurrent with any patent exclusivity that relates
to the drug. Orphan drugs may also be eligible for federal income tax credits
for costs associated with the drug's development. Possible amendment of the
Orphan Drug Act by the U.S. Congress and possible reinterpretation by the FDA
has been discussed by regulators and legislators. FDA regulations reflecting
certain definitions, limitations and procedures for orphan drugs initially went
into effect in January 1993 and were amended in certain respects in 1998.
Therefore, there is no assurance as to the precise scope of protection that may
be afforded by orphan drug status in the future or that the current level of
exclusivity and tax credits will remain in effect. Moreover, even if we have an
orphan drug designation for a particular use of a drug, there can be no
assurance that another company also holding orphan drug designation will not
receive approval prior to us for the same
12
indication. If that were to happen, our applications for that indication could
not be approved until the competing company's seven-year period of exclusivity
expired. Even if we are the first to obtain approval for the orphan drug
indication, there are certain circumstances under which a competing product may
be approved for the same indication during our seven-year period of exclusivity.
First, particularly in the case of large molecule drugs, a question can be
raised whether the competing product is really the "same drug" as that which was
approved. In addition, even in cases in which two products appear to be the same
drug, the agency may approve the second product based on a showing of clinical
superiority compared to the first product.
Among the conditions for NDA approval is the requirement that the prospective
manufacturer's quality control and manufacturing procedures continually conform
with the FDA's current Good Manufacturing Practice, cGMP, regulations (which are
regulations established by the FDA governing the manufacture, processing,
packing, storage and testing of drugs intended for human use). In complying with
cGMP, manufacturers must devote extensive time, money and effort in the area of
production and quality control and quality assurance to maintain full technical
compliance. Manufacturing facilities and company records are subject to periodic
inspections by the FDA to ensure compliance. If a manufacturing facility is not
in substantial compliance with these requirements, regulatory enforcement action
may be taken by the FDA, which may include seeking an injunction against
shipment of products from the facility and recall of products previously shipped
from the facility.
Under the Hatch-Waxman Amendments to the Federal Food, Drug, and Cosmetic Act,
products covered by approved NDAs or Supplemental NDAs may be protected by
periods of patent and/or non-patent exclusivity. During the exclusivity periods,
the FDA is generally prevented from granting effective approval of an
Abbreviated NDA, or ANDA, or 505(b)(2) application which refers to a product
protected by an effective and unexpired exclusivity. ANDAs and 505(b)(2)
applications are generally less burdensome than full NDAs in that, in lieu of
new clinical data, the applications rely in whole, or in part, upon the safety
and efficacy findings of the referenced approved drug in conjunction with
bridging data, typically bioequivalence data. Upon the expiration of the
applicable exclusivities, through passage of time or successful legal challenge,
the FDA may grant effective approval of an ANDA or 505(b)(2) which refers to the
product previously protected by the exclusivity provisions. Depending upon the
scope of the applicable exclusivities, any such approval could be limited to
certain formulations and/or indications/claims, i.e., those not covered by any
outstanding exclusivities.
Failure to comply with applicable FDA regulatory requirements can result in
enforcement actions such as warning letters, recalls or adverse publicity issued
by the FDA or in legal actions such as seizures, injunctions, fines based on the
equitable remedy of disgorgement, restitution and criminal prosecution.
Approval procedures similar to those in the United States must be undertaken in
virtually every other country comprising the market for our products before any
such product can be commercialized in those countries. The approval procedure
and the time required for approval vary from country to country and may involve
additional testing. There can be no assurance that approvals will be granted on
a timely basis or at all. In addition, regulatory approval of drug pricing is
required in most countries other than the United States. There can be no
assurance that the resulting pricing of our drugs would be sufficient to
generate an acceptable return to us.
COMPETITION
The pharmaceutical and biotechnology industries in which we compete are each
highly competitive. Our competitors include major pharmaceutical and
biotechnology companies, many of which have considerably greater financial,
scientific, technical and marketing resources than us. We also experience
competition in the development of our products and processes from universities
and other research institutions and, in some instances, compete with others in
acquiring technology from such sources.
13
Competition in the pharmaceutical industry, and specifically in the oncology and
immune-inflammatory areas being addressed by us, is particularly intense.
Numerous pharmaceutical, biotechnology and generic companies have extensive
anti-cancer and anti-inflammatory drug discovery, development and commercial
resources. Bristol-Myers Squibb Co., Amgen Inc., Genentech, Inc., Sanofi-Aventis
SA., Novartis AG, AstraZeneca PLC., Eli Lilly and Company, F. Hoffmann-LaRoche
Ltd, Millennium Pharmaceuticals, Inc., MGI Pharma, Inc., Biogen Idec Inc., Merck
and Co., Inc., Johnson and Johnson and Pfizer Inc. are among some of the
companies researching and developing new compounds in the oncology and
immunology fields.
The pharmaceutical and biotechnology industries have undergone, and are expected
to continue to undergo, rapid and significant technological change. Also,
consolidation and competition are expected to intensify as technical advances in
each field are achieved and become more widely known. In order to compete
effectively, we will be required to continually upgrade and expand our
scientific expertise and technology, identify and retain capable personnel and
pursue scientifically feasible and commercially viable opportunities.
Our competition will be determined in part by the indications and geographic
markets for which our products are developed and ultimately approved by
regulatory authorities. An important factor in competition will be the timing of
market introduction of our or our competitors' products. Accordingly, the
relative speed with which we can develop products, complete clinical trials and
regulatory approval processes, receive pricing and reimbursement in certain
markets and supply commercial quantities of products to the market are expected
to be important competitive factors. Competition among products approved for
sale will be based, among other things, on product efficacy, safety,
convenience, reliability, availability, price, third-party reimbursement and
patent and non-patent exclusivity.
SIGNIFICANT ALLIANCES
From time to time we enter into strategic alliances with third parties whereby
we either grant rights to certain of our compounds in exchange for rights to
receive payments, or acquire rights to compounds owned by other pharmaceutical
or biotechnology companies in exchange for obligations to make payments to the
partnering companies. Payments either to or from third parties may be in the
form of upfront payments, milestone payments contingent upon the achievement of
pre-determined criteria and/or research and development funding. Under these
arrangements, one of the parties may also purchase product and pay royalties on
product sales. The following are our most significant alliances:
NOVARTIS: In April 2000, we entered into a development and license
agreement with Novartis in which we granted to Novartis an exclusive
worldwide license (excluding Canada) to further develop and market
FOCALIN(TM) and FOCALIN XR(TM), the extended release drug formulation
(D-METHYLPHENIDATE, OR D- MPH). We have retained the exclusive commercial
rights to FOCALIN(TM) IR and FOCALIN XR(TM) for oncology-related
disorders. We also granted Novartis rights to all of our related
intellectual property and patents, including new formulations of the
currently marketed RITALIN(R). Under the agreement, we have received
upfront and regulatory achievement milestone payments totaling $55.0
million through December 31, 2006 and are entitled to additional payments
upon attainment of certain other milestone events. We also sell
FOCALIN(TM) to Novartis as well as receive royalties on all of Novartis'
sales of FOCALIN XR(TM) and RITALIN(R) family of ADHD-related products.
The research portion of the agreement terminated in June 2003.
PHARMION: In November 2001, we licensed to Pharmion Corporation exclusive
rights relating to the development and commercial use of our intellectual
property covering thalidomide and S.T.E.P.S(R). Under the terms of the
agreement, as amended in December 2004, we receive royalties of 8% of
Pharmion's net thalidomide sales in countries where Pharmion has received
regulatory
14
approval and S.T.E.P.S(R) licensing fees of 8% in all other licensed
territories. In December 2004, following our acquisition of Penn T Limited
in which, among other things, we acquired a product supply agreement to
exclusively supply Pharmion with thalidomide, we entered into an amended
thalidomide supply agreement whereby in exchange for a reduction in
Pharmion's purchase price to 15.5% of its net sales of thalidomide, we
received a one-time payment of $77.0 million. Pursuant to a separate
December 2004 agreement, we also received a one-time payment of $3.0
million in return for granting license rights to Pharmion to develop and
market thalidomide in additional territories and eliminating certain of
our license termination rights. Under the agreements, as amended, the
territory licensed to Pharmion is for all countries other than the United
States, Canada, Mexico, Japan and all provinces of China other than Hong
Kong. The agreements with Pharmion terminate upon the ten-year anniversary
following receipt of the first regulatory approval for thalidomide in the
United Kingdom.
To support the further clinical development of thalidomide, Pharmion has
also provided research funding under various agreements of approximately
$13.3 million through December 31, 2006, and is required to fund an
additional $2.7 million in 2007.
As of December 31, 2006, we held 1,939,598 shares of Pharmion common stock
received in connection with the conversion of a five-year Senior
Convertible Promissory Note and the exercise of warrants purchased in
April 2003 under a Securities Purchase Agreement and the exercise of
warrants received in connection with the November 2001 thalidomide and
S.T.E.P.S(R) license agreement.
GLAXOSMITHKLINE: In March 2003, we entered into a supply and distribution
agreement with GSK to distribute, promote and sell ALKERAN(R) (MELPHALAN),
a therapy approved by the FDA for the palliative treatment of multiple
myeloma and carcinoma of the ovary. Under the terms of the agreement, we
purchase ALKERAN(R) tablets and ALKERAN(R) for injection from GSK and
distribute the products in the United States under the Celgene label. The
agreement requires us to purchase certain minimum quantities each year
under a take-or-pay arrangement. The agreement has been extended through
March 31, 2009. As of December 31, 2006, the remaining minimum purchase
requirements under the agreement totaled $67.3 million, consisting of the
following:
o January 1, 2007 - December 31, 2007 $29.1 million
o January 1, 2008 - December 31, 2008 $30.5 million
o January 1, 2009 - March 31, 2009 $ 7.7 million
MANUFACTURING
We have contracted with third party manufacturers to supply active
pharmaceutical ingredient, or API, to meet our needs, and with third party
manufacturing service providers to provide encapsulation and finishing services
in accordance with our specifications, and with a third party contract packager
to package the final product. We intend to continue to utilize third parties as
needed to produce certain of our products on a commercial scale. Our third-party
manufacturers and service providers are required to meet the FDA's cGMP
regulations and guidelines. cGMP regulations require that all manufacturers of
pharmaceuticals for sale in or from the United States achieve and maintain
compliance with regulations governing the manufacturing, processing, packaging,
storing and testing of drugs intended for human use.
We have purchased a site in Neuchatel, Switzerland where we are constructing a
drug product manufacturing facility to perform formulation, encapsulation,
packaging, warehousing and distribution and, in December 2006, we purchased an
API manufacturing facility from Siegfried Ltd. and Siegfried Dienste AG
(referred to here together as "Siegfried") located in Zofingen, Switzerland. The
API facility has the capability to produce multiple drug substances and
initially will be used to produce REVLIMID(R)
15
API to supply global markets. The facility also may be used to produce drug
substance for our future drugs and drug candidates.
The API for THALOMID(R) is obtained from Aptuit, Inc., which recently acquired
Eagle Picher Pharmaceutical Services, a Division of Eagle-Picher Incorporated.
We currently have adequate supplies of API for THALOMID(R) on hand to support
our projected long-term requirements and do not believe that the acquisition of
Eagle-Picher by Aptuit will result in any supply disruptions for the foreseeable
future. In addition, a second supplier is currently being qualified. With regard
to drug product manufacturing, we have contracted and registered two
manufacturing service providers, Penn Pharmaceuticals Services Limited and
Institute of Drug Technology Australia Limited, for the formulation and
encapsulation of the finished dosage form of THALOMID(R) capsules, and one
contract packager, Sharp Corporation, for the packaging of the final product.
The API for REVLIMID(R) is currently manufactured by our Zofingen, Switzerland,
manufacturing facility purchased in December 2006 and by Evotec OAI, Ltd. We
have also contracted and registered two manufacturing service providers, OSG
Norwich Pharmaceuticals and Penn Pharmaceuticals Services Limited, for the
formulation and encapsulation of the finished dosage form of REVLIMID(R)
capsules, and one contract packager, Sharp Corporation, for the packaging of the
final product.
The API for FOCALIN(TM) is currently obtained from two suppliers, Johnson
Matthey Inc. and Siegfried USA, Inc., and we rely on a single manufacturer,
Mikart, Inc., for the tableting and packaging of FOCALIN(TM) finished product.
We obtain the API for FOCALIN XR(TM) from Johnson Matthey Inc., on behalf of
Novartis for the manufacture of FOCALIN XR(TM) finished product.
INTERNATIONAL OPERATIONS
We have established our international headquarters in Neuchatel, Switzerland
where we are constructing a drug product manufacturing facility to perform
formulation, encapsulation, packaging, warehousing and distribution and we have
purchased an API manufacturing facility located in Zofingen, Switzerland. We
have further expanded our international regulatory, clinical and commercial
infrastructure in Europe and throughout the world, we have established the legal
entities for our international operations. In Europe, we have made REVLIMID(R)
available for sale under a Named Patient Program, which offers European patients
in need access to REVLIMID(R) on a compassionate use basis while the EMEA
reviews our application seeking approval to market REVLIMID(R) as a treatment
for multiple myeloma and MDS.
We also have a strategic alliance with Pharmion Corporation to expand the
THALOMID(R) franchise in all countries other than the United States, Canada,
Mexico, Japan and all provinces of China other than Hong Kong. The strategic
partnership combines Pharmion's global development and marketing expertise and
our intellectual property. The alliance is designed to accelerate the
establishment of THALOMID(R) as an important therapy in the international
markets. To date, Pharmion has received regulatory approval in Australia, New
Zealand, Turkey, Israel and Kuwait to market and distribute thalidomide for the
treatment of multiple myeloma after the failure of standard therapies, as well
as for the treatment of complications of leprosy. In October 2004, we acquired
Penn T Limited, a worldwide supplier of THALOMID(R). Through manufacturing
agreements entered into with a third party in connection with this acquisition,
we are able to control manufacturing for THALOMID(R) worldwide and we also
increased our participation in the potential sales growth of THALOMID(R) in key
international markets.
SALES AND COMMERCIALIZATION
We have a 324-person pharmaceutical commercial organization. These individuals
have considerable experience in the pharmaceutical industry, and many have
experience with oncological and immunological products. We expect to expand our
sales and commercialization group to support
16
products we develop to treat oncological and immunological diseases. We intend
to market and sell the products we develop for indications with accessible
patient populations. For drugs with indications involving larger patient
populations, we may partner with other pharmaceutical companies. In addition, we
are positioned to accelerate the expansion of these sales and marketing
resources as appropriate to take advantage of product in-licensing and product
acquisition opportunities.
EMPLOYEES
As of January 1, 2007, we had 1,287 full-time employees, 725 of whom were
engaged primarily in research and development activities, 324 who were engaged
in sales and commercialization activities and the remainder of who were engaged
in executive and general and administrative activities. The number of
international full-time employees has grown to 216 as of January 1, 2007. We
also employ a number of part-time employees and maintain consulting arrangements
with a number of researchers at various universities and other research
institutions in Europe and the United States.
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this Annual Report
are forward-looking statements concerning our business, financial condition,
results of operations, economic performance and financial condition based on our
current expectations. Forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and within the meaning of Section 21E of the
Securities Exchange Act of 1934 are included, for example, in the discussions
about:
o our strategy;
o new product discovery, development or product introduction;
o product manufacturing
o product sales, royalties and contract revenues;
o expenses and net income;
o our credit risk management;
o our liquidity;
o our asset/liability risk management; and
o our operational and legal risks.
These and other forward-looking statements involve risks and uncertainties.
These forward-looking statements are not guarantees of future performance and
involve risks and uncertainties that could cause actual results to differ
materially from those implied by such forward-looking statements. Given these
risks and uncertainties, you are cautioned not to place undue reliance on any
forward-looking statements.
You can identify these forward-looking statements by their use of words such as
"forecast," "project," "plan," "strategy," "intend," "potential," "outlook,"
"target," "seek," "continue," "believe," "could," "estimate," "expect," "may,"
"probable," "should," "will" or other words of similar meaning in conjunction
with, among other thing, discussions of future operations, financial
performance, our strategy for growth, product development, regulatory approval
and market position. You also can identify them by the fact that they do not
relate strictly to historical or current facts.
17
Reference is made, in particular, to forward-looking statements regarding the
results of current or pending clinical trials, our products' ability to
demonstrate efficacy or an acceptable safety profile, actions by the FDA, the
financial conditions of suppliers including their solvency and ability to supply
product, and other factors detailed in "Item 1A. Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." We
note these factors as permitted by the Private Securities Litigation Reform Act
of 1995.
Except as required under the federal securities laws and the rules and
regulations of the Securities and Exchange Commission, we disclaim and do not
undertake any obligations to update or revise publicly any forward-looking
statements in this report, whether as a result of new information, future
events, changes in assumptions, or otherwise.
ITEM 1A. RISK FACTORS
WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.
We have historically experienced, and expect to continue for the foreseeable
future to experience, significant fluctuations in our quarterly operating
results. These fluctuations are due to a number of factors, many of which are
outside our control, and may result in volatility of our stock price. Future
operating results will depend on many factors, including:
o demand for our products;
o our pricing decisions, and those of our competitors, including
decisions to increase or decrease prices;
o regulatory approvals for our products;
o the timing and level of research and development and sales and
marketing, including product launch costs;
o the timing and level of reimbursement from third-party payors for
our products;
o the timing of the introduction and market acceptance of new products
by us or competing companies;
o the development or expansion of business infrastructure in new
clinical and geographic markets;
o the acquisition of new products and companies;
o tax rates in the jurisdictions in which we operate;
o the timing and recognition of certain research and development
milestones and license fees;
o our ability to control our costs; and
o fluctuations in foreign currency exchange rates.
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IF WE ARE UNSUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR PRODUCTS, OUR
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND LIQUIDITY COULD BE
MATERIALLY ADVERSELY AFFECTED WHICH COULD HAVE A NEGATIVE IMPACT ON THE VALUE OF
OUR SECURITIES.
Many of our drug candidates are in the early or mid-stages of research and
development and will require the commitment of substantial financial resources,
extensive research, development, preclinical testing, clinical trials,
manufacturing scale-up and regulatory approval prior to being ready for sale.
Moreover, our commercially available products may require additional studies
with respect to approved indications as well as new indications pending
approval. If it becomes too expensive to sustain our present commitment of
resources on a long-term basis, we will be unable to continue certain necessary
research and development activities. Furthermore, we cannot be certain that our
clinical testing will render satisfactory results, or that we will receive
required regulatory approvals for our new products or new indications. If any of
our products, even if developed and approved, cannot be successfully
commercialized, our business, financial condition, results of operations and
liquidity could be materially adversely affected which could have a negative
impact on the value of our common stock or debt securities obligations.
DURING THE NEXT SEVERAL YEARS, WE WILL BE VERY DEPENDENT ON THE COMMERCIAL
SUCCESS OF REVLIMID(R), THALOMID(R), ALKERAN(R), FOCALIN(TM) AND FOCALIN XR(TM).
At our present and anticipated level of operations, we may not be able to
maintain profitability without continued growth in our revenues. The growth of
our business during the next several years will be largely dependent on the
commercial success of REVLIMID(R) and our other products. REVLIMID(R) was
approved by the FDA on December 27, 2005 for the treatment of certain
myelodysplastic syndromes, or MDS, associated with a deletion 5q cytogenetic
abnormality. REVLIMID(R) in combination with dexamethasone was approved by the
FDA in June 2006 for treatment of patients with multiple myeloma who have
received at least one prior therapy. REVLIMID(R) is distributed primarily
through contracted pharmacies under the RevAssist(R) program, which is a
proprietary risk-management distribution program tailored specifically to help
ensure the safe use of REVLIMID(R). We do not have long-term data on the use of
the product and cannot predict whether REVLIMID(R) will gain widespread
acceptance, which will mostly depend on the continued acceptance of regulators,
physicians, patients and other key opinion leaders as a relatively safe and
effective drug that has certain advantages as compared to existing or future
therapies. In addition, some of our products compete with one another as
therapies designed to treat cancer. For example, market acceptance of
REVLIMID(R) may result to the detriment of THALOMID(R) and ALKERAN(R). We are
also seeking to market REVLIMID(R) in Europe as WELL as for other indications in
the United States. A delay in gaining the requisite regulatory approvals could
negatively impact our growth plans and the value of our common stock or debt
securities obligations.
THALOMID(R) in combination with dexamethasone was approved by FDA in May 2006
for the treatment of patients with newly diagnosed multiple myeloma. In
addition, THALOMID(R) is currently approved as a therapy for the treatment of
erythema nodosum leprosum, or ENL, although the market for the use of
THALOMID(R) in patients suffering from ENL is very small. If adverse experiences
are reported in connection with the use of THALOMID(R) by patients, this could
undermine physician and patient comfort with the product, could limit the
commercial success of the product and could even impact the acceptance of our
other products, including REVLIMID(R). Also, we are dependent upon sales of
ALKERAN(R), which we license from GSK, and royalties baSED on Novartis' sales of
FOCALIN XR(TM), which we cannot directly impact.
Our revenues and profits would be negatively impacted if generic versions of any
of these products were to be approved and launched. See "WE MAY NOT BE ABLE TO
PROTECT OUR INTELLECTUAL PROPERTY AND OUR PRODUCTS MAY BE SUBJECT TO GENERIC
competition" in this Item 1A with respect to an Abbreviated New
19
Drug Application, or ANDA, for a generic filing by Barr Laboratories, Inc.
seeking permission to market generic versions of THALOMID(R).
IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, DEMAND FOR OUR PRODUCTS WILL
DETERIORATE OR NOT MATERIALIZE AT ALL.
It is necessary that our and our distribution partners' products, including
REVLIMID(R), THALOMID(R), ALKERAN(R), FOCALIN(TM) anD FOCALIN XR(TM), and the
RITALIN(R) family of drugs achieve and maintain market acceptance. A number of
factors can render the degree of market acceptance of our products uncertain,
including the products' efficacy, safety and advantages, if any, over competing
products, as well as the reimbursement policies of third-party payors, such as
government and private insurance plans. In particular, thalidomide, when used by
pregnant women, has resulted in serious birth defects, and the negative history
associated with thalidomide and birth defects may decrease the market acceptance
of THALOMID(R). In addition, the stem cell products that we are attempting to
develop through our Celgene Cellular Therapeutics subsidiary may represent
substantial departures from established treatment methods and will compete with
a number of traditional drugs and therapies which are now, or may be in the
future, manufactured and marketed by major pharmaceutical and biopharmaceutical
companies. Furthermore, public attitudes may be influenced by claims that stem
cell therapy is unsafe, and stem cell therapy may not gain the acceptance of the
public or the medical community. If our products are not accepted by the market,
demand for our products will deteriorate or not materialize at all.
WE HAVE GROWN RAPIDLY, AND IF WE FAIL TO ADEQUATELY MANAGE THAT GROWTH OUR
BUSINESS COULD BE ADVERSELY IMPACTED.
We have an aggressive growth plan that has included substantial and increasing
investments in research and development, sales and marketing, and facilities. We
plan to continue to grow and our plan has a number of risks, some of which we
cannot control. For example:
o we will need to generate higher revenues to cover a higher level of
operating expenses (including clinical trial costs, expenses
associated with the regulatory approval process and
commercialization of our products), and our ability to do so may
depend on factors that we do not control;
o we will need to assimilate new staff members;
o we will need to manage complexities associated with a larger and
faster growing multinational organization; and
o we will need to accurately anticipate demand for the products we
manufacture and maintain adequate manufacturing, marketing and
distribution capacity, and our ability to do so may depend on
factors that we do not control;
IF THE THIRD PARTIES UPON WHOM WE RELY FAIL TO PRODUCE ON A TIMELY BASIS THE API
OR ENCAPSULATION, FINISHING AND PACKAGING SERVICES IN THE VOLUMES THAT WE
REQUIRE OR FAIL TO MEET QUALITY STANDARDS AND MAINTAIN NECESSARY LICENSURE FROM
REGULATORY AUTHORITIES, WE MAY BE UNABLE TO MEET DEMAND FOR OUR PRODUCTS,
POTENTIALLY RESULTING IN LOST REVENUES.
We have contracted with third party manufacturers to supply API to meet our
needs, and with third party manufacturing service providers to provide
encapsulation and finishing services in accordance with our
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specifications, and with a third party contract packager to package the final
product. We intend to continue to utilize third parties as needed to produce
certain of our products on a commercial scale.
The active pharmaceutical ingredient, or API, for THALOMID(R) is obtained from
Aptuit, Inc., which recently acquired Eagle Picher Pharmaceutical Services, a
Division of Eagle-Picher Incorporated. We currently have adequate supplies of
API for THALOMID(R) on hand to support our projected long-term requirements and
do not believe that the acquisition of Eagle-Picher by Aptuit will result in any
supply disruptions for the foreseeable future. In addition, a second supplier is
currently being qualified. With regard to drug product manufacturing, we rely on
two manufacturing service providers, Penn Pharmaceuticals Services Limited and
Institute of Drug Technology Australia Limited, for the formulation and
encapsulation of the finished dosage form of THALOMID(R) capsules, and on one
contract packager, Sharp Corporation, for the packaging of the final product.
The API for REVLIMID(R) is manufactured by our Zofingen, Switzerland,
manufacturing facility purchased in December 2006 from Siegfried and by Evotec
OAI Limited. We have contracted and registered two manufacturing service
providers, OSG Norwich Pharmaceuticals and Penn Pharmaceuticals Services
Limited, for the formulation and encapsulation of the finished dosage form of
REVLIMID(R) capsules, and one contract packager, Sharp Corporation, for the
packaging of the final product.
The API for FOCALIN(TM) is currently obtained from two suppliers, Johnson
Matthey Inc. and Siegfried USA, Inc., and we rely on a single manufacturer,
Mikart, Inc., for the tableting and packaging of FOCALIN(TM) finished product.
We obtain the API for FOCALIN XR(TM) from Johnson Matthey Inc., on behalf of
Novartis for the manufacture of FOCALIN XR(TM) finished product.
In all the countries where we sell our products, governmental regulations exist
to define standards for manufacturing, packaging, labeling and storing. All of
our suppliers of raw materials and contract manufacturers must comply with these
regulations. Failure to do so could result in supply interruptions. In the
United States, the FDA requires that all suppliers of pharmaceutical bulk
material and all manufacturers of pharmaceuticals for sale in or from the United
States achieve and maintain compliance with the FDA's cGMP regulations and
guidelines. Failure of our third-party manufacturers to comply with applicable
regulations could result in sanctions being imposed on them or us, including
fines, injunctions, civil penalties, disgorgement, suspension or withdrawal of
approvals, license revocation, seizures or recalls of products, operating
restrictions and criminal prosecutions, any of which could significantly and
adversely affect supplies of our products. In addition, before any product batch
produced by our manufacturers can be shipped, it must conform to release
specifications pre-approved by regulators for the content of the pharmaceutical
product. If the operations of one or more of our manufacturers were to become
unavailable for any reason, any required FDA review and approval of the
operations of an alternative supplier could cause a delay in the manufacture of
our products. If our outside manufacturers do not meet our requirements for
quality, quantity or timeliness, or do not achieve and maintain compliance with
all applicable regulations, demand for our products or our ability to continue
supplying such products could substantially decline.
WE HAVE LIMITED FOREIGN MARKETING AND DISTRIBUTION CAPABILITIES.
We have limited marketing and distribution capabilities in countries other than
the United States with respect to our products. We are currently expanding our
infrastructure in these foreign countries to provide supportive marketing and
distribution services. At the same time, we are in the process of obtaining
necessary governmental and regulatory approvals to sell our products in such
foreign jurisdictions. If we have not successfully completed and implemented
adequate marketing and distribution support services upon our receipt of such
approvals, our ability to effectively launch our products in these foreign
jurisdictions would be severely restricted. In addition, we have contracted with
21
Ivers Lee Corporation, d/b/a Sharp, a specialty distributor, to distribute
THALOMID(R) and REVLIMID(R) in the United States. If Sharp does not perform its
obligations, our ability to distribute THALOMID(R) and REVLIMID(R) in the United
States may be impacted for a limited period of time.
WE RECEIVE SIGNIFICANT REVENUES FROM COLLABORATIONS AND MAY BE DEPENDENT ON
COLLABORATIONS AND LICENSES WITH THIRD PARTIES.
Our ability to fully commercialize our preclinical and clinical-stage pipeline,
if developed, may depend to some extent upon our entering into collaborations
with other pharmaceutical and biopharmaceutical companies with the requisite
experience and financial and other resources to obtain regulatory approvals and
to manufacture and market such products. Our collaborations and licenses include
an exclusive license (excluding Canada) to Novartis for the development and
commercialization of FOCALIN(TM) and FOCALIN XR(TM); an agreement with Pharmion
Corporation to expand the THALOMID(R) franchise internationally; and an
agreement with GSK enabling us to distribute, promote and sell ALKERAN(R). Our
present and future arrangements may be jeopardized if any or all of the
following occur:
o we are not able to enter into additional joint ventures or other
arrangements on acceptable terms, if at all;
o our joint ventures or other arrangements do not result in a
compatible working relationship;
o our partners change their business priorities, fail to perform as
agreed upon or experience financial difficulties that disrupt
necessary business operations;
o our joint ventures or other arrangements do not lead to the
successful development and commercialization of any products;
o we are unable to obtain or maintain proprietary rights or licenses
to technology or products developed in connection with our joint
ventures or other arrangements; or
o we are unable to preserve the confidentiality of any proprietary
rights or information developed in connection with our joint
ventures or other arrangements.
WE MAY CONTINUE TO MAKE STRATEGIC ACQUISITIONS OF OTHER COMPANIES BUSINESSES OR
PRODUCTS AND THESE ACQUISITIONS INTRODUCE SIGNIFICANT RISKS AND UNCERTAINTIES,
INCLUDING RISKS RELATED TO INTEGRATING THE ACQUIRED BUSINESSES AND PRODUCTS AND
TO ACHIEVING BENEFITS FROM THE ACQUISITIONS.
To take advantage of external growth opportunities, we have made, and may
continue to make, strategic acquisitions that involve significant risks and
uncertainties. These risks and uncertainties include: (1) the difficulty in
integrating newly-acquired businesses and operations in an efficient and
effective manner; (2) the challenges in achieving strategic objectives, cost
savings and other benefits from acquisitions; (3) the risk that the technologies
acquired do not evolve as anticipated; (4) contracts, agreements, assets and
liabilities are not as represented; (5) the potential loss of key employees of
the acquired businesses; (6) the risk of diverting the attention of senior
management from our other operations; (7) the risks of entering new markets in
which we have limited experience; (8) difficulties in expanding information
technology systems and other business processes to accommodate the acquired
businesses; (9) future impairments of goodwill and other intangibles of an
acquired business; and, (10) the impact that possible in-process research and
development charges may have on future earnings.
Many acquisition candidates in the biopharmaceuticals industry carry high price
to earnings valuations. As a result, acquiring a business that has a high
valuation may be dilutive to our earnings, especially when the acquired business
has little or no revenue.
22
Key employees of acquired businesses may receive substantial value in connection
with a transaction in the form of change-in-control agreements, acceleration of
stock options and the lifting of restrictions on other equity-based compensation
rights. To retain such employees and integrate the acquired business, we may
offer additional, sometimes costly, retention incentives.
WE MAY BE UNABLE TO RETAIN SKILLED PERSONNEL AND MAINTAIN KEY RELATIONSHIPS.
The success of our business depends, in large part, on our continued ability to
(i) attract and retain highly qualified management, scientific, manufacturing
and sales and marketing personnel, (ii) successfully integrate large numbers of
new employees into our corporate culture, and (iii) develop and maintain
important relationships with leading research and medical institutions and key
distributors. Competition for these types of personnel and relationships is
intense.
Among other benefits, we use stock options to attract and retain personnel. In
addition, changes in stock option accounting rules require us to recognize all
stock-based compensation costs as expenses. These or other factors could reduce
the number of shares management and our board of directors choose to grant under
our stock option plans. We cannot be sure that we will be able to attract or
retain skilled personnel or maintain key relationships or that the costs of
retaining such personnel or maintaining such relationships will not materially
increase.
THE HAZARDOUS MATERIALS WE USE IN OUR RESEARCH, DEVELOPMENT AND OTHER BUSINESS
OPERATIONS COULD RESULT IN SIGNIFICANT LIABILITIES, WHICH COULD EXCEED OUR
INSURANCE COVERAGE AND FINANCIAL RESOURCES.
We use certain hazardous materials in our research, development and general
business activities. While we believe we are currently in substantial compliance
with the federal, state and local laws and regulations governing the use of
these materials, we cannot be certain that accidental injury or contamination
will not occur. Any such accident or contamination could result in substantial
liabilities that could exceed our insurance coverage and financial resources.
Additionally, the cost of compliance with environmental and safety laws and
regulations may increase in the future, requiring us to expend more financial
resources either in compliance or in purchasing supplemental insurance coverage.
THE PHARMACEUTICAL INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION WHICH
PRESENTS NUMEROUS RISKS TO US.
The discovery, preclinical development, clinical trials, manufacturing,
marketing and labeling of pharmaceuticals and biologics are all subject to
extensive regulation by numerous governmental authorities and agencies in the
United States and other countries. If we or our contractors and collaborators
are delayed in receiving, or are unable to obtain at all, necessary governmental
approvals, we will be unable to effectively market our products.
The testing, marketing and manufacturing of our products require regulatory
approval, including approval from the FDA and, in some cases, from the U.S.
Environmental Protection Agency, or the EPA, or governmental authorities outside
of the United States that perform roles similar to those of the FDA and EPA.
Certain of our pharmaceutical products, such as FOCALIN(TM), fall under the
Controlled Substances Act of 1970 that requires authorization by the U.S. Drug
Enforcement Agency, or DEA, of the U.S. Department of Justice in order to handle
and distribute these products. The regulatory approval process presents several
risks to us:
o In general, preclinical tests and clinical trials can take many
years, and require the expenditure of substantial resources, and the
data obtained from these tests and trials can be susceptible to
varying interpretation that could delay, limit or prevent regulatory
approval;
23
o Delays or rejections may be encountered during any stage of the
regulatory process based upon the failure of the clinical or other
data to demonstrate compliance with, or upon the failure of the
product to meet, a regulatory agency's requirements for safety,
efficacy and quality or, in the case of a product seeking an orphan
drug indication, because another designee received approval first or
receives approval of other labeled indications;
o Requirements for approval may become more stringent due to changes
in regulatory agency policy, or the adoption of new regulations or
legislation;
o The scope of any regulatory approval, when obtained, may
significantly limit the indicated uses for which a product may be
marketed and reimbursed and may impose significant limitations in
the nature of warnings, precautions and contra-indications that
could materially affect the sales and profitability of the drug;
o Pricing and reimbursement controls;
o Approved drugs, as well as their manufacturers, are subject to
continuing and ongoing review, and discovery of previously unknown
problems with these products or the failure to adhere to
manufacturing or quality control requirements may result in
restrictions on their manufacture, sale or use or in their
withdrawal from the market;
o Regulatory authorities and agencies of the United States or foreign
governments may promulgate additional regulations restricting the
sale of our existing and proposed products;
o Guidelines and recommendations published by various non-governmental
organizations can reduce the use of our products;
o Once a product receives marketing approval, we may not market that
product for broader or different applications, and the FDA may not
grant us approval with respect to separate product applications that
represent extensions of our basic technology. In addition, the FDA
may withdraw or modify existing approvals in a significant manner or
promulgate additional regulations restricting the sale of our
present or proposed products. The FDA may also request that we
perform additional clinical trials or change the labeling of our
existing or proposed products if we or others identify side effects
after our products are on the market;
o Products, such as REVLIMID(R), that are subject to accelerated
approval can be subject to an expedited withdrawal if the
post-marketing study commitments are not completed with due
diligence, the post-marketing restrictions are not adhered to or are
shown to be inadequate to assure the safe use of the drug, or
evidence demonstrates that the drug is not shown to be safe and
effective under its conditions of use. Additionally, promotional
materials for such drugs are subject to enhanced surveillance,
including pre-approval review of all promotional materials used
within 120 days following marketing approval and a requirement for
the submissions 30 days prior to initial dissemination of all
promotional materials disseminated after 120 days following
marketing approval.
o Our labeling and promotional activities relating to our products are
regulated by the FDA and state regulatory agencies and, in some
circumstances, by the DEA, and are subject to associated risks. If
we fail to comply with FDA regulations prohibiting promotion of
off-label uses and the promotion of products for which marketing
clearance has not been obtained, the FDA, or the Office of the
Inspector General of the Department of Health and Human Services or
the state
24
Attorneys General could bring an enforcement action against us that
could inhibit our marketing capabilities as well as result in
significant penalties.
Additionally, the FDA approval process would allow for the approval of an ANDA
or 505(b)(2) application for a generic version of our approved products upon the
expiration, through passage of time or successful legal challenge, of relevant
patent or non-patent exclusivity protection. ANDAs and 505(b)(2) applications
are generally less burdensome than full NDAs in that, in lieu of clinical data,
these applications rely in whole, or in part, upon the safety and efficacy
findings of the referenced approved product in conjunction with bridging data,
typically bioequivalence data.
The FDA's Center for Biologics Evaluation and Research currently regulates under
21 CFR Parts 1270 and 1271 human tissue intended for transplantation that is
recovered, processed, stored or distributed by methods that do not change tissue
function or characteristics and that is not currently regulated as a human drug,
biological product or medical device. Certain stem cell-related activities fall
within this category. Part 1270 requires tissue establishments to screen and
test donors, to prepare and follow written procedures for the prevention of the
spread of communicable disease and to maintain records. It also provides for
inspection by the FDA of tissue establishments. Part 1271 requires human cells,
tissue and cellular and tissue-based product establishments (HCT/Ps) to register
with the agency and list their HCT/Ps.
Currently, we are required to be, and are, licensed to operate in New York and
New Jersey, two of the states in which we currently collect placentas and
umbilical cord blood for our allogeneic and private stem cell banking
businesses. If other states adopt similar licensing requirements, we would need
to obtain such licenses to continue operating. If we are delayed in receiving,
or are unable to obtain at all, necessary licenses, we will be unable to provide
services in those states and this would impact negatively on our revenues.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND OUR PRODUCTS MAY BE
SUBJECT TO GENERIC COMPETITION.
Our success depends, in part, on our ability to obtain and enforce patents,
protect trade secrets, obtain licenses to technology owned by third parties and
to conduct our business without infringing upon the proprietary rights of
others. The patent positions of pharmaceutical and biopharmaceutical firms,
including ours, can be uncertain and involve complex legal and factual
questions.
Under the current U.S. patent laws, patent applications in the United States are
maintained in secrecy for at least four to 18 months, and publication of
discoveries in the scientific and patent literature often lag behind actual
discoveries. Thus, we may discover sometime in the future that we, or the third
parties from whom we have licensed patents or patent applications, were not the
first to make and/or file the inventions covered by the patents and patent
applications in which we have or seek rights. In the event that a third party
has also filed a patent application for any of the inventions claimed in our
patents or patent applications, or those we have licensed-in, we could become
involved in an interference proceeding declared by the U.S. Patent and Trademark
Office, or the PTO, to determine priority of invention or an opposition
proceeding in other places such as Europe. Such an interference or opposition
could result in the loss of an issued U.S. or foreign patent, respectively, or
loss of any opportunity to secure U.S. patent protection for that invention.
Even if the eventual outcome is favorable to us, such proceedings could result
in substantial cost and delay to us and limit the scope of the claimed subject
matter.
In addition, the coverage sought in a patent application may not be obtained or
may be significantly reduced before the patent is issued. Consequently, if our
pending applications, or pending application that we have licensed-in from third
parties, do not result in the issuance of patents or if any patents that are
25
issued do not provide significant proprietary protection or commercial
advantage, our ability to sustain the necessary level of intellectual property
rights upon which our success depends may be restricted.
Moreover, different countries have different procedures for obtaining patents,
and patents issued in different countries provide different degrees of
protection against the use of a patented invention by others. Therefore, if the
issuance to us or our licensors, in a given country, of a patent covering an
invention is not followed by the issuance in other countries of patents covering
the same invention, or if any judicial interpretation of the validity,
enforceability or scope of the claims in a patent issued in one country is not
similar to the interpretation given to the corresponding patent issued in
another country, our ability to protect our intellectual property in other
countries may be limited.
Furthermore, even if our patent applications, or those we have licensed-in, are
issued, our competitors may still challenge the scope, validity or
enforceability of such patents in court, requiring us to engage in complex,
lengthy and costly litigation. Alternatively, our competitors may be able to
design around such patents and compete with us using the resulting alternative
technology. If any of our issued or licensed patents are infringed, we may not
be successful in enforcing our or our licensor's intellectual property rights or
defending the validity or enforceability of our issued patents and subsequently
not be able to develop or market applicable product exclusively.
FDA regulatory exclusivity for thalidomide has expired so that generic drug
companies can file an ANDA to seek approval to market thalidomide in the United
States. Barr Laboratories, Inc., a generic drug manufacturer located in Pomona,
New York, filed an ANDA for the treatment of ENL in the manner described in our
label and seeking permission from the FDA to market a generic version of 50mg,
100mg and 200mg THALOMID(R). Under the federal Hatch-Waxman Act of 1984, any
generic manufacturer may file an ANDA with a certification (a "Paragraph IV
certification") challenging the validity or infringement of a patent listed in
the FDA's APPROVED DRUG PRODUCTS WITH THERAPEUTIC EQUIVALENCE EVALUATIONS, or
the "Orange Book", four years after the pioneer company obtains approval of its
New Drug Application, or an NDA. On or after December 5, 2006, Barr mailed
notices of Paragraph IV certifications alleging that the following patents
listed for THALOMID(R) in the Orange Book are invalid, unenforceable, and/or not
infringed: U.S. Patent Nos. 6,045,501 ("the '501 patent"), 6,315,720 ("the '720
patent"), 6,561,976 ("the '976 patent"), 6,561,977 ("the '977 patent"),
6,755,784 ("the '784 patent"), 6,869,399 ("the '399 patent"), 6,908,432 ("the
'432 patent"), and 7,141,018 ("the '018 patent"). The '501, '976, and '432
patents do not expire until August 28, 2018, while the remaining patents do not
expire until October 23, 2020. On January 18, 2007, we filed an infringement
action in the United States District Court of New Jersey against Barr. We intend
to vigorously enforce our rights under these patents. If the ANDA is approved by
the FDA, and Barr is successful in challenging our patents listed in the Orange
Book for THALOMID(R), Barr would be permitted to sell a generic thalidomide
product.
On August 19, 2004, we, together with our exclusive licensee Novartis, filed an
infringement action in the United States District Court of New Jersey against
Teva Pharmaceuticals USA, Inc., in response to notices of Paragraph IV
certifications made by Teva in connection with the filing of an ANDA for
FOCALIN(TM). The notification letters contend that U.S. Patent Nos. 5,908,850,
or '850 patent, and 6,355,656, or '656 patent, were invalid. After the suit was
filed, Novartis listed another patent, U.S. Patent No. 6,528,530, or '530
patent, in the Orange Book in association with the FOCALIN(TM) NDA. The original
2004 action asserted infringement of the '850 patent. Teva amended its answer
during discovery to contend that the '850 patent was not infringed by the filing
of its ANDA, and that the '850 patent is not enforceable due to an allegation of
inequitable conduct. Fact discovery expired on February 28, 2006. At about the
time of the filing of the '850 patent infringement action, reexamination
proceedings for the '656 patent were initiated in the U.S. PTO. Recently, the
U.S. PTO sent to us a Notice of Intent to Issue Ex Parte Reexamination
Certificate. On December 21, 2006, Celgene and Novartis filed an action in the
United States District Court of New Jersey against Teva for infringement of the
'656 patent. As a related case, the '656 patent infringement action has been
assigned to the same judge assigned to the '850 patent
26
infringement action who consolidated it with the previously pending '850 patent
infringement action. No trial date has been set for either case. The statutory
30-month stay of FDA approval of Teva's ANDA expired on January 9, 2007. If Teva
goes to market with a generic version of FOCALIN(TM) prior to trial, or
successfully defends against both patents, our sales of FOCALIN(TM) to Novartis
could be significantly reduced. The '530 patent is not part of the patent
infringement action against Teva. The proceeding does not involve an ANDA for
FOCALIN XR(TM).
On December 4, 2006, we, together with our exclusive licensee Novartis, filed an
infringement action in the United States District Court for the District of New
Jersey against Abrika Pharmaceuticals, Inc. and Abrika Pharmaceuticals, LLP, in
response to a notice of a Paragraph IV certification made by Abrika
Pharmaceuticals, Inc. in connection with the filing of an ANDA for RITALIN
LA(TM). The notification letter contends that claims in United States Patent
Nos. 5,837,284 and 6,635,284 are invalid and are not infringed by the proposed
Abrika products. On December 6, 2006, we and Novartis filed a second identical
action in the United States District Court for the District of Delaware as a
protective suit and intended to serve the complaint and summons only in the
event that personal jurisdiction in New Jersey was successfully challenged by
Abrika. Abrika filed an answer and counterclaim in the Delaware court on
December 8, 2006. The counterclaim seeks a declaratory judgment of patent
invalidity, noninfringement and unenforceability. We and Novartis have moved the
Delaware court to strike Abrika's answer and counterclaim without prejudice to
refiling if the complaint is later served, or to stay the action pending a
determination of personal jurisdiction in the New Jersey court. The motion is
fully briefed and awaiting a decision by the court. Abrika has moved to dismiss
the New Jersey action or to transfer it to the Delaware court. We and Novartis
have been granted leave to take discovery from Abrika prior to filing an
opposition brief. The motion is scheduled to be fully briefed by March 26, 2007.
Neither the Delaware court nor the New Jersey court has set a date for trial. If
we are unsuccessful in defending our patents by a Court of final decision,
Novartis' sales of RITALIN LA(TM) could be significantly reduced in the United
States by the entrance of a generic RITALIN LA(TM) product, consequently
reducing our revenue from royalties associated with these sales.
On June 14, 2006, an opposition proceeding was brought by IPC-Nordic A/S
("Opponent") against granted European Patent 1264597, which is one of second of
two European patents that we have licensed from The Children's Medical Center
Corporation and sub-licensed to Pharmion. The granted European patent in
opposition relates to use of thalidomide as a medicament of the treatment of
solid or blood-borne tumors. The Opponent alleges several bases for which the
patent is not patentable. On February 13, 2007, a response to the opponent
opposition brief was submitted to the European Patent Office. We intend to
vigorously pursue our rights in the opposition proceeding.
On January 15, 2004, an opposition proceeding was brought by Celltech R&D Ltd.
("Opponent") against granted European Patent 0728143 which we have licensed from
the University of California relating to JNK 1 and JNK 2 polypeptides. This
proceeding is directed solely to our claims for JNK 2 and not JNK 1. An oral
hearing occurred in October of 2005 in which the European Patent Office, or the
EPO, advised us of its intent to revoke certain of our claims. A written
decision confirming the intent of the EPO was issued in January of 2006. The
written decision was appealed to the European Board of Appeals ("Board") in
March of 2006. In connection with the appeal process, in May of 2006, we
submitted a Statement of Grounds providing further evidence for consideration by
the Board. The Opponent made no responsive submissions. An oral hearing is
scheduled for May of 2007. We do have other JNK 1 and JNK European patent
application claims pending.
We rely upon unpatented proprietary and trade secret technology that we try to
protect, in part, by confidentiality agreements with our collaborative partners,
employees, consultants, outside scientific collaborators, sponsored researchers
and other advisors. If these agreements are breached, we may not have adequate
remedies for any such breach. Despite precautions taken by us, others may obtain
access to
27
or independently develop our proprietary technology or such technology may be
found to be non-proprietary or not a trade secret.
Our right to practice the inventions claimed in certain patents that relate to
THALOMID(R) arises under licenses granted to us by others, including The
Rockefeller University and Children's Medical Center Corporation, or CMCC. In
addition to these patents, which relate to thalidomide, we have also licensed
from CMCC certain patents relating to thalidomide analogs. In December 2002, we
entered into an exclusive license agreement with CMCC and EntreMed Inc. pursuant
to which CMCC exclusively licensed to us certain patents and patent applications
that relate to analogs, metabolites, precursors and hydrolysis products of
thalidomide, and all stereoisomers thereof. Our license under the December 2002
agreement is worldwide and royalty-bearing, and we have complete control over
the prosecution of the licensed thalidomide analog patent rights. Under this
December 2002 agreement, we are obligated to comply with certain milestones for
a REVLIMID(R) approval and royalties with respect to sales of REVLIMID(R). The
December 2002 agreement also grants us an option for a certain time period to
inventions in the field of thalidomide analogs that may be developed at CMCC in
the laboratory of Dr. Robert D'Amato, pursuant to the terms and conditions of a
separate Sponsored Research Agreement negotiated between CMCC and us.
Further, while we believe these confidentiality agreements and license
agreements to be valid and enforceable, our rights under these agreements may
not continue or disputes concerning these agreements may arise. If any of the
foregoing should occur, we may be unable to rely upon our unpatented proprietary
and trade secret technology, or we may be unable to use the third-party
proprietary technology we have licensed-in, either of which may prevent or
hamper us from successfully pursuing our business.
It is also possible that third-party patent applications and patents could issue
with claims that broadly cover certain aspects of our business or of the subject
matter claimed in the patents or patent applications owned or optioned by us or
licensed to us, which may limit our ability to conduct our business or to
practice under our patents, and may impede our efforts to obtain meaningful
patent protection of our own. If patents are issued to third parties that
contain competitive or conflicting claims, we may be legally prohibited from
pursuing research, development or commercialization of potential products or be
required to obtain licenses to these patents or to develop or obtain alternative
technology. We may be legally prohibited from using patented technology, may not
be able to obtain any license to the patents and technologies of third parties
on acceptable terms, if at all, or may not be able to obtain or develop
alternative technologies. Consequently, if we cannot successfully defend against
any patent infringement suit that may be brought against us by a third-party, we
may lose the ability to continue to conduct our business as we presently do, or
to practice certain subject matter delineated by patent claims that we have
exclusive rights to, whether by ownership or by license, and that may have a
material adverse effect on our business.
We rely upon trademarks and service marks to protect our rights to the
intellectual property used in our business. On October 29, 2003, we filed a
lawsuit against Centocor, Inc. to prevent Centocor's use of the term "I.M.I.D.s"
in connection with Centocor's products, which use, we believe, is likely to
cause confusion with our IMiDs(R) registered trademark for compounds (including
REVLIMID(R)) developed or being developed by us to treat cancer and inflammatory
diseases. If we are not successful in this suit, it may be necessary for us to
adopt a different trademark for that class of compounds and thereby lose the
value we believe we have built in the "IMiDs(R)" mark. Currently, this case is
scheduled for trial on April 23, 2007.
WE FACE THE RISK OF PRODUCT LIABILITY CLAIMS.
We may be subject to a variety of product liability or other claims based on
allegations that the use of our technology or products has resulted in adverse
effects, whether by participants in our clinical trials, by
28
patients using our products or by other persons exposed to our products.
Thalidomide, when used by pregnant women, has resulted in serious birth defects.
Therefore, necessary and strict precautions must be taken by physicians
prescribing the drug and pharmacies dispensing the drug to women with
childbearing potential. These precautions may not be observed in all cases or,
if observed, may not be effective. Use of thalidomide has also been associated,
in a limited number of cases, with other side effects, including nerve damage.
Although we have product liability insurance that we believe is sufficient, we
may be unable to maintain existing coverage or obtain additional coverage on
commercially reasonable terms if required, or our coverage may be inadequate to
protect us in the event of a multitude of claims being asserted against us. Our
obligation to defend against or pay any product liability or other claim may be
expensive and divert the efforts of our management and technical personnel.
LITIGATION ON A VARIETY OF MATTERS MAY SUBJECT US TO SIGNIFICANT LEGAL EXPENSES
AND LIABILITY.
From time to time, we may be subject to litigation on a variety of matters,
including, as discussed above, intellectual property, licensing arrangements
with other persons and product liability. Litigation requires the expenditure of
significant time and resources, and is inherently unpredictable. If any
litigation were to have an unanticipated adverse result, there could be a
material impact on our results of operations or financial position.
THE PHARMACEUTICAL AND BIOTECH INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO
RAPID AND SIGNIFICANT TECHNOLOGICAL CHANGE.
The pharmaceutical industry in which we operate is highly competitive and
subject to rapid and significant technological change. Our present and potential
competitors include major pharmaceutical and biotechnology companies, as well as
specialty pharmaceutical firms, including but not limited to:
o Amgen, which potentially competes with our TNFa and kinase
inhibitors;
o Novartis, which potentially competes with our IMiDs(R) compounds and
kinase programs;
o Bristol Myers Squibb Co., which potentially competes in clinical
trials with our IMiDs(R) compounds and TNFa inhibitors;
o Genentech, Inc., which potentially competes in clinical trials with
our IMiDs(R) compounds and TNFa inhibitors;
o AstraZeneca plc, which potentially competes in clinical trials with
our IMiDs(R) compounds and TNFa inhibitors;
o Millennium Pharmaceuticals Inc. and Johnson & Johnson, which
potentially compete with REVLIMID(R) and THALOMID(R) in thE
treatment of multiple myeloma and in clinical trials with our
IMiDs(R) compounds;
o Pfizer Inc., which potentially competes in clinical trials with our
kinase inhibitors;
o Biogen Idec Inc. and Genzyme Corporation, both of which are
generally developing drugs that address the oncology and immunology
markets; and
o Centocor, Inc., which potentially competes with certain of our
proprietary programs including our oral anti-inflammatory programs.
29
Many of these companies have considerably greater financial, technical and
marketing resources than we do. We also experience competition from universities
and other research institutions, and in some instances, we compete with others
in acquiring technology from these sources. The pharmaceutical industry has
undergone, and is expected to continue to undergo, rapid and significant
technological change, and we expect competition to intensify as technical
advances in the field are made and become more widely known. The development of
products, including generics, or processes by our competitors with significant
advantages over those that we are seeking to develop could cause the
marketability of our products to stagnate or decline.
SALES OF OUR PRODUCTS ARE DEPENDENT ON THIRD-PARTY REIMBURSEMENT.
Sales of our products will depend, in part, on the extent to which the costs of
our products will be paid by health maintenance, managed care, pharmacy benefit
and similar health care management organizations, or reimbursed by government
health administration authorities, private health coverage insurers and other
third-party payors. These health care management organizations and third-party
payors are increasingly challenging the prices charged for medical products and
services. Additionally, the containment of health care costs has become a
priority of federal and state governments, and the prices of drugs have been a
focus in this effort. If these organizations and third-party payors do not
consider our products to be cost-effective or competitive with other available
therapies, they may not reimburse providers or consumers of our products or, if
they do, the level of reimbursement may not be sufficient to allow us to sell
our products on a profitable basis.
In addition, certain legislative and regulatory changes to the healthcare system
could impact the pricing of our products. Effective January 1, 2006, Medicare
prescription drug coverage legislation authorizes the Centers for Medicare &
Medicaid Services to implement a new Medicare, Part D coverage benefit for
prescription drugs.
While numerous factors may influence the impact that the drug program may have
on us, the most significant factors are:
(a) not all drugs in a class may be covered under the program;
(b) payment levels under the new Medicare program may be lower than the
previous Medicare payment levels;
(c) Medicare patients will have to pay co-insurance and this may influence
which products are recommended by physicians and selected by patients;
(d) enrollment in the program is mandatory for those who are dually
eligible for both Medicaid and Medicare;
(e) there is no assurance that our drugs will be recognized under the new
Medicare Part D program for outpatient prescription drugs or paid at levels that
reflect current or historical levels;
(f) each Part D plan must review our drugs for addition to their formulary
and there may be some lag time before being added to each plan's formulary, if
added at all; and
(g) federal Medicare proposals, along with State Medicaid drug payment
changes and healthcare reforms could also lower payment for our products.
30
Our results of operations could be materially adversely affected by the
reimbursement changes emerging in 2007 and beyond from the Medicare prescription
drug coverage legislation. To the extent that private insurers such as Blue
Cross and Blue Shield or managed care programs follow Medicaid coverage and
payment developments, the adverse effects of lower Medicare payment may be
magnified by private insurers adopting lower payment. Additionally, some states
have enacted health care reform legislation. Further federal and state
developments are possible. The impact of proposed legislation and other reforms
is unclear, but it may result in pricing and reimbursement restrictions, which
could adversely impact our revenues.
CHANGES IN OUR EFFECTIVE INCOME TAX RATE COULD REDUCE OUR EARNINGS.
Various factors may have favorable or unfavorable effects on our effective
income tax rate. These factors include, but are not limited to, interpretations
of existing tax laws, the accounting for stock options and other share-based
payments, changes in tax laws and rates, future levels of research and
development spending, changes in accounting standards, future levels of capital
expenditures, changes in the mix of earnings in the various tax jurisdictions in
which we operate, challenges to our transfer pricing, the outcome of IRS exams
and changes in overall levels of pre-tax earnings. The impact on our income tax
provision resulting from the above-mentioned factors may be significant and
could have a negative impact on our results of operations.
OUR OPERATIONS MAY BE IMPACTED BY CURRENCY FLUCTUATIONS THAT MAY CAUSE OUR
EARNINGS TO FLUCTUATE AND ADVERSELY AFFECT OUR STOCK PRICE.
Fluctuations in the value of the U.S. dollar against foreign currencies could
impact our earnings. We anticipate utilizing foreign currency forward contracts
to manage foreign currency risk and not to engage in currency speculation. We
would use these forward contracts to hedge certain forecasted transactions
denominated in foreign currencies. Our hedging efforts would reduce but not
eliminate our anticipated exposure to currency fluctuations. Any significant
foreign exchange rate fluctuations within a short period of time could still
adversely affect our financial condition and results of operations.
WE MAY EXPERIENCE AN ADVERSE MARKET REACTION IF WE ARE UNABLE TO MEET OUR
FINANCIAL REPORTING OBLIGATIONS.
Because of inherent limitations, our internal control over financial reporting
may not prevent or detect misstatements in our financial reporting. Such
misstatements may result in litigation and/or negative publicity and possibly
cause an adverse market reaction that may negatively impact our growth plans and
the value of our common stock or debt securities obligations.
ACCOUNTING PRONOUNCEMENTS MAY AFFECT OUR FUTURE FINANCIAL POSITION AND RESULTS
OF OPERATIONS.
There may be new accounting pronouncements or regulatory rulings, which may have
an affect on our future financial position and results of operations. For
example, in December 2004, the FASB issued Statement of Financial Accounting
Standards, or SFAS, No. 123R, "Share-Based Payment," which supersedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and requires
companies to recognize compensation expense, using a fair-value based method,
for costs related to share-based payments including stock options and stock
issued under our employee stock plans. We have adopted SFAS 123R using the
modified prospective application method on January 1, 2006. Our estimate of
future stock-based compensation expense is affected by our stock price, the
number of stock-based awards our board of directors may grant in 2007 and
subsequent years, as well as a number of complex and subjective valuation
assumptions and the related tax impact. These valuation assumptions include, but
are not limited to, the volatility of our stock price and employee stock option
exercise behaviors.
31
THE PRICE OF OUR COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY MAKE IT
DIFFICULT FOR YOU TO SELL THE COMMON STOCK WHEN YOU WANT OR AT PRICES YOU FIND
ATTRACTIVE.
There has been significant volatility in the market prices for publicly traded
shares of biopharmaceutical companies, including ours. We expect that the market
price of our common stock will continue to fluctuate. The split-adjusted
intra-day price of our common stock fluctuated from a high of $60.12 per share
to a low of $31.51 per share in 2006. On December 31, 2006, our common stock
closed at a price of $57.53 per share. The price of our common stock may not
remain at or exceed current levels. The following key factors may have an
adverse impact on the market price of our common stock:
o results of our clinical trials or adverse events associated with our
marketed products;
o announcements of technical or product developments by our
competitors;
o market conditions for pharmaceutical and biotechnology stocks;
o market conditions generally;
o governmental regulation;
o new accounting pronouncements or regulatory rulings;
o health care legislation;
o public announcements regarding medical advances in the treatment of
the disease states that we are targeting;
o patent or proprietary rights developments;
o changes in pricing and third-party reimbursement policies for our
products;
o fluctuations in our operating results;
o the outcome of litigation involving our products or processes
related to production and formulation of those products or uses of
those products; or
o competition.
In addition, the stock market in general and the biotechnology sector in
particular has experienced extreme volatility that has often been unrelated to
the operating performance of a particular company. These broad market
fluctuations may adversely affect the market price of our common stock.
THE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE COULD
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
Future sales of substantial amounts of our common stock or debt or other
securities convertible into common stock could adversely affect the market price
of our common stock. As of December 31, 2006, there were outstanding stock
options and warrants for 37,490,340 shares of common stock, of which 28,013,548
were currently vested and exercisable at an exercise price range between $0.04
per share and $59.01 per share, with a weighted average exercise price of $16.97
per share. In addition, in June 2003, we issued $400.0 million of unsecured
convertible notes that are currently convertible into 33,014,519
32
shares of our common stock at the conversion price of $12.1125. The conversion
of some or all of these notes will dilute the ownership interest of existing
stockholders.
OUR SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BY-LAW PROVISIONS MAY DETER
A THIRD-PARTY FROM ACQUIRING US AND MAY IMPEDE THE STOCKHOLDERS' ABILITY TO
REMOVE AND REPLACE OUR MANAGEMENT OR BOARD OF DIRECTORS.
Our board of directors has adopted a shareholder rights plan, the purpose of
which is to protect stockholders against unsolicited attempts to acquire control
of us that do not offer a fair price to all of our stockholders. The rights plan
may have the effect of dissuading a potential acquirer from making an offer for
our common stock at a price that represents a premium to the then current
trading price.
Our board of directors has the authority to issue, at any time, without further
stockholder approval, up to 5,000,000 shares of preferred stock, and to
determine the price, rights, privileges and preferences of those shares. An
issuance of preferred stock could discourage a third-party from acquiring a
majority of our outstanding voting stock. Additionally, our board of directors
has adopted certain amendments to our by-laws intended to strengthen the board's
position in the event of a hostile takeover attempt. These provisions could
impede the stockholders' ability to remove and replace our management and/or
board of directors.
Furthermore, we are subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law, which may also dissuade a
potential acquirer of our common stock.
AVAILABLE INFORMATION
Our current reports on Form 8-K, quarterly reports on Form 10-Q and Annual
Reports on Form 10-K are electronically filed with or furnished to the
Securities and Exchange Commission, or SEC, and all such reports and amendments
to such reports filed have been and will be made available, free of charge,
through our website (HTTP://WWW.CELGENE.COM) as soon as reasonably practicable
after such filing. Such reports will remain available on our website for at
least 12 months. The contents of our website are not incorporated by reference
into this Annual Report. The public may read and copy any materials filed by us
with the SEC at the SEC's Public Reference Room at 100 F Street, NW, Washington,
D.C. 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements,
and other information regarding issuers that file electronically with the SEC.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Summit, New Jersey on approximately 45
acres of land and consist of several buildings, which house our administrative,
sales, marketing and research functions. This facility was purchased in 2004 and
should accommodate our needs for the foreseeable future.
We own a site in Neuchatel, Switzerland where we are constructing our European
headquarters and a drug product manufacturing facility to perform formulation,
encapsulation, packaging, warehousing and distribution. The site is scheduled
for completion during 2007. In December 2006, we purchased an API
33
manufacturing facility from Siegfried located in Zofingen, Switzerland. The API
facility has the capability to produce multiple drug substances and initially
will be used to produce REVLIMID(R) API to supply global markets. The facility
may also be used to produce drug substance for our future drugs and drug
candidates.
We occupy the following facilities under lease arrangements that have remaining
lease terms greater than one-year. Under these lease arrangements, we also are
required to reimburse the lessors for real estate taxes, insurance, utilities,
maintenance and other operating costs. All leases are with unaffiliated parties.
o 73,500-square feet of laboratory and office space in Warren, New
Jersey. The two leases for this facility have terms ending in May
2007 and July 2010, respectively, and each has two five-year renewal
options. We expect to renew the lease expiring in May 2007 for an
additional five-year term. Annual rent for these facilities is
approximately $1.0 million.
o 78,202-square feet of laboratory and office space in San Diego,
California. The lease for this facility has a term ending in August
2012 with one five-year renewal option. Annual rent for this
facility is approximately $2.0 million and is subject to specified
annual rental increases.
o 20,234-square feet of office and laboratory space in Cedar Knolls,
New Jersey. The leases for this facility have terms ending between
October 2007 and April 2009 with renewal options ranging from either
one or two additional five-year terms. We expect to renew the lease
expiring in October 2007 for an additional five-year term. Annual
rent for this facility is approximately $0.3 million and is subject
to specified annual rental increases.
o 11,000-square feet of office and laboratory space in Baton Rouge,
Louisiana. The lease for this facility has a term ending in May 2008
with one three-year renewal option. Annual rent for this facility is
approximately $0.1 million.
We also lease a number of offices under various lease agreements in Europe,
Australia and Japan. The minimum annual rents may be subject to specified annual
rent increases. At December 31, 2006, the non-cancelable lease terms for these
operating leases expire at various dates between 2007 and 2015 and in some cases
include renewal options.
ITEM 3. LEGAL PROCEEDINGS
Barr Laboratories, Inc., a generic drug manufacturer located in Pomona, New
York, filed an ANDA for the treatment of ENL in the manner described in our
label and seeking permission from the FDA to market a generic version of 50mg,
100mg and 200mg THALOMID(R). Under the federal Hatch-Waxman Act of 1984, any
generic manufacturer may file an ANDA with a certification (a "Paragraph IV
certification") challenging the validity or infringement of a patent listed in
the FDA's Orange Book four years after the pioneer company obtains approval of
its New Drug Application, or an NDA. On or after December 5, 2006, Barr mailed
notices of Paragraph IV certifications alleging that the following patents
listed for THALOMID(R) in the Orange Book are invalid, unenforceable, and/or not
infringed: U.S. Patent Nos. 6,045,501 ("the '501 patent"), 6,315,720 ("the '720
patent"), 6,561,976 ("the '976 patent"), 6,561,977 ("the '977 patent"),
6,755,784 ("the '784 patent"), 6,869,399 ("the '399 patent"), 6,908,432 ("the
'432 patent"), and 7,141,018 ("the '018 patent"). The '501, '976, and '432
patents do not expire until August 28, 2018, while the remaining patents do not
expire until October 23, 2020. On January 18, 2007, we filed an infringement
action in the United States District Court of New Jersey against Barr. We intend
to vigorously enforce our rights under these patents. If the ANDA is approved by
the FDA, and Barr is successful in challenging our patents listed in the Orange
Book for THALOMID(R), Barr would be permitted to sell a generic thalidomide
product.
34
On August 19, 2004, we, together with our exclusive licensee Novartis, filed an
infringement action in the United States District Court of New Jersey against
Teva Pharmaceuticals USA, Inc., in response to notices of Paragraph IV
certifications made by Teva in connection with the filing of an ANDA for
FOCALIN(TM). The notification letters contend that United States Patent Nos.
5,908,850, or '850 patent, and 6,355,656, or '656 patent, were invalid. After
the suit was filed, Novartis listed another patent, United States Patent No.
6,528,530, or '530 patent, in the Orange Book in association with the
FOCALIN(TM) NDA. The original 2004 action asserted infringement of the '850
patent. Teva amended its answer during discovery to contend that the '850 patent
was not infringed by the filing of its ANDA, and that the '850 patent is not
enforceable due to an allegation of inequitable conduct. Fact discovery expired
on February 28, 2006. At about the time of the filing of the '850 patent
infringement action, reexamination proceedings for the '656 patent were
initiated in the U.S. PTO. Recently, the U.S. PTO sent to us a Notice of Intent
to Issue Ex Parte Reexamination Certificate. On December 21, 2006, Celgene and
Novartis filed an action in the United States District Court of New Jersey
against Teva for infringement of the '656 patent. As a related case, the '656
patent infringement action has been assigned to the same judge assigned to the
'850 patent infringement action who consolidated it with the previously pending
'850 patent infringement action. No trial date has been set. The statutory
30-month stay of FDA approval of Teva's ANDA expired on January 9, 2007. If Teva
goes to market with a generic version of FOCALIN(TM) prior to trial, or
successfully defends against both patents, our sales of FOCALIN(TM) to Novartis
could be significantly reduced. The '530 patent is not part of the patent
infringement action against Teva. The proceeding does not involve an ANDA for
FOCALIN XR(TM).
On December 4, 2006, we, together with our exclusive licensee Novartis, filed an
infringement action in the United States District Court for the District of New
Jersey against Abrika Pharmaceuticals, Inc. and Abrika Pharmaceuticals, LLP, in
response to a notice of a Paragraph IV certification made by Abrika
Pharmaceuticals, Inc. in connection with the filing of an ANDA for RITALIN
LA(TM). The notification letter contends that claims in United States Patent
Nos. 5,837,284 and 6,635,284 are invalid and are not infringed by the proposed
Abrika products. On December 6, 2006, we and Novartis filed a second identical
action in the United States District Court for the District of Delaware as a
protective suit and intended to serve the complaint and summons only in the
event that personal jurisdiction in New Jersey was successfully challenged by
Abrika. Abrika filed an answer and counterclaim in the Delaware court on
December 8, 2006. The counterclaim seeks a declaratory judgment of patent
invalidity, noninfringement and unenforceability. We and Novartis have moved the
Delaware court to strike Abrika's answer and counterclaim without prejudice to
refiling if the complaint is later served, or to stay the action pending a
determination of personal jurisdiction in the New Jersey court. The motion is
fully briefed and awaiting a decision by the court. Abrika has moved to dismiss
the New Jersey action or to transfer it to the Delaware court. We and Novartis
have been granted leave to take discovery from Abrika prior to filing an
opposition brief. The motion is scheduled to be fully briefed by March 26, 2007.
Neither the Delaware court nor the New Jersey court has set a date for trial. If
we are unsuccessful in defending our patents by a Court of final decision,
Novartis' sales of RITALIN LA(TM) could be significantly reduced in the United
States by the entrance of a generic RITALIN LA(TM) product, consequently
reducing our revenue from royalties associated with these sales.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
35
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET PRICE OF DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(A) MARKET INFORMATION
Our common stock is traded on the NASDAQ Global Select Market under the symbol
"CELG." The following table sets forth, for the periods indicated, the
split-adjusted intra-day high and low prices per share of common stock on the
NASDAQ Global Select Market:
----------------------------------------------------------------
HIGH LOW
-------------------------
2006
Fourth Quarter $60.12 $41.68
Third Quarter 49.41 39.31
Second Quarter 48.40 36.02
First Quarter 44.22 31.51
2005
Fourth Quarter $32.68 $22.59
Third Quarter 29.41 19.77
Second Quarter 21.62 16.60
First Quarter 17.62 12.35
----------------------------------------------------------------
Comparison of five-year cumulative total return among Celgene
Corporation, the S&P 500 Index, the NASDAQ Composite Index and the NASDAQ
Pharmaceutical Index is included in this filing as Exhibit 99.1
36
(B) HOLDERS
The last reported sales price per share of common stock on the NASDAQ Global
Select Market on February 22, 2007 was $54.87. As of January 29, 2007, there
were approximately 165,518 holders of record of our common stock.
(C) DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not anticipate paying any cash dividends on our common stock in
the foreseeable future.
(D) EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes the equity compensation plans under which our
common stock may be issued as of December 31, 2006:
--------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY COMPENSATION PLANS,
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A)
(A) (B) (C)
--------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
security holders 35,237,965 $18.89 22,042,287
Equity compensation plans not approved
by security holders 2,252,375 $ 4.45 -
-------------------------------------------------------------------
Total 37,490,340 $18.02 22,042,287
=================================================================================================================
The Anthrogenesis Corporation Qualified Employee Incentive Stock Option Plan has
not been approved by our stockholders. As a result of the acquisition of
Anthrogenesis on December 31, 2002, we acquired the Anthrogenesis Qualified
Employee Incentive Stock Option Plan, or the Qualified Plan, and the
Non-Qualified Recruiting and Retention Stock Option Plan, or the Non-Qualified
Plan. No future awards will be granted under the Non-Qualified Plan. The
Qualified Plan authorizes the award of incentive stock options, which are stock
options that qualify for special federal income tax treatment. The exercise
price of any stock option granted under the Qualified Plan may not be less than
the fair market value of the common stock on the date of grant. In general,
options granted under the Qualified Plan vest evenly over
37
a four-year period and expire ten years from the date of grant, subject to
earlier expiration in case of termination of employment. The vesting period is
subject to certain acceleration provisions if a change in control occurs. No
award will be granted under the Qualified Plan on or after December 31, 2008.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following Selected Consolidated Financial Data should be read in conjunction
with our Consolidated Financial Statements and the related Notes thereto,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other financial information included elsewhere in this Annual
Report. The data set forth below with respect to our Consolidated Statements of
Operations for the years ended December 31, 2006, 2005 and 2004 and the
Consolidated Balance Sheet data as of December 31, 2006 and 2005 are derived
from our Consolidated Financial Statements which are included elsewhere in this
Annual Report and are qualified by reference to such Consolidated Financial
Statements and related Notes thereto. The data set forth below with respect to
our Consolidated Statements of Operations for the years ended December 31, 2003
and 2002 and the Consolidated Balance Sheet data as of December 31, 2004, 2003
and 2002 are derived from our Consolidated Financial Statements, which are not
included elsewhere in this Annual Report. Our historical results are not
necessarily indicative of future results of operations.
--------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
IN THOUSANDS, EXCEPT PER SHARE DATA 2006 2005 2004 2003 2002
--------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenue $ 898,873 $ 536,941 $ 377,502 $ 271,475 $ 135,746
Costs and operating expenses 724,182 453,357 334,774 274,124 250,367
---------------------------------------------------------------
Operating income (loss) 174,691 83,584 42,728 (2,649) (114,621)
---------------------------------------------------------------
Interest and investment income, net 40,352 24,557 28,340 21,760 22,976
Equity in losses of affiliated companies 8,233 6,923 -- 4,392 --
Interest expense 9,417 9,497 9,551 5,667 27
Other income (expense), net 5,502 (7,509) 1,654 16,609 82
---------------------------------------------------------------
Income (loss) before tax 202,895 84,212 63,171 25,661 (91,590)
---------------------------------------------------------------
Income tax provision (benefit) 133,914 20,556 10,415 718 (98)
---------------------------------------------------------------
Income (loss) from continuing
operations 68,981 63,656 52,756 24,943 (91,492)
---------------------------------------------------------------
Discontinued operations:
Gain on sale of chiral assets -- -- -- 750 1,000
---------------------------------------------------------------
Net income (loss) $ 68,981 $ 63,656 $ 52,756 $ 25,693 $ (90,492)
===============================================================
38
--------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
2006 2005 2004 2003 2002
--------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
per common share(1):
Basic $ 0.20 $ 0.19 $ 0.16 $ 0.08 $ (0.30)
Diluted $ 0.18 $ 0.18 $ 0.15 $ 0.07 $ (0.30)
Net income (loss) per common share (1):
Basic $ 0.20 $ 0.19 $ 0.16 $ 0.08 $ (0.29)
Diluted $ 0.18 $ 0.18 $ 0.15 $ 0.08 $ (0.29)
Weighted average shares(1):
Basic 352,217 335,512 327,738 323,548 309,348
Diluted 407,181 390,585 345,710 341,592 309,348
--------------------------------------------------------------------------------------------------------------
(1) Amounts have been adjusted for the two-for-one stock splits effected in
February 2006 and October 2004.
----------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
IN THOUSANDS 2006 2005 2004 2003 2002
----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS DATA
Cash, cash equivalents and marketable
securities $ 1,982,220 $ 724,260 $ 748,537 $ 666,967 $ 261,182
Total assets 2,735,791 1,258,313 1,107,293 813,026 336,795
Convertible notes 399,889 399,984 400,000 400,000 --
Accumulated deficit (101,773) (170,754) (234,410) (287,166) (312,859)
Stockholders' equity 1,976,177 635,775 477,444 331,744 286,206
----------------------------------------------------------------------------------------------------------------------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
We are a global integrated biopharmaceutical company primarily engaged in the
discovery, development and commercialization of innovative therapies designed to
treat cancer and immune-inflammatory related diseases. Our lead products are:
REVLIMID(R) (lenalidomide), which was approved by the U.S. Food and Drug
Administration, or FDA, in December 2005 for treatment of patients with
transfusion-dependent anemia due to low- or intermediate-1-risk myelodysplastic
syndromes, or MDS, associated with a deletion 5q cytogenetic abnormality with or
without additional cytogenetic abnormalities and in June 2006 for treatment in
combination with dexamethasone for multiple myeloma patients who have received
at least one prior therapy; and, THALOMID(R) (thalidomide), which gained FDA
approval in May 2006 for treatment in combination with dexamethasone of newly
diagnosed multiple myeloma patients and which is also approved in erythema
nodosum leprosum, an inflammatory complication of leprosy. Over the past several
years, our total revenues have increased led by REVLIMID(R) and THALOMID(R)
sales growth. This growth has enabled us to make substantial investments in
research and development and thus, advance our broad portfolio of drug
candidates in our product pipeline, including our IMiDs(R) compounds, which are
a class of compounds proprietary to us and having certain immunomodulatory and
other biologically important properties. We believe that the commercial
potential of REVLIMID(R) and THALOMID(R), the depth of our product pipeline,
near-term regulatory activities and clinical data reported
39
both at major medical conferences and in peer-reviewed publications provide the
catalysts for our future growth.
FACTORS AFFECTING FUTURE RESULTS
Future operating results will depend on many factors, including demand for our
products, regulatory approvals of our products and product candidates, the
timing and market acceptance of new products launched by us or competing
companies, the timing of research and development milestones, challenges to our
intellectual property and our ability to control costs. See also the Risk
Factors discussion contained in Part I, Item 1A. Some of the more salient
factors that we are focused on include: the ability of REVLIMID(R) to
successfully penetrate relevant markets; our ability to advance clinical and
regulatory programs and competitive risks.
THE ABILITY OF REVLIMID(R) TO SUCCESSFULLY PENETRATE RELEVANT MARKETS: Our
REVLIMID(R) launch strategy has included among otheR things: registering
physicians in the RevAssist(R) program, which is a proprietary risk-management
distribution program tailored specifically to help ensure the safe use of
REVLIMID(R); partnering with contracted pharmacies to ensure, to the maximum
extent possible, safe and rapid distribution of REVLIMID(R); and, transitioning
previously treated multiple myeloma patients from our expanded access program,
which provided patients with free access to REVLIMID(R), to commercial paying
patients as a result of the June 2006 approval in combination with dexamethasone
for multiple myeloma patients who have received at least one prior therapy.
While these initiatives appear to have resulted in a highly visible and
successful product launch, we remain focused on ensuring REVLIMID(R)'s continued
market penetration in both multiple myeloma and MDS. We do not have long-term
data on the use of the product and cannot predict whether REVLIMID(R) will gain
widespread acceptance, which will mostly depend on the acceptance of regulators,
physicians, patients, payors and opinion leaders. The success of REVLIMID(R)
will also depend, in part, on prescription drug coverage by government health
agencies, commercial and employer health plans, and other third-party payors. As
an oral cancer agent, REVLIMID(R) qualifies as a Medicare, Part D drug. Each
Part D plan will review REVLIMID(R) for addition to their formulary. As with all
new products introduced into the market, there may be some lag time before being
added to each plan's formulary, which may impact our commercial performance.
THE ABILITY TO ADVANCE REGULATORY AND CLINICAL PROGRAMS: Obtaining international
regulatory approvals beginning with Europe is a key component of our continued
growth strategy. We currently have two REVLIMID(R) Marketing Authorization
Applications, or MAA's, under review by the European Medicines Agency, or EMEA.
The MAAs seek approval to market REVLIMID(R) in both multiple myeloma and MDS
with the 5q chromosomal deletion. The timing of European approval is
unpredictable. Moreover, the period of time it takes to obtain pricing and
reimbursement approvals in each country could further delay our international
growth strategy.
A major objective of our on-going clinical programs is to broaden our knowledge
about the full potential of REVLIMID(R) and our other proprietary IMiDs(R)
compounds and to continue to evaluate them in a broad range of hematological
malignancies and other cancers. Our near-term focus is on evaluating REVLIMID(R)
as a treatment of chronic lymphocytic leukemia and aggressive non-Hodgkin's
lymphomas.
COMPETITIVE RISKS: While competition could limit REVLIMID(R) and THALOMID(R)
sales, we do not believe that competing products would eliminate their use
entirely. Moreover, while generic competitors could seek to challenge our
THALOMID(R) franchise, we own intellectual property which includes, for example,
U.S. patents covering our S.T.E.P.S.(R) distribution program for the safe
distribution and appropriate use of thalidomide, which all physicians, patients
and pharmacies prescribing, receiving or dispensing thalidomide in the United
States must follow. We also have exclusive rights to several issued patents
covering the use of THALOMID(R) in oncology and other therapeutic areas.
40
COMPANY BACKGROUND
o In 1986, we were spun off from Celanese Corporation and, in July 1987, we
completed an initial public offering. Initially, our operations involved
research and development of chemical and biotreatment processes for the
chemical and pharmaceutical industries. Between 1990 and 1998, our
revenues were derived primarily from the development and supply of
chirally pure intermediates to pharmaceutical companies for use in new
drug development. By 1998, sales of chirally pure intermediates became a
less integral part of our strategic focus and, in January 1998, we sold
the chiral intermediates business to Cambrex Corporation.
o In July 1998, we received approval from the FDA to market THALOMID(R) for
the treatment and suppression of ENL, an inflammatory complication of
leprosy. Sales of THALOMID(R) have grown significantly each year since
then. In 2004, 2005 and 2006 we recorded net THALOMID(R) sales of $308.6
million, $387.8 million and $433.0 million, respectively.
o In April 2000, we entered into a development and license agreement with
Novartis Pharma AG in which we granted to Novartis an exclusive worldwide
license to further develop and market FOCALIN(TM), our chirally pure
version of RITALIN(R). The agreement provided for significant upfront and
milestone payments to us based on the achievement of various stages in the
regulatory approval process. Under the agreement, we sell FOCALIN(TM) to
Novartis as well as receive royalties on all of Novartis' sales of FOCALIN
XR(TM) and RITALIN(R) family of ADHD-related products.
o In August 2000, we acquired Signal Pharmaceuticals, Inc., d/b/a Celgene
Research San Diego, a privately held biopharmaceutical company focused on
the discovery and development of drugs that regulate genes associated with
disease.
o In November 2001, we licensed to Pharmion Corporation exclusive rights
relating to the development and commercial use of our intellectual
property covering thalidomide and S.T.E.P.S(R) in all countries outside of
North America, Japan, China, Taiwan and Korea (see our references below to
the December 2004 amendment with respect to these territories).
o In December 2002, we acquired Anthrogenesis Corp., a privately held
biotherapeutics company developing processes for the recovery of stem
cells from human placental tissue following the completion of a successful
full-term pregnancy for use in stem cell transplantation, cancer,
autoimmune diseases, regenerative medicine and biomaterials for organ and
wound repair.
o In March 2003, we entered into a supply and distribution agreement with
GlaxoSmithKline, or GSK, to distribute, promote and sell ALKERAN(R), or
melphalan, a therapy approved by the FDA for the palliative treatment of
multiple myeloma and carcinoma of the ovary. The agreement requires that
we purchase ALKERAN(R) from GSK and distribute the products in the United
States under the Celgene label. The agreement has been extended through
March 31, 2009.
o In October 2004, we acquired Penn T Limited, or Penn T, a worldwide
supplier of THALOMID(R). Through manufacturing agreements acquired in the
transaction, we are able to control manufacturing for THALOMID(R)
worldwide. In the transaction, we also acquired a product supply agreement
to exclusively supply Pharmion with thalidomide, thereby enabling us to
increase our participation in thalidomide sales in key international
markets. Subsequently, in December 2004, we amended the thalidomide supply
agreement with Pharmion and granted them license rights in additional
territories. As amended, the territory licensed to Pharmion is for all
countries other than the United States, Canada, Mexico, Japan and all
provinces of China other than Hong Kong.
41
o In December 2005, the FDA approved REVLIMID(R) for the treatment of
patients with transfusion-dependent anemia due to low- or
intermediate-1-risk myelodysplastic syndromes associated with a deletion
5q cytogenetic abnormality with or without additional cytogenetic
abnormalities and, in June 2006, the FDA approved REVLIMID(R) for
treatment in combination with dexamethasone for multiple myeloma patients
who have received at least one prior therapy. In May 2006, we also
received an additional approval from the FDA to market THALOMID(R) for
treatment in combination with dexamethasone of newly diagnosed multiple
myeloma.
o In November 2006, we issued an additional 20,000,000 shares of our common
stock at a public offering price of $51.60 per share with gross proceeds
of $1.032 billion and proceeds, net of the underwriters' discount, of
$1.006 billion.
o In December 2006, we purchased an API manufacturing facility and certain
assets and liabilities from Siegfried located in Zofingen, Switzerland.
The API facility has the capability to produce multiple drug substances
and initially will be used to produce REVLIMID(R) API to supply global
markets. The facility also may be used to produce drug substance for our
future drugs and drug candidates.
RESULTS OF OPERATIONS -
FISCAL YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
TOTAL REVENUE: Total revenue and related percentages for the years ended
December 31, 2006, 2005 and 2004, were as follows:
-------------------------------------------------------------------------------------
% CHANGE
----------------------
2005 2004
TO TO
(IN THOUSANDS $) 2006 2005 2004 2006 2005
-------------------------------------------------------------------------------------
Net product sales:
REVLIMID(R) 320,558 2,862 -- N/A N/A
THALOMID(R) 432,950 387,816 308,577 11.6% 25.7%
ALKERAN(R) 50,337 49,748 16,956 1.2% 193.4%
FOCALIN(TM) 7,340 4,210 4,177 74.3% 0.8%
Other 420 989 861 (57.5)% 14.9%
--------------------------------
Total net product sales $811,605 $445,625 $330,571 82.1% 34.8%
Collaborative agreements
and other revenue 18,189 41,334 20,012 (56.0)% 106.5%
Royalty revenue 69,079 49,982 26,919 38.2% 85.7%
--------------------------------
Total revenue $898,873 $536,941 $377,502 67.4% 42.2%
=====================================================================================
NET PRODUCT SALES:
2006 COMPARED TO 2005: REVLIMID(R) net sales recorded in 2005 related to initial
stocking at certain contracted pharmacies following the product's approval on
December 27, 2005. REVLIMID(R) net sales grew consistently each quarter in 2006
driven primarily by the additional approval in June 2006 for treatment in
combination with dexamethasone of patients with multiple myeloma who have
received at least one prior therapy. Also contributing to the 2006 sales growth
was the impact of transitioning patients from our expanded access program, which
provided patients with free access to REVLIMID(R), to commercial paying
patients. Multiple myeloma accounted for approximately 56% of all commercial
dispenses during 2006, followed by MDS, which accounted for approximately 38% of
all commercial dispenses, and a broad range of other cancer indications
accounted for the remaining commercial dispenses. In Europe, we have made
REVLIMID(R) available under a Named Patient Program, or NPP,
42
which offers European patients in need access to REVLIMID(R) on a compassionate
use basis while the European Medicines Agency, or EMEA, reviews our application
seeking approval to market REVLIMID(R) as a treatment for multiple myeloma and
MDS. NPP sales totaled 7.8% of total REVLIMID(R) net sales during 2006. We
expect continued incremental benefit from the named patient sales leading up to
a potential European approval in 2007.
Supported by the FDA's approval of newly diagnosed multiple myeloma and newly
presented data, THALOMID(R) net sales were higher in 2006, compared to 2005.
Price increases implemented as we continue to move towards a cost of therapy
pricing structure as opposed to a price per milligram basis also contributed to
the increase. Sales volumes decreased due to continued average daily dose
declines as well as a small decrease in the total number of prescriptions.
Partially offsetting the increase in THALOMID(R) sales were higher gross to net
sales accruals for sales returns and distributor chargebacks, partially offset
by lower Medicaid rebate accruals, which are recorded based on historical data.
ALKERAN(R) net sales were slightly higher in 2006, compared to 2005. ALKERAN(R)
sales benefited from an increase in ALKERAN(R) tablet sales volumes, as well as
price increases implemented during 2006, particularly in ALKERAN(R) IVs (i.e.,
injectables). Largely offsetting the increase in sales were higher gross to net
sales accruals for sales returns and distributor chargebacks.
Sales of FOCALIN(TM), which is sold exclusively to Novartis and is dependent on
the timing of orders from Novartis for their commercial distribution, were
higher in 2006, compared to 2005, due to increased end-market demand.
2005 COMPARED TO 2004: THALOMID(R) net sales were higher in 2005, as compared to
2004, primarily due to price increases implemented as we moved towards a cost of
therapy pricing structure as opposed to a price per milligram. Sales volumes
decreased due to lower average daily doses; however, the total number of
prescriptions for 2005 remained essentially flat when compared to the prior year
period. Partially offsetting the increase in THALOMID(R) sales were higher gross
to net sales accruals for sales returns, Medicaid rebates and distributor
chargebacks, which are recorded based on historical data.
Focalin(TM) net sales, which are dependent on the timing of orders from Novartis
for their commercial distribution, were essentially flat when compared to the
prior year period. ALKERAN(R) net sales were higher in 2005, as compared to
2004, due to price increases implemented during 2005 and an increase in sales
volumes.
ALKERAN(R) use in combination therapies for the treatment of hematological
diseases continued to grow driven by clinical data reported at major medical
conferences around the world. Also contributing to the increase in ALKERAN(R)
sales volumes was the resolution of supply disruptions experienced in 2004,
which resolution led to more consistent supplies of ALKERAN(R) for injection and
consequently more consistent end-market buying patterns.
REVLIMID(R) was approved by the FDA on December 27, 2005 and the first
commercial sales were recorded relating to initial stocking at certain
contracted pharmacies that were registered under the RevAssist(R) program.
GROSS TO NET SALES ACCRUALS: We record gross to net sales accruals for sales
returns, sales discounts, Medicaid rebates and distributor charge-backs and
service fees. Allowance for sales returns are based on the actual returns
history for consumed lots and the trend experience for lots where product is
still being returned. Sales discounts accruals are based on payment terms
extended to customers. Medicaid rebate accruals are based on historical payment
data and estimates of future Medicaid beneficiary utilization. Distributor
charge-back accruals are based on the differentials between product acquisition
prices paid by wholesalers and lower government contract pricing paid by
eligible customers covered under federally
43
qualified programs. Distributor services accruals are based on contractual fees
to be paid to the wholesale distributor for services provided. See Critical
Accounting Policies for further discussion.
Gross to net sales accruals and the balance in the related allowance accounts
for the years ended December 31, 2006, 2005 and 2004 were as follows:
---------------------------------------------------------------------------------------------------------------
Returns Distributor
(IN THOUSANDS $) and Medicaid chargebacks
allowances Discounts rebates and services Total
---------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 8,368 $ 657 $ 4,200 $ 889 $ 14,114
Allowances for sales during 2004 16,279 7,420 15,780 14,976 54,455
Allowances for sales during prior periods -- 28 -- -- 28
Credits issued for prior year sales (6,221) (685) (2,880) (607) (10,393)
Credits issued for sales during 2004 (8,826) (6,583) (11,566) (11,537) (38,512)
-----------------------------------------------------------------
Balance at December 31, 2004 $ 9,600 $ 837 $ 5,534 $ 3,721 $ 19,692
Allowances for sales during 2005 19,476 10,948 35,009 35,926 101,359
Allowances for sales during prior periods 1,780 -- 89 -- 1,869
Credits issued for prior year sales (11,380) (834) (5,623) (3,264) (21,101)
Credits issued for sales during 2005 (14,459) (9,504) (14,049) (29,605) (67,617)
-----------------------------------------------------------------
Balance at December 31, 2005 $ 5,017 $ 1,447 $ 20,960 $ 6,778 $ 34,202
Allowances for sales during 2006 23,944 18,847 22,353 57,750 122,894
Allowances for sales during prior periods 30,607 34 -- -- 30,641
Credits issued for prior year sales (35,624) (1,481) (20,357) (6,315) (63,777)
Credits issued for sales during 2006 (14,464) (16,551) (15,488) (47,580) (94,083)
-----------------------------------------------------------------
Balance at December 31, 2006 $ 9,480 $ 2,296 $ 7,468 $ 10,633 $ 29,877
===============================================================================================================
2006 COMPARED TO 2005: Sales returns allowances increased in 2006, compared to
2005, primarily due to unusually high THALOMID(R) returns from one specific
large retail pharmacy chain, which occurred during the first half of 2006. The
returns from this customer were the results of its efforts to more aggressively
manage inventory, our package configuration which required pharmacies to
purchase full cartons of up to ten sleeves of THALOMID(R) capsules with each
order and S.T.E.P.S. (R) related restrictions, which limited the customer's
ability to transfer inventories between its locations. For the past several
years, we have experienced sales returns of approximately 4% of sales. As a
result of the higher returns activity during the first half of 2006, we recorded
additional allowances to increase our reserve to approximately 9% of all
estimated THALOMID(R) pharmacy inventories. In addition, we introduced single
sleeve units, beginning June 7, 2006 (rather than requiring full carton
purchases) and we amended our product returns policy to include a product
returns handling fee. These measures have been designed to allow customers to
more effectively manage their inventories, since they can now order smaller
quantities, as well as limit our product returns exposure. Also, contributing to
the increase in sales returns allowances, but to a lesser extent, were higher
returns of expired ALKERAN(R) IV product.
Sales discounts increased in 2006, compared to 2005, due to higher net sales.
Medicaid rebate allowances decreased in 2006, compared to 2005, primarily due to
the impact of the new Medicare, Part D legislation, which became effective
January 1, 2006. As a result of the new legislation many patients who had been
eligible to receive THALOMID(R) through Medicaid coverage are now covered under
Medicare, Part D. Partially offsetting the THALOMID(R) decrease are Medicaid
rebate allowances included in 2006 for REVLIMID(R) sales. Distributor
chargebacks increased in 2006, compared to 2005, primarily due to THALOMID(R)
price increases, which increase the differential between annual contract pricing
available to federally funded healthcare providers and our wholesale acquisition
cost. Also contributing to the increase in distributor chargeback allowances was
an increase in ALKERAN(R) IV sales to certain public health services, or PHS,
contract eligible customers and an inclusion of accruals for REVLIMID(R) sales.
44
2005 COMPARED TO 2004: Sales returns and sales discounts allowances increased in
2005, compared to 2004, primarily due to higher net sales. Medicaid rebate and
distributor chargeback accruals increased in 2005, compared to 2004, due to
higher sales volumes and price increases. As a result of THALOMID(R) price
increases, the Medicaid unit rebate amount for 2005 increased as a percentage of
gross product sales, as compared to the accrual for 2004. As in the case of
Medicaid rebate accruals, the THALOMID(R) price increases resulted in higher
distributor chargeback accruals in 2005, as compared to 2004.
OTHER REVENUES:
2006 COMPARED TO 2005: Revenues from collaborative agreements and other sources
totaled $18.2 million in 2006, compared to $41.3 million in 2005. The decrease
was primarily due to the inclusion in 2005 of a $20.0 million milestone payment
received from Novartis relating to the FDA marketing approval for Focalin
XR(TM).
Royalty revenue totaled $69.1 million in 2006 and primarily consisted of $67.3
million received from Novartis on sales of their entire family of Ritalin(R)
drugs and FOCALIN XR(TM). Royalty revenue was $50.0 million in 2005 and included
$48.5 million from sales of Novartis' Ritalin(R) family of drugs and FOCALIN
XR(TM). Royalty revenues from Novartis increased primarily due to higher FOCALIN
XR(TM) product sales.
2005 COMPARED TO 2004: Revenues from collaborative agreements and other sources
totaled $41.3 million in 2005, compared to $20.0 million in 2004. The increase
was primarily due to a $20.0 million milestone payment from Novartis reflected
in 2005 for the FOCALIN XR(TM) approval while, in 2004, we received a $7.5
million milestone payment related to the FOCALIN XR(TM) NDA submission. Also
contributing to the increase were higher Pharmion collaboration related revenues
in 2005.
Royalty revenue totaled $50.0 million in 2005 and included $48.5 million from
sales of Novartis' Ritalin(R) family of drugs and FOCALIN XR(TM), which gained
FDA approval on May 27, 2005. Royalty revenue was $26.9 million in 2004 and
consisted primarily of royalties received from Novartis strictly on sales of
their RITALIN(R) family of drugs.
COST OF GOODS SOLD: Cost of goods sold and related percentages for the years
ended December 31, 2006, 2005 and 2004 were as follows:
-------------------------------------------------------------------------------
(IN THOUSANDS $) 2006 2005 2004
-------------------------------------------------------------------------------
Cost of goods sold $ 125,892 $ 80,727 $ 59,726
Increase from prior year $ 45,165 $ 21,001 $ 6,776
Percentage increase from prior year 55.9% 35.2% 12.8%
Percentage of net product sales 15.5% 18.1% 18.1%
===============================================================================
2006 COMPARED TO 2005: Cost of goods sold were higher in 2006, compared to 2005,
primarily due to higher ALKERAN(R) costs. ALKERAN(R) costs tend to experience
variability depending on the purchase price of the specific units sold during a
given period. Also contributing to the increase in cost of goods sold were
higher royalties on THALOMID(R) as a result of higher net sales and the
inclusion of costs associated with REVLIMID(R) sales. Cost of goods sold as a
percentage of net product sales were lower in 2006, compared to 2005 primarily
due to the impact of REVLIMID(R) sales, which have a lower per unit cost than
THALOMID(R), partially offset by higher ALKERAN(R) costs.
45
2005 COMPARED TO 2004: Cost of goods sold were higher in 2005, as compared to
2004, primarily due to higher royalties on THALOMID(R) net sales and higher
ALKERAN(R) costs as a result of higher sales volumes. As a percentage of net
product sales, cost of goods sold in 2005 were in line with 2004.
RESEARCH AND DEVELOPMENT: Research and development expenses and related
percentages for the years ended December 31, 2006, 2005 and 2004 were as
follows:
--------------------------------------------------------------------------------
(IN THOUSANDS $) 2006 2005 2004
--------------------------------------------------------------------------------
Research and development expenses $ 258,621 $ 190,834 $ 160,852
Increase from prior year $ 67,787 $ 29,982 $ 38,152
Percentage increase from prior year 35.5% 18.6% 31.1%
Percentage of total revenue 28.8% 35.5% 42.6%
================================================================================
2006 COMPARED TO 2005: Research and development expenses were higher in 2006,
compared to 2005, primarily due to higher clinical research and development
expenses, which among other things support multiple programs evaluating
REVLIMID(R) and other IMiDs(R) across a broad range of hematological cancers,
including multiple myeloma, MDS, chronic lymphocytic leukemia, non-Hodgkin's
lymphoma, myelofibrosis and hemoglobinopathies; higher medical information and
education expenses, which support educating and training the medical community
on hematological cancers such as multiple myeloma and MDS; and higher expenses
to support ongoing development of other compounds such as CC-4047, CC-11006,
CC-10004, CC-11050 as well as our kinase and ligase inhibitor programs and
placental-derived stem cell program. Included in 2006 was share-based
compensation expense of $12.7 million resulting from the application of SFAS
123R, which became effective January 1, 2006.
2005 COMPARED TO 2004: Research and development expenses were higher in 2005, as
compared to 2004, primarily due to higher costs to support further clinical
development and regulatory advancement of REVLIMID(R) Phase II and Phase III
programs in myelodysplastic syndromes and multiple myeloma, including the
ongoing pivotal Phase III MDS deletion 5q trial to support our MAA seeking
approval to market REVLIMID(R) in Europe.
Research and development expenses in 2006 consisted of $95.4 million spent on
human pharmaceutical clinical programs; $109.1 million spent on other
pharmaceutical programs, including toxicology, analytical research and
development, drug discovery, quality and regulatory affairs; $40.8 million spent
on biopharmaceutical discovery and development programs; and $13.3 million spent
on placental stem cell and biomaterials programs. These expenditures support
ongoing clinical progress in multiple proprietary development programs for
REVLIMID(R) and THALOMID(R), and for other compounds such as: CC-10004, our lead
anti-inflammatory compound that inhibits PDE-4, which results in the inhibition
of multiple proinflammatory mediators such as TNF-[alpha] and, which is
currently being evaluated in Phase II clinical trials in the treatment of
psoriasis and psoriatic arthritis; CC-4047, CC-11006 and CC-11050 which are
currently either being evaluated in healthy volunteer Phase I clinical trials or
for which Phase II clinical trials are planned or ongoing; and our kinase and
ligase inhibitor programs as well as the placental stem cell program. In 2005,
we spent $73.9 million on human pharmaceutical clinical programs; $69.1 million
on other pharmaceutical programs; $36.9 million on biopharmaceutical discovery
and development programs; and $10.9 million on placental stem cell and
biomaterials programs. In 2004, we spent $67.0 million on human pharmaceutical
clinical programs; $44.7 million on other human pharmaceutical programs; $40.6
million on biopharmaceutical discovery and development programs; and $8.6
million on placental stem cell and biomaterials programs.
As total revenue increases, research and development expense may continue to
decrease as a percentage of total revenue, however the actual dollar amount may
continue to increase as earlier stage compounds
46
are moved through the preclinical and clinical stages. Due to the significant
risk factors and uncertainties inherent in preclinical tests and clinical trials
associated with each of our research and development projects, the cost to
complete such projects can vary. The data obtained from these tests and trials
may be susceptible to varying interpretation that could delay, limit or prevent
a project's advancement through the various stages of clinical development,
which would significantly impact the costs incurred to bring a project to
completion.
For information about the commercial and development status and target diseases
of our drug compounds, refer to the product overview table contained in Part I,
Item I of this Annual Report.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses and related percentages for the years ended December 31, 2006, 2005 and
2004 were as follows:
-----------------------------------------------------------------------------------------
(IN THOUSANDS $) 2006 2005 2004
-----------------------------------------------------------------------------------------
Selling, general and administrative expenses $ 339,669 $ 181,796 $ 114,196
Increase from prior year $ 157,873 $ 67,600 $ 15,722
Percentage increase from prior year 86.8% 59.2% 16.0%
Percentage of total revenue 37.8% 33.9% 30.3%
=========================================================================================
2006 COMPARED TO 2005: Selling, general and administrative expenses were higher
in 2006, compared to 2005 primarily due to $62.3 million of share-based
compensation expense resulting from the application of SFAS 123R, which became
effective January 1, 2006, $63.8 million of higher commercial expenses related
to REVLIMID(R) sales and marketing efforts in the United States, increased
spending related to the build-out of our international organization and
contributions to independent non-profit third-party foundations and $30.5
million of higher general administrative expenses primarily related to personnel
and professional and other outside service costs.
2005 COMPARED TO 2004: Selling, general and administrative expenses were higher
in 2005, as compared to 2004, primarily due to the inclusion in 2005 of
approximately $40.0 million of REVLIMID(R) pre-launch commercial expenses, such
as global market research, marketing and educational programs and sales and
marketing training and an increase of approximately $22.7 million in general
administrative expenses resulting from higher professional and other
miscellaneous outside service fees, higher personnel-related expenses, higher
facility-related expenses and higher insurance costs, partially offset by lower
THALOMID(R) and ALKERAN(R) related marketing expenses. Included in selling,
general and administrative expenses in 2005 was $2.5 million of expense related
to accelerated depreciation of leasehold improvements at four New Jersey
locations being consolidated into our new corporate headquarters.
INTEREST AND INVESTMENT INCOME, NET: Interest and investment income, net
increased $15.8 million in 2006, compared to 2005. The increase was due to
higher average cash, cash equivalents and marketable securities balances, an
increase in net realized gains from the sale of certain marketable securities
and higher short-term interest rates. Included in 2006 and 2005 were
other-than-temporary impairment losses on marketable securities available for
sale of $3.8 million and $3.1 million, respectively. Interest and investment
income, net decreased $3.8 million in 2005, compared to 2004 primarily due to
the inclusion of the other-than-temporary impairment loss on marketable
securities available for sale of $3.1 million in 2005.
EQUITY IN LOSSES OF AFFILIATED COMPANIES: Under the equity method of accounting,
we recorded losses of $8.2 million in 2006, which included $6.8 million for our
share of EntreMed losses. In 2005, we recorded equity method losses of $6.9
million, which included $1.6 million for our share of EntreMed losses and a
47
charge of $4.4 million to write-down the value of the EntreMed investment
ascribed to in-process research and development.
INTEREST EXPENSE: Interest expense was $9.4 million, $9.5 million and $9.6
million in 2006, 2005 and 2004, respectively, and primarily reflects interest
expense and amortization of debt issuance costs on the $400 million convertible
notes issued on June 3, 2003.
OTHER INCOME (EXPENSE), NET: Other income (expense), net was $5.5 million of
income in 2006 and included foreign exchange gains of $5.5 million. Other income
(expense), net was $7.5 million of expense in 2005 and primarily consisted of
unrealized losses of $6.9 million for changes in the estimated value of our
investment in EntreMed, Inc. warrants. Other income (expense), net was $1.7
million of income in 2004 and primarily consisted of $3.6 million of foreign
exchange and other miscellaneous net gains, partially offset by an unrealized
loss of $1.9 million for changes in the estimated value of our investment in
EntreMed, Inc. warrants.
INCOME TAX PROVISION: The income tax provision for 2006 was $133.9 million and
reflects tax expense impacted by certain expenses incurred in taxing
jurisdictions outside the United States for which we do not presently receive a
tax benefit and nondeductible expenses which include share-based compensation
expense related to incentive stock options. The income tax provision for 2005
was $20.6 million and reflects tax expense impacted by certain expenses incurred
outside the United States under an incentive tax holiday that expires in 2015
for which no tax benefit can be recorded. This was partially offset by the
benefit from the elimination of valuation allowances totaling $42.6 million as
of March 31, 2005, which was based on the fact that we determined it was more
likely than not that certain benefits of our deferred tax assets would be
realized. The income tax provision for 2004 was $10.4 million.
NET INCOME: Net income and per common share amounts for the years ended December
31, 2006, 2005 and 2004 were as follows:
--------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2006 2005 2004
--------------------------------------------------------------------------------
Net income $ 68,981 $ 63,656 $ 52,756
Per common share amounts:
Basic $ 0.20 $ 0.19 $ 0.16
Diluted $ 0.18(1) $ 0.18(1) $ 0.15
Weighted average shares:
Basic 352,217 335,512 327,738
Diluted 407,181 390,585 345,710
================================================================================
Amounts have been adjusted for the two-for-one stock splits effected in
February 2006 and October 2004.
(1) In computing diluted earnings per share, the numerator has been adjusted to
add-back the after-tax amount of interest expense recognized in the year on our
convertible debt.
2006 COMPARED TO 2005: Net income was higher in 2006, compared to 2005,
primarily due to an increase in total revenues partially offset by $76.6 million
of share-based compensation expense resulting from the application of SFAS 123R,
which became effective January 1, 2006, inclusion in the 2005 period of the
one-time benefit of $42.6 million recognized from the elimination of deferred
tax asset valuation allowances and higher operating expenses in 2006.
2005 COMPARED TO 2004: Net income and per common share amounts were higher in
2005, as compared to 2004, primarily due to an increase in total revenues
partially offset by higher operating expenses and other expenses recorded for
changes in the estimated value of our investment in EntreMed, Inc. warrants,
48
other-than-temporary impairment write-downs on available for sale securities and
our share of equity losses of EntreMed, Inc.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating, investing and financing activities for the years
ended December 31, 2006, 2005 and 2004 were as follows:
------------------------------------------------------------------------------------------------------
INCREASE (DECREASE)
------------------------
2005 2004
TO TO
(IN THOUSANDS $) 2006 2005 2004 2006 2005
------------------------------------------------------------------------------------------------------
Net cash provided by operating
activities $ 83,561 $ 41,917 $ 155,939 $ 41,644 $ (114,022)
Net cash provided by (used in)
investing activities $ 6,784 $ (103,131) $ (92,636) $ 109,915 $ (10,495)
Net cash provided by financing
activities $1,221,246 $ 52,631 $ 16,002 $1,168,615 $ 36,629
======================================================================================================
OPERATING ACTIVITIES: Net cash provided by operating activities increased in
2006, as compared to 2005, primarily due to higher earnings, excluding the
effects of certain non-cash items including share-based compensation expense
totaling $76.6 million recorded in 2006 in connection with our application of
SFAS 123R beginning January 1, 2006, and lower income taxes paid in 2006,
partially offset by higher working capital levels associated with the growth of
our business and SFAS 123R requirements to classify excess tax benefits (i.e.,
the tax benefit recognized upon exercise of stock options in excess of the
benefit recognized from recognizing compensation cost for those options) as
financing cash flows in the Consolidated Statement of Cash Flows beginning in
2006. See working capital discussion below.
INVESTING ACTIVITIES: Net cash provided by investing activities in 2006 included
$77.8 million from net sales of available-for-sale marketable securities,
partially offset by $46.1 million of capital expenditures; $12.4 million for the
purchase of an API manufacturing facility from Siegfried Ltd.; $7.4 million for
investments in affiliated companies and $5.1 million for an investment in other
non-marketable securities. Net cash used in investing activities in 2005
included $35.9 million of capital expenditures; $7.2 million for acquisition
costs and working capital adjustments related to the October 2004 acquisition of
Penn T; $49.5 million for net purchases of available-for-sale marketable
securities; and $10.5 million from the exercise of warrants to purchase
7,000,000 shares of EntreMed common stock. Capital expenditures increased in
2006, compared to 2005, primarily due to the construction of a drug product
manufacturing facility at our Neuchatel, Switzerland site and expansion of our
corporate headquarters in Summit, New Jersey.
FINANCING ACTIVITIES: Net cash provided by financing activities in 2006 included
$1.006 billion from our November 2006 public offering wherein we issued an
additional 20,000,000 shares of our common stock at a public offering price of
$51.60 per share. Prior to the adoption of SFAS 123R, we presented all tax
benefits of deductions resulting from the exercise of stock options as operating
cash flows in the Consolidated Statement of Cash Flows. SFAS 123R requires
excess tax benefits (i.e., the tax benefit recognized upon exercise of stock
options in excess of the benefit recognized from recognizing compensation cost
for those options) to be classified as financing cash flows in the Consolidated
Statement of Cash Flows. Cash received from the exercise of employee stock
options in 2006 was $113.1 million and the excess tax benefit recognized was
$102.0 million. Net cash provided by financing activities in 2005 primarily
reflects cash received from the exercise of employee stock options.
49
WORKING CAPITAL AND CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES: Working
capital and cash, cash equivalents and marketable securities for the years ended
December 31, 2006, 2005 and 2004 were as follows:
----------------------------------------------------------------------------------------------
INCREASE
(DECREASE)
----------
2005
TO
(IN THOUSANDS $) 2006 2005 2006
----------------------------------------------------------------------------------------------
Cash, cash equivalents and marketable securities $1,982,220 $ 724,260 $1,257,960
Other current assets and current liabilities, net(1) 8,749 6,354 2,395
--------------------------------------
Net working capital $1,990,969 $ 730,614 $1,260,355
==============================================================================================
(1) Includes accounts receivable, net of allowances, inventory, other current
assets, accounts payable, accrued expenses, income taxes payable and other
current liabilities.
ACCOUNTS RECEIVABLE, NET: Accounts receivable, net as of December 31, 2006
increased $49.9 million from December 31, 2005 as a result of higher net sales.
Our days of sales outstanding, or DSO, as of December 31, 2006 improved by
approximately nine days compared to December 31, 2005. The decrease in our DSO
was primarily due to the collection of accounts receivables of certain large
customers.
INVENTORY: Inventory as of December 31, 2006 increased $5.1 million from
December 31, 2005 primarily due to increases in THALOMID(R) and REVLIMID(R)
inventories partially offset by a decrease in ALKERAN(R) inventory. REVLIMID(R)
and THALOMID(R) inventories increased as a result of the introduction of new
formulations and packaging configurations to support the products' continued
sales growth. ALKERAN(R) inventories tend to fluctuate depending on the purchase
price of the specific units purchased during a given period.
OTHER CURRENT ASSETS: Other current assets as of December 31, 2006 increased
$50.3 million from December 31, 2005 primarily due to an increase in prepaid
expenses and in the amounts due from Novartis under the FOCALIN(R) license
agreement. Prepaid expenses increased primarily due to inclusion of $31.6
million of prepaid taxes.
ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES: Accounts
payable, accrued expenses and other current liabilities as of December 31, 2006
increased $32.8 million from December 31, 2005 primarily due to increases in
accruals for management incentives, distributor chargebacks and sales returns.
INCOME TAXES PAYABLE: Income taxes payable increased $70.1 million during 2006
primarily from a current provision for income taxes of $189.4 million offset by
a tax benefit on stock option exercises of $125.5 million.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES: We invest our excess cash
primarily in money market funds and in highly liquid debt instruments of U.S.
municipalities, corporations, and the U.S. government and its agencies. All
investments with maturities of three months or less from the date of purchase
are classified as cash equivalents and all highly liquid investments with
maturities of greater than three months from the date of purchase are classified
as marketable securities. We determine the appropriate classification of our
investments in marketable debt and equity securities at the time of purchase.
The increase in cash, cash equivalents and marketable securities from December
31, 2005 to December 31, 2006 was primarily due to $1.006 billion provided from
our November 2006 public offering.
50
We expect to make substantial additional expenditures to further develop and
commercialize our products. We expect increased research and product development
costs, clinical trial costs, expenses associated with the regulatory approval
process, international expansion costs and commercialization of product costs
and capital investments. However, existing cash, cash equivalents and marketable
securities available for sale, combined with cash received from expected net
product sales and revenues from various research, collaboration and royalties
agreements, are expected to provide sufficient capital resources to fund our
operations for the foreseeable future.
CONTRACTUAL OBLIGATIONS
The following table sets forth our contractual obligations as of December 31,
2006:
----------------------------------------------------------------------------------------------------
PAYMENT DUE BY PERIOD
---------------------
LESS THAN MORE THAN
(IN MILLIONS $) 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS TOTAL
----------------------------------------------------------------------------------------------------
Convertible note obligations $ -- $399.9 $ -- $ -- $399.9
Operating leases 5.8 10.1 8.7 5.3 29.9
ALKERAN(R) supply agreements 29.1 38.2 -- -- 67.3
Manufacturing facility note payable 3.4 6.7 6.7 16.4 33.2
Other contract commitments 24.2 6.7 -- -- 30.9
-------------------------------------------------------------
$ 62.5 $461.6 $ 15.4 $ 21.7 $561.2
====================================================================================================
CONVERTIBLE DEBT: In June 2003, we issued an aggregate principal amount of
$400.0 million of unsecured convertible notes. The convertible notes have a
five-year term and a coupon rate of 1.75% payable semi-annually. The convertible
notes can be converted at any time into 33,014,519 shares of common stock at a
stock-split adjusted conversion price of $12.1125 per share. At December 31,
2006, the fair value of the convertible notes exceeded the carrying value of
$400.0 million by $1.507 billion (for more information see Note 9 of the Notes
to the Consolidated Financial Statements).
OPERATING (FACILITIES) LEASES: We lease office and research facilities under
various operating lease agreements in the United States, Europe, Japan and
Australia. At December 31, 2006, the non-cancelable lease terms for the
operating leases expire at various dates between 2007 and 2015 and include
renewal options. In general, we are also required to reimburse the lessors for
real estate taxes, insurance, utilities, maintenance and other operating costs
associated with the leases. For more information on the facilities that we
occupy under lease arrangements that have remaining lease terms greater than
one-year see Part I, Item 2, "Properties."
ALKERAN(R) PURCHASE COMMITMENT: In March 2003, we entered into a supply and
distribution agreement with GlaxoSmithKline, or GSK, to distribute, promote and
sell ALKERAN(R) (melphalan), a therapy approved by the FDA for the palliative
treatment of multiple myeloma and carcinoma of the ovary. Under the terms of the
agreement, we purchase ALKERAN(R) tablets and ALKERAN(R) for infusion from GSK
and distribute the products in the United States under the Celgene label. The
agreement requires us to purchase certain minimum quantities each year under a
take-or-pay arrangement. The agreement has been extended through March 31, 2009.
On December 31, 2006, the remaining minimum purchase requirements under the
agreement totaled $67.3 million.
MANUFACTURING FACILITY NOTE PAYABLE: In December 2006, we purchased an API
manufacturing facility and certain other assets and liabilities from Siegfried
located in Zofingen, Switzerland. The assets were purchased for a U.S. dollar
equivalency of approximately $46.0 million, consisting of a payment of
51
approximately $12.4 million at the closing, $3.4 million payable in each of the
first five following years and $3.3 million in each of the subsequent five
years. The transaction included a technical service agreement which will allow
us to retain the necessary support to operate the plant. At December 31, 2006,
the remaining commitment based on year-end exchange rates was a U.S. dollar
equivalency of approximately $33.2 million of which payments totaling $16.4
million due over years 6 to 10 are forgiven if, pursuant to our right, we elect
to sell the facility back to Siegfried during this period.
OTHER CONTRACT COMMITMENTS: In connection with the acquisition of Penn T on
October 21, 2004, we entered into a five-year minimum period Technical Services
Agreement with Penn Pharmaceutical Services Limited, or PPSL, and Penn
Pharmaceutical Holding Limited under which PPSL provides the services and
facilities necessary for the manufacture of THALOMID(R) and other thalidomide
formulations. At December 31, 2006, the remaining cost to be incurred was
approximately $6.7 million.
In October 2006, we invested $1.4 million in Burrill Life Sciences Capital Fund
III, a limited partnership. We have committed to investing an additional $18.6
million into the Fund over a ten-year period, which is callable at any time. For
more information see Note 17 of the Notes to the Consolidated Financial
Statements included in this Annual Report.
Other contract commitments at December 31, 2006 also includes $5.6 million of
various contractual obligations.
NEW ACCOUNTING PRINCIPLES
In June 2006, the Financial Accounting Standards Board, or FASB, issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes--an
interpretation of FASB Statement No. 109." This Interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with Statement of Financial Accounting
Standard, or SFAS, No. 109 and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. As the
provisions of FIN 48 will be applied to all tax positions upon initial adoption,
the cumulative effect of applying the provisions of FIN 48 will be reported as
an adjustment to the opening balance of retained earnings for that fiscal year.
This Interpretation is effective for us beginning January 1, 2007. We are in the
process of analyzing the impact of this Interpretation and do not believe it
will have a material impact on our results of operations. However, we do expect
to make certain balance sheet reclassifications to comply with FIN 48.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. Where applicable, this Statement simplifies and
codifies related guidance within generally accepted accounting principles
(GAAP). This accounting standard is effective for us beginning January 1, 2008.
We have not yet determined the effect, if any, the adoption of FAS 157 may have
on the our consolidated financial statements.
In February 2006 the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140," which
permits a fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that would otherwise require bifurcation. This
accounting standard is effective for us beginning January 1, 2007. We have not
yet determined the effect, if any, the adoption of FAS 155 may have on our
financial position and results of operations.
52
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements," or SAB 108, which provides guidance on the consideration of the
effects of prior period misstatements in quantifying current year misstatements
for the purpose of a materiality assessment. SAB 108 provides for the
quantification of the impact of correcting all misstatements, including both the
carryover and reversing effects of prior year misstatements, on the current year
financial statements. SAB 108 is effective for fiscal years ending on or after
November 15, 2006. We adopted the provisions of SAB 108 retroactive to January
1, 2006 and determined that it had no impact on our financial statements for the
year ended December 31, 2006.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one that is both important to the portrayal of
our financial condition and results of operation and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain. While
our significant accounting policies are more fully described in Note 1 of the
Notes to the Consolidated Financial Statements included in this Annual Report,
we believe the following accounting policies to be critical:
REVENUE RECOGNITION ON COLLABORATION AGREEMENTS: We have formed collaborative
research and development agreements and alliances with several pharmaceutical
companies. These agreements are in the form of research and development and
license agreements. The agreements call for nonrefundable upfront payments,
milestone payments on achieving significant milestone events, and in some cases
ongoing research funding. The agreements also contemplate royalty payments on
sales if and when the compound receives FDA marketing approval.
Our revenue recognition policies for all nonrefundable upfront license fees and
milestone arrangements are in accordance with the guidance provided in the
Securities and Exchange Commission's Staff Accounting Bulletin, or SAB, No. 101,
"Revenue Recognition in Financial Statements," as amended by SAB No. 104,
"Revenue Recognition," or SAB 104. In addition, we follow the provisions of
Emerging Issues Task Force, or EITF, Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables," or EITF 00-21, for multiple element revenue arrangements
entered into or materially amended after June 30, 2003. EITF 00-21 provides
guidance on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into separate
units of accounting for revenue recognition purposes, and if this division is
required, how the arrangement consideration should be allocated among the
separate units of accounting. If the deliverables in a revenue arrangement
constitute separate units of accounting according to the EITF's separation
criteria, the revenue-recognition policy must be determined for each identified
unit. If the arrangement is a single unit of accounting, the revenue-recognition
policy must be determined for the entire arrangement.
Under arrangements where the license fees and research and development
activities can be accounted for as a separate unit of accounting, nonrefundable
upfront license fees are deferred and recognized as revenue on a straight-line
basis over the expected term of our continued involvement in the research and
development process. Revenues from the achievement of research and development
milestones, if deemed substantive, are recognized as revenue when the milestones
are achieved, and the milestone payments are due and collectible. Milestones are
considered substantive if all of the following conditions are met: (1) the
milestone is nonrefundable; (2) achievement of the milestone was not reasonably
assured at the inception of the arrangement; (3) substantive effort is involved
to achieve the milestone; and, (4) the amount of the milestone appears
reasonable in relation to the effort expended, the other milestones in the
arrangement and the related risk associated with achievement of the milestone.
If any of these conditions are not met, we would recognize a proportionate
amount of the milestone payment upon
53
receipt as revenue that correlates to work already performed and the remaining
portion of the milestone payment will be deferred and recognized as revenue as
we complete our performance obligations.
GROSS TO NET SALES ACCRUALS FOR SALES RETURNS, MEDICAID REBATES AND CHARGEBACKS:
Our gross to net sales accruals for Sales Returns, Medicaid Rebates and
Chargebacks are based on our sales. THALOMID(R) is distributed under our
S.T.E.P.S.(R), or System for Thalidomide Education and Prescribing Safety,
distribution program. Among other things, S.T.E.P.S.(R), which is a proprietary
comprehensive education and risk-management distribution program, requires
prescribers, patients and dispensing pharmacies to participate in a registry and
an order cannot be filled unless the physician, patient and pharmacy have all
obtained an appropriate registration number. Automatic refills are not permitted
under the program. Each prescription may not exceed a 28-day supply and a new
prescription is required with each order.
Although we invoice through traditional pharmaceutical wholesalers, all
THALOMID(R) orders are drop-shipped directly to the prescribing pharmacy
overnight. Wholesaler stocking of this product is prohibited. In addition, we do
not offer commercial discounts on our products to pharmacies or hospitals and,
therefore, have no commercial distributor chargebacks. Our chargebacks result
from the difference between the wholesaler price and the lower federal ceiling
price available to federally funded healthcare providers, such as Veterans
Affairs and the U.S. Department of Defense.
REVLIMID(R) is distributed under the RevAssist(R) program, which is a
proprietary risk-management distribution program tailored specifically to help
ensure the safe use of REVLIMID(R), and is sold primarily through contracted
pharmacies lending itself to tighter controls of inventory quantities within the
supply channel.
SALES RETURNS: We record a sales returns allowance in the period the related
product sale is recorded. We base the allowance, which primarily relates to
THALOMID(R) sales returns, on actual returns history and known factors, such as
the trend experience for lots where product is still being returned. If the
historical data we use to calculate these estimates do not properly reflect
future returns, then a change in the allowance would be made in the period in
which such a determination is made and revenues in that period could be
materially affected. Under this methodology, we track actual returns by
individual production lots. Returns on closed lots, that is, lots no longer
eligible for return credits, are analyzed to determine historical returns
experience. Returns on open lots, that is, lots still eligible for return
credits, are monitored and compared with historical return trend rates. Any
changes from the historical trend rates are considered in determining the
current sales return allowance. We do not use information from external sources
in estimating our product returns. As indicated above, THALOMID(R) is
drop-shipped directly to the prescribing pharmacy and, as a result, wholesalers
do not stock the product. In addition, since THALOMID(R) has a relatively long
shelf life, typically two years, short-dated inventory has not historically been
an issue. REVLIMID(R) is distributed primarily through contracted pharmacies
lending itself to tighter controls of inventory quantities within the supply
channel and thus, resulting in lower returns activity to date.
The impact that external factors such as price changes from competitors and
introductions of new and generic competing products could have on our sales
returns accruals is highly judgmental and difficult to quantify. Our sales
returns have not been impacted thus far by such external factors; however we
continue to monitor such factors. Our sales returns allowances were $54.6
million, $21.3 million and $16.3 million in 2006, 2005 and 2004, respectively,
which equates to an accrual rate of 5.7%, 3.9% and 4.2% of gross product sales
in each of the three respective years. A 10% increase in our returns rate would
have resulted in a $5.5 million decrease in our 2006 reported revenue.
MEDICAID REBATES: The Medicaid rebate formula, which is established by the
Center for Medicare and Medicaid Services, provides for price increases based on
increases in the Consumer Price Index-All Urban Consumers, or CPI-U. Price
increases in excess of the allowable increase results in a higher unit
54
rebate amount, or URA. Our Medicaid rebate accruals are computed using the
Medicaid URA, as determined under the Medicaid rebate formula, applied to the
estimated Medicaid dispense quantities. Actual Medicaid dispense quantities are
reported by individual states on a 45-60 day quarter-end lag. Differences in
Medicaid rebate accruals resulting from differences in the estimated Medicaid
dispense quantities and actual Medicaid dispense quantities are adjusted in the
following period. Medicaid rebate allowances decreased in 2006, compared to
2005, primarily due to the impact of the new Medicare, Part D legislation, which
became effective January 1, 2006. As a result of the new legislation many
patients who had been eligible to receive THALOMID(R) through Medicaid coverage
during the prior year period are now covered under Medicare, Part D. Partially
offsetting the THALOMID(R) decrease are Medicaid rebate allowances included in
the current year period for REVLIMID(R) sales.
DISTRIBUTOR CHARGEBACK: As indicated above, we do not offer commercial discounts
on our products to pharmacies or hospitals and, therefore, have no commercial
distributor chargebacks. Our distributor chargebacks result from the difference
between the wholesaler price and the lower pricing available to federally funded
healthcare providers, such as Veteran Affairs and the U.S. Department of
Defense. We estimate distributor chargeback allowances at the time of sale based
on the pharmacies to which the order was drop-shipped and its eligibility for
the lower pricing. Actual chargeback credits claimed by the wholesaler may
significantly differ from our accruals. Distributor chargeback allowances
relating to THALOMID(R) are more sensitive to price increases and will typically
increase as result of differences between annual contract pricing available to
federally funded healthcare providers and our current wholesale acquisition
cost. On the other hand, REVLIMID(R) chargeback allowances are less sensitive to
current wholesale acquisition cost price increases due to its relatively recent
commercial launch date.
OTHER GROSS TO NET SALES ACCRUALS: We record sales discounts accruals based on
payment terms extended to customers and we record distributor services accruals
based on contractual fees incurred for the wholesale distributor services
provided.
INCOME TAXES: We utilize the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement carrying amounts and tax
bases of assets and liabilities using enacted tax rates in effect for years in
which the temporary differences are expected to reverse. We provide a valuation
allowance when it is more likely than not that deferred tax assets will not be
realized.
Our 2006 effective tax rate is approximately 66%. The effective tax rate exceeds
the statutory tax rate primarily due to certain expenses incurred in taxing
jurisdictions outside the United States for which we do not presently receive a
tax benefit and nondeductible expenses which include share based compensation
expense related to incentive stock options. We operate under an incentive tax
holiday in Switzerland that expires in 2015 and exempts us from certain Swiss
taxes. Likewise, expenses currently being incurred there do not provide a tax
benefit. To the extent we receive approvals in markets outside the United
States, and manufacture and generate taxable income subject to our Swiss tax
holiday, we would expect our effective tax rate to be lower in the future.
At March 31, 2005, we determined it was more likely than not that we will
generate sufficient taxable income to realize the benefits of our deferred tax
assets and as a result, eliminated certain deferred tax valuation allowances,
which resulted in us recording an income tax benefit in 2005 of $42.6 million
and an increase to additional paid-in capital of $30.2 million. The decision to
eliminate the deferred tax valuation allowances was based on an external
Independent Data Monitoring Committee's, or IDMC, analyses of two Phase III
Special Protocol Assessment multiple myeloma trials and the conclusion that
these trials exceeded the pre-specified stopping rule. The IDMC found a
statistically significant improvement in time to disease progression -- the
primary endpoint of these Phase III trials -- in patients receiving REVLIMID(R)
plus dexamethasone compared to patients receiving dexamethasone alone. This,
55
in concert with our nine consecutive quarters of profitability, led to the
conclusion that it was more likely than not that we will generate sufficient
taxable income to realize the benefits of our deferred tax assets.
We periodically evaluate the likelihood of the realization of deferred tax
assets, and reduce the carrying amount of these deferred tax assets by a
valuation allowance to the extent we believe a portion will not be realized. We
consider many factors when assessing the likelihood of future realization of
deferred tax assets, including our recent cumulative earnings experience by
taxing jurisdiction, expectations of future taxable income, the carryforward
periods available to us for tax reporting purposes, various income tax
strategies and other relevant factors. Significant judgment is required in
making this assessment and, to the extent future expectations change, we would
have to assess the recoverability of our deferred tax assets at that time. At
December 31, 2006, it was more likely than not that we would realize our
deferred tax assets, net of valuation allowances.
SHARE-BASED COMPENSATION: We adopted the provisions of SFAS 123R effective
January 1, 2006, which requires that the cost resulting from all share-based
payment transactions be recognized in the financial statements at their fair
values. We adopted SFAS 123R using the modified prospective application method
under which the provisions of SFAS 123R apply to new awards and to awards
modified, repurchased, or cancelled after the adoption date. We use the
Black-Scholes option pricing model to estimate the fair value of options on the
date of grant which requires certain estimates to be made by management
including the expected forfeiture rate and expected term of the options.
Management also makes decisions regarding the method of calculating the expected
volatilities and the risk free interest rate used in the model. Fluctuations in
the market that affect these estimates could have an impact on the resulting
compensation cost. Additionally, compensation cost for the portion of awards for
which the requisite service has not been rendered that are outstanding as of the
adoption date is recognized over the remaining service period after the adoption
date (for additional information see Note 13 of the Notes to the Consolidated
Financial Statements included in this annual report).
OTHER-THAN-TEMPORARY IMPAIRMENTS OF AVAILABLE-FOR-SALE MARKETABLE SECURITIES: A
decline in the market value of any available-for-sale marketable security below
its cost that is deemed to be other-than-temporary results in a reduction in
carrying amount to fair value. The impairment is charged to earnings and a new
cost basis for the security established. The determination of whether an
available-for-sale marketable security is other-than-temporarily impaired
requires significant judgment on our part and requires consideration of
available quantitative and qualitative evidence in evaluating the potential
impairment. Our marketable securities consist primarily of debt securities whose
fair value is affected by interest rate and credit rating changes. The fair
value of certain debt securities were negatively impacted by interest rate
increases during 2006. If the cost of an investment exceeds its fair value,
factors evaluated to determine whether the investment is other-than-temporarily
impaired include: significant deterioration in the issuer's earnings
performance, credit rating, asset quality, business prospects of the issuer,
adverse changes in the general market conditions in which the issuer operates,
length of time that the fair value has been below our cost, our expected future
cash flows from the security and our intent and ability to retain the investment
for a sufficient period of time to allow for recovery in the market value of the
investment. Assumptions associated with these factors are subject to future
market and economic conditions, which could differ from our assessment. During
2006 and 2005, we determined that certain securities had sustained
other-than-temporary impairments and, as a result, we recognized impairment
losses of $3.8 million and $3.1 million in 2006 and 2005, respectively, which
were recorded in interest and investment income, net.
INVESTMENT IN AFFILIATED COMPANIES: Our investment in EntreMed had a carrying
value of $15.3 million and a fair value of $16.4 million at December 31, 2006.
If the carrying value of our investment were to exceed its fair value, we would
review it to determine whether an other-than-temporary decline in value of the
investment has been sustained. If the investment is determined to have sustained
an other-than-temporary decline in value, the investment will be written-down to
its fair value. Such an evaluation is
56
judgmental and dependent on the specific facts and circumstances. Factors that
we considered in determining whether an other-than-temporary decline in value
has occurred include: the market value of the security in relation to its cost
basis, the period of time that the market value is below cost, the financial
condition of the investee and our intent and ability to retain the investment
for a sufficient period of time to allow for recovery in the market value of the
investment. We evaluate information that we are aware of in addition to quoted
market prices, if any, in determining whether an other-than-temporary decline in
value exists.
ACCOUNTING FOR LONG-TERM INCENTIVE PLANS: We have established a Long-Term
Incentive Plan, or LTIP, designed to provide key officers and executives with
performance based incentive opportunities contingent upon achievement of
pre-established corporate performance objectives covering a three-year period.
We currently have three 3-year performance cycles running concurrently ending
December 31, 2007, 2008 and 2009. The 2007 performance cycle was approved by the
Management Compensation and Development Committee of the Board of Directors on
February 2, 2007 and began on January 1, 2007 and will end on December 31, 2009.
Performance measures for the Plans are based on the following components in the
last year of the 3-year cycle: 25% on earnings per share, 25% on net income and
50% on revenue.
Payouts may be in the range of 0% to 200% of the participant's salary for the
2007, 2008 and 2009 Plans. The estimated payout for the concluded 2006 Plan is
$4.5 million and the maximum potential payout, assuming objectives are achieved
at the 200 % level for the 2007, 2008 and 2009 Plans, are $6.2 million, $6.4
million and $7.7 million, respectively. Such awards are payable in cash or, at
our discretion, we can elect to pay the same value in our common stock based
upon our stock price at the payout date. We accrue the long-term incentive
liability over each three-year cycle. Prior to the end of a three-year cycle,
the accrual is based on an estimate of our level of achievement during the
cycle. Upon a change in control, participants will be entitled to an immediate
payment equal to their target award, or, if higher, an award based on actual
performance through the date of the change in control. For the years ended
December 31, 2006, 2005 and 2004, we recognized expense related to the LTIP of
$4.6 million, $4.4 million and $3.4 million, respectively.
Accruals recorded for the LTIP entail making certain assumptions concerning
future earnings per share, net income and revenues, the actual results of which
could be materially different than the assumptions used. Accruals for the LTIP
are reviewed on a regular basis and revised accordingly so that the liability
recorded reflects updated estimates of future payouts. In estimating the
accruals management considers actual results to date for the performance period,
expected results for the remainder of the performance period, operating trends,
product development, pricing and competition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion provides forward-looking quantitative and qualitative
information about our potential exposure to market risk. Market risk represents
the potential loss arising from adverse changes in the value of financial
instruments. The risk of loss is assessed based on the likelihood of adverse
changes in fair values, cash flows or future earnings.
We have established guidelines relative to the diversification and maturities of
investments to maintain safety and liquidity. These guidelines are reviewed
periodically and may be modified depending on market conditions. Although
investments may be subject to credit risk, our investment policy specifies
credit quality standards for our investments and limits the amount of credit
exposure from any single issue, issuer or type of investment. At December 31,
2006, our market risk sensitive instruments consisted of marketable securities
available for sale, unsecured convertible notes issued by us and our notes
payable to Siegfried.
We may periodically utilize foreign currency denominated forward contracts to
hedge currency fluctuations of transactions denominated in currencies other than
the functional currency. At December
57
31, 2006, we had one foreign currency forward contract outstanding to sell U.S.
dollars and buy British pounds for a notional amount of $12.1 million. The
forward contract expires on March 30, 2007 and is an economic hedge of a U.S.
dollar receivable of a U.K. foreign entity, which is remeasured through earnings
each period based on changes in the spot rate. At December 31, 2006, the
unrealized loss on the forward contract was immaterial. Assuming that the
year-end exchange rates between the U.S. dollar and the British pound were to
adversely change by a hypothetical ten percent, the change in the fair value of
the contract would decrease by approximately $1.2 million. However, since the
contract hedges a U.S. dollar receivable of a U.K foreign entity, any change in
the fair value of the contract would be offset by a change in the underlying
value of the hedged item.
MARKETABLE SECURITIES AVAILABLE FOR SALE: At December 31, 2006, our marketable
securities available for sale consisted of U.S. treasury securities,
government-sponsored agency securities, mortgage-backed obligations, corporate
debt securities, other asset-backed securities and 1,939,598 shares of Pharmion
Corporation common stock. Marketable securities available for sale are carried
at fair value, are held for an indefinite period of time and are intended for
use in meeting our ongoing liquidity needs. Unrealized gains and losses on
available-for-sale securities, which are deemed to be temporary, are reported as
a separate component of stockholders' equity, net of tax. The cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity. The amortization, along with realized gains and losses, is included
in interest and investment income, net. At the end of 2006, we determined that
certain securities had sustained an other-than-temporary impairment due to a
reduction in their future estimated cash flows and as a result, recognized a
$3.8 million impairment loss, which was recorded in interest and investment
income, net.
As of December 31, 2006, the principal amounts, fair values and related weighted
average interest rates of our investments in debt securities classified as
marketable securities available-for-sale were as follows:
-------------------------------------------------------
DURATION
-------------------------------------------------------
LESS THAN 1 1 TO 3 3 TO 5 5 TO 7 TOTAL
(IN THOUSANDS $) YEAR YEARS YEARS YEARS
---------------------------------------------------------------------------------------------------
Principal amount $ 128,447 $95,295 $266,196 $17,400 $507,338
Fair value $ 128,453 $95,190 $253,121 $16,116 $492,880
Average interest rate 5.3% 5.0% 4.6% 1.2% 4.7%
PHARMION COMMON STOCK: At December 31, 2006, we held a total of 1,939,598 shares
of Pharmion Corporation common stock, which had an estimated fair value of
approximately $49.9 million (based on the closing price reported by the National
Association of Securities Dealers Automated Quotations, or NASDAQ system), and,
which exceeded the cost by approximately $29.7 million. The amount by which the
fair value exceeded the cost (i.e., the unrealized gain) was included in
Accumulated Other Comprehensive Income in the Stockholders' Equity section of
the Consolidated Balance Sheet. The fair value of the Pharmion common stock
investment is subject to market price volatility and any increase or decrease in
Pharmion's common stock quoted market price will have a similar percentage
increase or decrease in the fair value of our investment.
CONVERTIBLE DEBT: In June 2003, we issued an aggregate principal amount of
$400.0 million of unsecured convertible notes. The convertible notes have a
five-year term and a coupon rate of 1.75% payable semi-annually. The convertible
notes can be converted at any time into 33,014,519 shares of common stock at a
stock-split adjusted conversion price of $12.1125 per share (for more
information see Note 9 of the Notes to the Consolidated Financial Statements).
At December 31, 2006, the fair value of the convertible notes exceeded the
carrying value of $399.9 million by approximately $1.5 billion, which we believe
reflects the increase in the market price of our common stock to $57.53 per
share as of December 31,
58
2006. Assuming other factors are held constant, an increase in interest rates
generally results in a decrease in the fair value of fixed-rate convertible
debt, but does not impact the carrying value, and an increase in our stock price
generally results in an increase in the fair value of convertible debt, but does
not impact the carrying value.
NOTE PAYABLE: At December 31, 2006, the fair value of our note payable to
Siegfried approximated the carrying value of the note of $25.9 million due to
the short period of time since we issued it. Assuming other factors are held
constant, an increase in interest rates generally will result in a decrease in
the fair value of the note. The fair value of the note will also be effected by
changes in the U.S. dollar/Swiss franc exchange rate. The note is denominated in
Swiss francs.
59
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Part IV, Item 15 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this Annual Report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
and 15d-15(e)). Our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission and that such information is accumulated and communicated to
our management (including our Chief Executive Officer and Chief Financial
Officer) to allow timely decisions regarding required disclosures. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that we are in compliance with Rule 13a-15(e) of the Exchange Act.
60
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting and for the assessment of the effectiveness of
internal control over financial reporting. As defined by the Securities and
Exchange Commission, internal control over financial reporting is a process
designed by, or under the supervision of our principal executive and principal
financial officers and effected by our Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the consolidated financial statements
in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect our transactions and dispositions of our
assets; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of the consolidated financial statements in
accordance with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations of our
management and directors; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the consolidated financial
statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In connection with the preparation of our annual consolidated financial
statements, management has undertaken an assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, or the COSO
Framework. Management's assessment included an evaluation of the design of our
internal control over financial reporting and testing of the operational
effectiveness of those controls.
Based on this evaluation, management has concluded that our internal control
over financial reporting was effective as of December 31, 2006.
KPMG LLP, the independent registered public accounting firm that audited our
consolidated financial statements included in this report, has issued their
report on management's assessment of and the effectiveness of internal control
over financial reporting as of December 31, 2006, a copy of which is included
herein.
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Celgene Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Celgene
Corporation and subsidiaries maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO. Celgene Corporation's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Celgene Corporation and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2006, is fairly stated, in all material respects, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, or COSO. Also,
in our opinion, Celgene Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission, or
COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Celgene Corporation and subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of operations, cash flows and
62
stockholders' equity for each of the years in the three-year period ended
December 31, 2006, and the related consolidated financial statement schedule,
and our report dated February 27, 2007 expressed an unqualified opinion on those
consolidated financial statements and related schedule.
/s/ KPMG LLP
Short Hills, New Jersey
February 27, 2007
63
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There have not been any changes in our internal control over financial reporting
during the fiscal quarter ended December 31, 2006 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the
information required by Part III (Items 10, 11, 12 , 13 and 14) is being
incorporated by reference herein from our definitive proxy statement (or an
amendment to our Annual Report on Form 10-K) to be filed with the Securities and
Exchange Commission within 120 days of the end of the fiscal year ended December
31, 2006 in connection with our 2007 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
See Item 10.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See Item 10.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
See Item 10.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
See Item 10.
64
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1),(a)(2) See Index to Consolidated Financial Statements and
Consolidated Financial Statement Schedule immediately following Signatures and
Power of Attorney.
(a)(3) Exhibits
The following exhibits are filed with this report or incorporated by
reference:
EXHIBIT
NO. EXHIBIT DESCRIPTION
-------- -----------------------------------------------------------------
1.1 Underwriting Agreement, dated November 3, 2006, between the
Company and Merrill Lynch Pierce, Fenner and Smith Incorporated
and J.P. Morgan Securities Inc. as representatives of the several
underwriters (incorporated by reference to Exhibit 1.1 to the
Company's Current Report on Form 8-K filed on November 6, 2006).
2.1 Purchase Option Agreement and Plan of Merger, dated April 26,
2002, among the Company, Celgene Acquisition Corp. and
Anthrogenesis Corp. (incorporated by reference to Exhibit 2.1 to
the Company's Registration Statement on Form S-4 dated November
13, 2002 (No. 333-101196)).
2.2 Amendment to the Purchase Option Agreement and Plan of Merger,
dated September 6, 2002, among the Company, Celgene Acquisition
Corp. and Anthrogenesis Corp. (incorporated by reference to
Exhibit 2.2 to the Company's Registration Statement on Form S-4
dated November 13, 2002 (No. 333-101196)).
2.3 Asset Purchase Agreement by and between the Company and EntreMed,
Inc., dated as of December 31, 2002 (incorporated by reference to
Exhibit 99.6 to the Company's Schedule 13D filed on January 3,
2003).
2.4 Securities Purchase Agreement by and between EntreMed, Inc. and
the Company, dated as of December 31, 2002 (incorporated by
reference to Exhibit 99.2 to the Company's Schedule 13D filed on
January 3, 2003).
2.5 Share Acquisition Agreement for the Purchase of the Entire Issued
Share Capital of Penn T Limited among Craig Rennie and Others,
Celgene UK Manufacturing Limited and the Company dated October
21, 2004 (incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K dated October 26, 2004).
3.1 Certificate of Incorporation of the Company, as amended through
February 16, 2006 (incorporated by reference to Exhibit 3.1 to
the Company' Annual Report on Form 10-K for the year ended
December 31, 2005).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 2 to
the Company's Current Report on Form 8-K, dated September 16,
1996), as amended effective May 1, 2006 (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q, for the quarter ended March 31, 2006).
65
4.1 Rights Agreement, dated as of September 16, 1996, between the
Company and American Stock Transfer & Trust Company (incorporated
by reference to the Company's Registration Statement on Form 8A,
filed on September 16, 1996), as amended on February 18, 2000
(incorporated by reference to Exhibit 99 to the Company's Current
Report on Form 8-K filed on February 22, 2000), as amended on
August 13, 2003 (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed on August 14, 2003).
4.2 Indenture dated as of June 3, 2003 between the Company and The
Bank of New York, Trustee (incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form S-3 dated
August 14, 2003 (No. 333-107977)).
10.1 Purchase and Sale Agreement between Ticona LLC, as Seller, and
the Company, as Buyer, relating to the purchase of the Company's
Summit, New Jersey, real property (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004).
10.2 1986 Stock Option Plan (incorporated by reference to Exhibit A to
the Company's Proxy Statement dated April 13, 1990).
10.3 1992 Long-Term Incentive Plan (incorporated by reference to
Exhibit A to the Company's Proxy Statement, dated May 30, 1997).
10.4 1995 Non-Employee Directors' Incentive Plan (incorporated by
reference to Exhibit A to the Company's Proxy Statement, dated
May 24, 1999).
10.5 Form of indemnification agreement between the Company and each
officer and director of the Company (incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996).
10.6 Services Agreement effective May 1, 2006 between the Company and
John W. Jackson (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006).
10.7 Employment Agreement effective May 1, 2006 between the Company
and Sol J. Barer (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006).
10.8 Employment Agreement effective May 1, 2006 between the Company
and Robert J. Hugin (incorporated by reference to Exhibit 10.3 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006).
10.9 Celgene Corporation Replacement Stock Option Plan (incorporated
by reference to Exhibit 99.1 to the Company's Registration
Statement on Form S-3 dated May 18, 1998 (No. 333-52963)).
10.10 Form of Stock Option Agreement to be issued in connection with
the Celgene Corporation Replacement Stock Option Plan
(incorporated by reference to Exhibit 99.2 to the Company's
Registration Statement on Form S-3 dated May 18, 1998 (No.
333-52963)).
66
10.11 1998 Stock Incentive Plan, Amended and Restated as of April 23,
2003 (incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 10-Q for the quarter ended June 30, 2006).
10.12 Stock Purchase Agreement dated June 23, 1998 between the Company
and Biovail Laboratories Incorporated (incorporated by reference
to Exhibit 10.1 to the Company's Current Report on Form 8-K filed
on July 17, 1998).
10.13 Registration Rights Agreement dated as of July 6, 1999 between
the Company and the Purchasers in connection with the issuance of
the Company's 9.00% Senior Convertible Note Due June 30, 2004
(incorporated by reference to Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999).
10.14 Development and License Agreement between the Company and
Novartis Pharma AG, dated April 19, 2000 (incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000).
10.15 Collaborative Research and License Agreement between the Company
and Novartis Pharma AG, dated December 20, 2000 (incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000).
10.16 Custom Manufacturing Agreement between the Company and Johnson
Matthey Inc., dated March 5, 2001 (incorporated by reference to
Exhibit 10.24 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2001).
10.17 Manufacturing and Supply Agreement between the Company and
Mikart, Inc., dated as of April 11, 2001 (incorporated by
reference to Exhibit 10.25 to the Company's Annual Report on Form
10-K for the year ended December 31, 2001).
10.18 Distribution Services Agreement between the Company and Ivers Lee
Corporation, d/b/a Sharp, dated as of June 1, 2000 (incorporated
by reference to Exhibit 10.26 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2001).
10.19 Amendment No. 1 to the 1992 Long-Term Incentive Plan, effective
as of June 22, 1999 (incorporated by reference to Exhibit 10.1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002).
10.20 Amendment No. 1 to the 1995 Non-Employee Directors' Incentive
Plan, effective as of June 22, 1999 (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002).
10.21 Amendment No. 2 to the 1995 Non-Employee Directors' Incentive
Plan, effective as of April 18, 2000 (incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002).
10.22 Celgene Corporation 2005 Deferred Compensation Plan, effective as
of January 1, 2005 (incorporated by referring to Exhibit 10.22 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2004).
67
10.23 Anthrogenesis Corporation Qualified Employee Incentive Stock
Option Plan (incorporated by reference to Exhibit 10.35 to the
Company's Annual Report on Form 10-K for the year ended December
31, 2002).
10.24 Agreement dated August 2001 by and among the Company, Children's
Medical Center Corporation, Bioventure Investments KFT and
EntreMed Inc. (certain portions of the agreement have been
omitted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment,
which request has been granted) (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002).
10.25 Exclusive License Agreement among the Company, Children's Medical
Center Corporation and, solely for purposes of certain sections
thereof, EntreMed, Inc., effective December 31, 2002
(incorporated by reference to Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2002).
10.26 Supply Agreement between the Company and Sifavitor s.p.a., dated
as of September 28, 1999 (incorporated by reference to Exhibit
10.32 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002).
10.27 Supply Agreement between the Company and Siegfried (USA), Inc.,
dated as of January 1, 2003 (incorporated by reference to Exhibit
10.33 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2002).
10.28 Distribution and Supply Agreement by and between SmithKline
Beecham Corporation, d/b/a GlaxoSmithKline and Celgene
Corporation, entered into as of March 31, 2003 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2003).
10.29 Securities Purchase Agreement dated as of April 8, 2003 between
the Company and Pharmion Corporation in connection with the
purchase by the Company of Pharmion's Senior Convertible
Promissory Note in the principal amount of $12,000,000
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).
10.30 Purchase Agreement dated May 28, 2003 between the Company and
Morgan Stanley & Co. Incorporated, as Initial Purchaser, in
connection with the purchase of $400,000,000 principal amount of
the Company's 1 3/4% Convertible Note Due 2008 (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003).
10.31 Registration Rights Agreement dated as of June 3, 2003 between
the Company, as Issuer, and Morgan Stanley & Co. Incorporated, as
Initial Purchaser (incorporated by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-3 dated August 14,
2003 (No. 333-107977)).
10.32 Form of 1 3/4% Convertible Note Due 2008 (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement
of Form S-3 dated August 14, 2003).
10.33 Technical Services Agreement among the Company, Celgene UK
Manufacturing II, Limited (f/k/a Penn T Limited), Penn
Pharmaceutical Services Limited and Penn Pharmaceutical Holding
Limited dated October 21, 2004 (incorporated by reference to
68
Exhibit 10.33 to the Company's Annual Report on Form 10-K for the
year ended December 31, 2004).
10.34 Purchase and Sale Agreement between Ticona LLC and the Company
dated August 6, 2004, with respect to the Summit, New Jersey
property (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003).
10.35 Letter Agreement among the Company, Pharmion Corporation and
Pharmion GmbH dated December 3, 2004 (incorporated by reference
to Exhibit 10.35 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2004).
10.36 License Agreement among the Company, Pharmion Corporation and
Pharmion GmbH, dated as of November 16, 2001 (incorporated by
reference to Exhibit 10.36 to the Company's Annual Report on Form
10-K for the year ended December 31, 2005).
10.37 Amendment No. 1, dated March 3, 2003, to License Agreement among
the Company, Pharmion Corporation and Pharmion GmbH, dated as of
November 16, 2001 (incorported by reference to Exhibit 10.37 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2005).
10.38 Letter Agreement, dated March 3, 2003, to License Agreement among
the Company, Pharmion Corporation and Pharmion GmbH, dated as of
November 16, 2001 (incorporated by reference to Exhibit 10.38 to
the Company's Annual Report on Form 10-K for the year ended
December 31, 2005).
10.39 Amendment No. 2, dated April 8, 2003, to License Agreement among
the Company, Pharmion Corporation and Pharmion GmbH, dated as of
November 16, 2001, as further amended (incorporated by reference
to Exhibit 10.39 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2005).
10.40 Letter Agreement, dated August 18, 2003, to License Agreement
among the Company, Pharmion Corporation and Pharmion GmbH, dated
as of November 16, 2001, as further amended (incorporated by
reference to Exhibit 10.40 to the Company's Annual Report on Form
10-K for the year ended December 31, 2005).
10.41 Letter Agreement, dated December 3, 2004, to License Agreement
among the Company, Pharmion Corporation and Pharmion GmbH, dated
as of November 16, 2001, as further amended (incorporated by
reference to Exhibit 10.36 to the Company's Annual Report on Form
10-K for the year ended December 31, 2004).
10.42 Letter Agreement among the Company, Pharmion Corporation and
Pharmion GmbH dated December 3, 2004 (incorporated by reference
to Exhibit 10.37 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2004).
10.43 Amendment No. 2 to the Amended and Restated Distribution and
License Agreement dated as of November 16, 2001, as amended March
4, 2003 and supplemented June 18, 2003, by and between Pharmion
GmbH and Celgene UK Manufacturing II, Limited, dated December 3,
2004 (incorporated by reference to Exhibit 10.38 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2004).
69
10.44 Sublease between Gateway, Inc. ("Sublandlord") and Celgene
Corporation ("Subtenant"), entered into as of December 10, 2001,
with respect to the San Diego property (incorporated by reference
to Exhibit 10.39 to the Company's Annual Report on Form 10-K for
the year ended December 31, 2004).
10.45 Lease Agreement, dated January 16, 1987, between the Company and
Powder Horn Associates, with respect to the Warren, New Jersey
property (incorporated by reference to Exhibit 10.17 to the
Company's Registration Statement on Form S-1, dated July 24,
1987) (incorporated by reference to Exhibit 10.40 to the
Company's Annual Report on Form 10-K for the year ended December
31, 2004).
10.46 Amendment No. 3 to the 1995 Non-Employee Directors' Incentive
Plan, effective as of April 23, 2003 (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2005).
10.47 Amendment No. 4 to the 1995 Non-Employee Directors' Incentive
Plan, effective as of April 5, 2005 (incorporated by reference to
Exhibit 99.2 to the Company's Registration Statement on Form S-8
(No. 333-126296).
10.48 Amendment No. 1 to the 1998 Stock Incentive Plan, Amended and
Restated as of April 23, 2003, effective as of April 14, 2005
(incorporated by reference to Exhibit 99.2 to the Company's
Registration Statement on Form S-8 (No. 333-126296).
10.49 Forms of Award Agreement for the 1998 Stock Incentive Plan
(incorporated by reference to Exhibit 99.1 to the Company's
Post-Effective Amendment to the Registration Statement on Form
S-3 dated December 30, 2005 (Registration No. 333-75636).
10.50 Supply Agreement between the Company and Evotec OAI Limited,
dated August 1, 2004 (certain portions of the agreement have been
redacted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment)
(incorporated by reference to Exhibit 10.50 to the Company's
Annual Report on Form 10-K for the year ended December 31, 2005).
10.51 Commercial Contract Manufacturing Agreement between the Company
and OSG Norwich Pharmaceuticals, Inc., dated April 26, 2004
(certain portions of the agreement have been redacted and filed
separately with the Securities and Exchange Commission pursuant
to a request for confidential treatment) (incorporated by
reference to Exhibit 10.51 to the Company's Annual Report on Form
10-K for the year ended December 31, 2005).
10.52 Finished Goods Supply Agreement (Revlimid(TM)) between the
Company and Penn Pharmaceutical Services Limited, dated September
8, 2004 (certain portions of the agreement have been redacted and
filed separately with the Securities and Exchange Commission
pursuant to a request for confidential treatment) (incorporated
by reference to Exhibit 10.52 to the Company's Annual Report on
Form 10-K for the year ended December 31, 2005).
10.53 Distribution Services and Storage Agreement between the Company
and Sharp Corporation, dated January 1, 2005 (certain portions of
the agreement have been redacted and filed separately with the
Securities and Exchange Commission pursuant to a request for
confidential treatment) (incorporated by reference to Exhibit
10.53 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2005).
70
10.54 Amendment No. 2 to the 1998 Stock Incentive Plan (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2006).
10.55* Asset Purchase Agreement dated as of December 8, 2006 by and
between Siegfried Ltd., Siegfried Dienste AG and Celgene
Chemicals Sarl (certain portions of the agreement have been
redacted and filed separately with the Securities and Exchange
Commission pursuant to a request for confidential treatment,
which request is still pending).
10.56* Celgene Corporation Management Incentive Plan (MIP) and
Performance Plan.
10.57* Letter Agreement between the Company and David W. Gryska.
14.1 Code of Ethics (incorporated by reference to Exhibit 14.1 to the
Company's Annual Report on Form 10-K for the year ended December
31, 2004).
21.1* List of Subsidiaries.
23.1* Consent of KPMG LLP.
24.1* Power of Attorney (included in Signature Page).
31.1* Certification by the Company's Chief Executive Officer.
31.2* Certification by the Company's Chief Financial Officer.
32.1* Certification by the Company's Chief Executive Officer pursuant
to 18 U.S.C. Section 1350.
32.2* Certification by the Company's Chief Financial Officer pursuant
to 18 U.S.C. Section 1350.
99.1* Comparison of cumulative total return among Celgene
Corporation, the S&P 500 Index, the NASDAQ Composite Index and
the NASDAQ Pharmaceutical Index.
* Filed herewith.
(c) See Financial Statements immediately following Index to Consolidated
Financial Statements and Consolidated Financial Statement Schedule.
71
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person or entity whose signature
appears below constitutes and appoints Sol J. Barer and Robert J. Hugin, and
each of them, its true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for it and in its name, place and stead, in
any and all capacities, to sign any and all amendments to this Form 10-K and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all contents and purposes as it might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes may lawfully do or cause to be
done by virtue thereof.
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CELGENE CORPORATION
By: /s/ Sol J. Barer
---------------------------
Sol J. Barer
Chairman of the Board and
Chief Executive Officer
Date: February 27, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Sol J. Barer Chairman of the Board and Chief February 27, 2007
------------------------------- Executive Officer
Sol J. Barer
/s/ Robert J. Hugin Director, Chief Operating Officer February 27, 2007
-------------------------------
Robert J. Hugin
/s/ David W. Gryska Chief Financial Officer (Principal February 27, 2007
------------------------------- Accounting Officer)
David W. Gryska
/s/ Jack L. Bowman Director February 27, 2007
-------------------------------
Jack L. Bowman
/s/ Michael D. Casey Director February 27, 2007
-------------------------------
Michael D. Casey
/s/ Rodman L. Drake Director February 27, 2007
-------------------------------
Rodman L. Drake
72
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Arthur Hull Hayes, Jr. Director February 27, 2007
-------------------------------
Arthur Hull Hayes, Jr.
/s/ Gilla Kaplan Director February 27, 2007
-------------------------------
Gilla Kaplan
Director February 27, 2007
-------------------------------
James Loughlin
Director February 27, 2007
-------------------------------
Richard C. E. Morgan
Director February 27, 2007
-------------------------------
Walter L. Robb
/s/ James R. Swenson Controller February 27, 2007
-------------------------------
James R. Swenson
The foregoing constitutes a majority of the directors.
73
CELGENE CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2006 and 2005 F-3
Consolidated Statements of Operations - Years Ended December 31, 2006, 2005, and 2004 F-4
Consolidated Statements of Cash Flows - Years Ended December 31, 2006, 2005, and 2004 F-5
Consolidated Statements of Stockholders' Equity - Years Ended December 31, 2006, 2005, and 2004 F-7
Notes to Consolidated Financial Statements F-8
Consolidated Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts F-37
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Celgene Corporation:
We have audited the accompanying consolidated balance sheets of Celgene
Corporation and subsidiaries as of December 31, 2006 and 2005, and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the years in the three-year period ended December 31, 2006. In
connection with our audits of the consolidated financial statements, we also
have audited the consolidated financial statement schedule, "Schedule II -
Valuation and Qualifying Accounts." These consolidated financial statements and
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial statement schedule
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Celgene Corporation
and subsidiaries as of December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Notes 1 and 13 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 123R, "Share-Based Payment," effective January 1, 2006.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Celgene
Corporation and subsidiaries' internal control over financial reporting as of
December 31, 2006, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, or COSO, and our report dated February 27, 2007 expressed an
unqualified opinion on management's assessment of, and the effective operation
of, internal control over financial reporting.
/s/ KPMG LLP
Short Hills, New Jersey
February 27, 2007
F-2
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
------------------------------------------------------------------------------------------------------------------
December 31, 2006 2005
------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,439,415 $ 123,316
Marketable securities available for sale 542,805 600,944
Accounts receivable, net of allowances of $6,625 and $3,739
at December 31, 2006 and 2005, respectively 127,777 77,913
Inventory 25,371 20,242
Deferred income taxes 87,979 113,059
Other current assets 87,657 37,363
------------------------------------------------------------------------------------------------------------------
Total current assets 2,311,004 972,837
------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 146,645 77,477
Investment in affiliated companies 16,379 17,017
Intangible assets, net 100,509 96,988
Goodwill 38,494 33,815
Other assets 122,760 60,179
------------------------------------------------------------------------------------------------------------------
Total assets $ 2,735,791 $ 1,258,313
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 24,410 $ 16,414
Accrued expenses 112,992 92,908
Income taxes payable 84,859 14,715
Current portion of deferred revenue 7,647 6,473
Other current liabilities 9,795 5,127
------------------------------------------------------------------------------------------------------------------
Total current liabilities 239,703 135,637
------------------------------------------------------------------------------------------------------------------
Long-term convertible notes 399,889 399,984
Deferred revenue, net of current portion 63,027 59,067
Other non-current liabilities 56,995 27,850
------------------------------------------------------------------------------------------------------------------
Total liabilities 759,614 622,538
------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value per share, 5,000,000 shares
authorized; none outstanding at December 31, 2006 and 2005, respectively -- --
Common stock, $.01 par value per share, 575,000,000 shares authorized; issued
380,092,309 and 344,125,158 shares at December 31, 2006 and 2005, respectively 3,801 3,441
Common stock in treasury, at cost; 4,057,553 and 1,953,282 shares
at December 31, 2006 and 2005, respectively (148,097) (50,601)
Additional paid-in capital 2,209,889 853,601
Accumulated deficit (101,773) (170,754)
Accumulated other comprehensive income 12,357 88
------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,976,177 635,775
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 2,735,791 $ 1,258,313
==================================================================================================================
See accompanying Notes to Consolidated Financial Statements
F-3
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
------------------------------------------------------------------------------------
Years ended December 31, 2006 2005 2004
------------------------------------------------------------------------------------
Revenue:
Net product sales $ 811,605 $ 445,625 $ 330,571
Collaborative agreements and other revenue 18,189 41,334 20,012
Royalty revenue 69,079 49,982 26,919
------------------------------------------------------------------------------------
Total revenue 898,873 536,941 377,502
------------------------------------------------------------------------------------
Expenses:
Cost of goods sold 125,892 80,727 59,726
Research and development 258,621 190,834 160,852
Selling, general and administrative 339,669 181,796 114,196
------------------------------------------------------------------------------------
Total expenses 724,182 453,357 334,774
------------------------------------------------------------------------------------
Operating income 174,691 83,584 42,728
Other income and expense:
Interest and investment income, net 40,352 24,557 28,340
Equity in losses of affiliated companies 8,233 6,923 --
Interest expense 9,417 9,497 9,551
Other income (expense), net 5,502 (7,509) 1,654
------------------------------------------------------------------------------------
Income before income taxes 202,895 84,212 63,171
------------------------------------------------------------------------------------
Income tax provision 133,914 20,556 10,415
------------------------------------------------------------------------------------
Net income $ 68,981 $ 63,656 $ 52,756
====================================================================================
Net income per common share:
Basic $ 0.20 $ 0.19 $ 0.16
Diluted $ 0.18 $ 0.18 $ 0.15
Weighted average shares:
Basic 352,217 335,512 327,738
========= ========= =========
Diluted 407,181 390,585 345,710
========= ========= =========
See accompanying Notes to Consolidated Financial Statements
F-4
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2006 2005 2004
-------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 68,981 $ 63,656 $ 52,756
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization of long-term assets 25,714 14,286 9,690
Provision for accounts receivable allowances 2,169 1,028 868
Realized loss (gain) on marketable securities available for sale 4,390 1,853 (3,050)
Unrealized loss on value of EntreMed warrants 418 6,875 1,922
Equity in losses of affiliated companies 7,401 6,236 --
Non-cash stock-based compensation expense 76,748 (243) 449
Amortization of premium (discount) on marketable
securities available for sale, net (3,101) 1,763 2,085
Amortization of debt issuance cost 2,443 2,443 2,443
Deferred income taxes (55,491) (47,120) (23,567)
Shares issued for employee benefit plans 6,517 3,506 4,267
Other 94 1,030 108
Change in current assets and liabilities, excluding the effect
of acquisition:
Increase in accounts receivable (55,290) (33,061) (5,604)
(Increase) decrease in inventory (1,600) 4,125 (11,192)
Increase in other operating assets (53,464) (21,514) (1,174)
(Decrease) increase in accounts payable and accrued expenses (32,989) 11,809 18,241
Increase in income tax payable 93,265 29,919 28,489
Increase (decrease) in deferred revenue (2,644) (4,674) 79,208
-------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 83,561 41,917 155,939
-------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (46,137) (35,861) (36,015)
Purchase of manufacturing facility (12,445) -- --
Business acquisition -- (7,152) (109,882)
Proceeds from sales and maturities of marketable securities
available for sale 857,918 598,319 539,200
Purchases of marketable securities available for sale (780,101) (647,815) (478,939)
Investment in affiliated companies (7,400) (10,500) --
Purchase of investment securities (5,051) -- (7,000)
Purchase of intangible assets -- (122) --
-------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 6,784 (103,131) (92,636)
-------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from exercise of common stock options and warrants 113,072 52,640 16,036
Excess tax benefit from share-based compensation arrangements 101,992 -- --
Repayment of capital lease and note obligations -- (9) (34)
Issuance of common stock 1,006,182 -- --
-------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,221,246 52,631 16,002
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Effect of currency rate changes on cash and cash equivalents 4,508 (3,328) (4,406)
-------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,316,099 (11,911) 74,899
Cash and cash equivalents at beginning of period 123,316 135,227 60,328
-------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,439,415 $ 123,316 $ 135,227
===================================================================================================================
See accompanying Notes to Consolidated Financial Statements
F-5
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)
--------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2006 2005 2004
--------------------------------------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and
financing activity:
Change in net unrealized loss (gain) on marketable
securities available for sale $ (16,576) $ 60,098 $ (53,312)
-------------------------------------
Matured shares tendered in connection with stock option exercises $(104,183) $ (50,295) $ (306)
-------------------------------------
Conversion of convertible notes $ 95 $ 16 $ --
-------------------------------------
Accrual for business and other long term asset purchases $ -- $ 4,250 $ 7,499
-------------------------------------
Note payable for purchase of manufacturing facility $ 26,086 $ -- $ --
-------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 6,999 $ 7,000 $ 7,000
-------------------------------------
Income taxes paid $ 25,677 $ 36,258 $ 5,493
-------------------------------------
See accompanying Notes to Consolidated Financial Statements
F-6
CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Accumulated
Other
Additional Comprehensive
Common Treasury Paid-in Accumulated Income
Years Ended December 31, 2006, 2005 and 2004 Stock Stock Capital Deficit (Loss) Total
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2003 $ 814 $ -- $ 607,484 $ (287,166) $ 10,612 $ 331,744
-----------------------------------------------------------------------------------------------------------------------------------
Net income 52,756 52,756
Other comprehensive income:
Increase in unrealized gain on
available for sale securities, net of tax 56,362 56,362
Reclassification adjustment for gains
included in net income (3,050) (3,050)
Currency translation adjustments 4,678 4,678
-----------
Comprehensive income $ 110,746
Treasury stock -mature shares tendered
related to option exercise (306) (306)
Issuance of common stock related to the 2:1
stock split 823 (823) --
Exercise of stock options and warrants 13 16,329 16,342
Issuance of common stock for employee benefit
plans 1 4,266 4,267
Expense related to non-employee stock options
and restricted stock granted to employees 449 449
Income tax benefit upon exercise of stock
options 14,202 14,202
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2004 $ 1,651 $ (306) $ 641,907 $ (234,410) $ 68,602 $ 477,444
-----------------------------------------------------------------------------------------------------------------------------------
Net income 63,656 63,656
Other comprehensive income:
Decrease in unrealized gain on available
for sale securities, net of tax (46,171) (46,171)
Reclassification adjustment for losses
included in net income 1,853 1,853
Income tax benefit upon recognition of
deferred tax assets and liabilities (14,775) (14,775)
Currency translation adjustments (9,421) (9,421)
-----------
Comprehensive income $ (4,858)
Recognition of deferred tax asset 30,199 30,199
Treasury stock -mature shares tendered related
to option exercise (50,295) (50,295)
Issuance of common stock related to the 2:1
February 17, 2006 stock split 1,720 (1,720) --
Conversion of long-term convertible notes 16 16
Exercise of stock options and warrants 69 76,346 76,415
Issuance of common stock for employee benefit
plans 1 3,506 3,507
Expense related to restricted stock granted
to employees (243) (243)
Income tax benefit upon exercise of stock
options 103,590 103,590
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2005 $ 3,441 $ (50,601) $ 853,601 $ (170,754) $ 88 $ 635,775
-----------------------------------------------------------------------------------------------------------------------------------
Net income 68,981 68,981
Other comprehensive income:
Increase in unrealized gain on available
for sale securities, net of tax 6,499 6,499
Reclassification adjustment for losses
included in net income 4,390 4,390
Currency translation adjustments 1,380 1,380
-----------
Comprehensive income $ 81,250
Treasury stock -mature shares tendered related
to option exercise (104,183) (104,183)
Issuance of common stock related to the 2:1
February 17, 2006 stock split 15 (15) --
Conversion of long-term convertible notes 95 95
Issuance of common stock related to the
secondary stock offering 200 1,005,982 1,006,182
Exercise of stock options and warrants 144 1,476 158,221 159,841
Issuance of common stock for employee benefit
plans 5,211 1,306 6,517
Issuance of restricted stock 1 (1) --
Expense related to stock-based compensation
and restricted stock granted to employees 76,748 76,748
Income tax benefit upon exercise of stock
options 113,952 113,952
-----------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2006 $ 3,801 $ (148,097) $ 2,209,889 $ (101,773) $ 12,357 $ 1,976,177
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
F-7
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION: Celgene Corporation and its
subsidiaries (collectively "Celgene" or the "Company") is a global
biopharmaceutical company primarily engaged in the discovery, development and
commercialization of innovative therapies designed to treat cancer and
immune-inflammatory diseases through regulation of cellular, genomic and
proteomic targets. The Company's commercial stage programs include
pharmaceutical sales of REVLIMID(R), THALOMID(R), ALKERAN(R) and sales of
FOCALINTM to Novartis Pharma AG, or Novartis; a licensing agreement with
Novartis which entitles us to royalties on FOCALIN XRTM and the entire
RITALIN(R) family of drugs; a licensing and product supply agreement with
Pharmion for its sales of thalidomide; and sales of bio-therapeutic products and
services through its Cellular Therapeutics subsidiary.
The consolidated financial statements include the accounts of Celgene
Corporation and its subsidiaries. All inter-company transactions and balances
have been eliminated. Investments in limited partnerships and interests where we
have an equity interest of 50% or less and do not otherwise have a controlling
financial interest are accounted for by either the equity or cost method.
Certain reclassifications have been made to prior years' financial statements in
order to conform to the current year's presentation. In addition, the Company
updated its presentation of how it reflects deferred income taxes and changes in
income tax payable within the cash flows from the operations section of the
Consolidated Statement of Cash Flows for the years ended December 31, 2005 and
2004. The presentation will better align the deferred income tax amount with the
deferred tax amount reflected in the statement of operations and the change in
income taxes payable with the amount of current expense. Our statement of cash
flows for the year ended December 31, 2006 was prepared on this basis. We have
reclassified certain amounts in 2005 and 2004 within the operating section of
cash flows in the Consolidated Statement of Cash Flows to conform to this
presentation. The reclasses do not impact previously reported cash flows from
operations, financing or investing activities for those years.
The preparation of the consolidated financial statements requires management to
make estimates and assumptions that affect reported amounts and disclosures.
Actual results could differ from those estimates. The Company is subject to
certain risks and uncertainties such as uncertainty of product development,
uncertainties regarding regulatory approval, no assurance of market acceptance
of products, risk of product liability, uncertain scope of patent and
proprietary rights, intense competition, and rapid technological change.
FINANCIAL INSTRUMENTS: Certain financial instruments reflected in the
Consolidated Balance Sheets, (e.g., cash, cash equivalents, account receivable,
certain other assets, accounts payable and certain other liabilities) are
recorded at cost, which approximates fair value due to their short-term nature.
The fair values of financial instruments other than marketable securities are
determined through a combination of management estimates and information
obtained from third parties using the latest market data. The fair value of
available for sale marketable securities is based on quoted market prices. The
carrying value of the note payable to Siegfried was $25.9 million at December
31, 2006 and approximated its fair value. The fair values of the following
financial instruments are disclosed in the following footnotes: marketable
securities (Note 4); EntreMed, Inc. common stock (Note 7); and convertible debt
(Note 9).
DERIVATIVE INSTRUMENTS: The Company periodically utilizes foreign currency
denominated forward contracts to hedge currency fluctuations of transactions
denominated in currencies other than the functional currency. These derivative
instruments are not designated as accounting hedges, and are recorded on the
balance sheet at fair value with changes in the fair value being recognized in
earnings along with any offsetting change in the value of the underlying hedged
item. We do not utilize derivatives for speculative or trading purposes.
F-8
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES: We invest our excess cash in
money market funds and in highly liquid debt instruments of U.S. municipalities,
corporations, and the U.S. government and its agencies. All investments with
maturities of three months or less from the date of purchase are classified as
cash equivalents and all highly liquid investments with maturities of greater
than three months from date of purchase are classified as marketable securities.
These securities are carried at fair value, with the unrealized gains and
losses, net of taxes, reported as a component of stockholders' equity, except
for unrealized losses determined to be other than temporary, which are recorded
as a charge to interest and investment income, net. Any realized gains or losses
on the sale of marketable securities are determined on a specific identification
method, and such gains and losses along with amortization of premiums and
accretion of discounts to maturity are included in interest and investment
income, net. Premiums and discounts are amortized or accreted over the life of
the related available-for-sale security as an adjustment to yield using the
effective-interest method. Dividend and interest income are recognized when
earned.
A decline in the market value of any available-for-sale security below cost that
is deemed to be other-than-temporary results in a reduction in carrying amount
to fair value in accordance with Financial Accounting Standards Board, or FASB,
Staff Position, or FSP, FAS No. 115-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The impairment would be
charged to earnings for the difference between the investment's cost and fair
value at such date and a new cost basis for the security established. Factors
evaluated to determine if an investment is other-than-temporarily impaired
include significant deterioration in the earnings performance, credit rating,
asset quality, or business prospects of the issuer; adverse changes in the
general market condition in which the issuer operates; the intent and ability to
retain the investment for a sufficient period of time to allow for recovery in
the market value of the investment; and, issues that raise concerns about the
issuer's ability to continue as a going concern.
CONCENTRATION OF CREDIT RISK: Cash, cash equivalents, and marketable securities
are financial instruments that potentially subject the Company to concentration
of credit risk. The Company invests its excess cash primarily in U.S. government
agency securities, mortgage obligations and marketable debt securities of
financial institutions and corporations with strong credit ratings. The Company
may also invest in unrated or below investment grade securities, such as
collateralized debt obligations or equity in private companies. The Company has
established guidelines relative to diversification and maturities to maintain
safety and liquidity. These guidelines are reviewed periodically and may be
modified to take advantage of trends in yields and interest rates.
As is typical in the pharmaceutical industry, the Company sells its products
primarily through wholesale distributors and therefore, wholesale distributors
account for a large portion of the Company's trade receivables and net product
revenues (see Note 18). In light of this concentration, the Company continuously
monitors the creditworthiness of its customers and has internal policies
regarding customer credit limits. The Company estimates an allowance for
doubtful accounts based on the creditworthiness of its customers, aging of
receivables balances and general economic conditions. An adverse change in those
factors could affect the Company's estimate of its bad debts.
INVENTORY: Inventories are carried at the lower of cost or market. Cost is
determined using the first-in, first-out, or FIFO, method. We periodically
review the composition of inventory in order to identify obsolete, slow-moving
or otherwise non-saleable items. We record inventory write-downs in the period
that the impairment is first recognized. Historically, inventory write-downs
have been immaterial.
F-9
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost
less accumulated depreciation. Depreciation of plant and equipment is recorded
using the straight-line method. Leasehold improvements are depreciated over the
lesser of the economic useful life of the asset or the remaining term of the
lease. The estimated useful lives of plant and equipment are as follows:
Buildings 40 years
Building and operating equipment 15 years
Machinery and equipment 5 years
Furniture and fixtures 5 years
Computer equipment and software 3 years
Maintenance and repairs are charged to operations as incurred and improvements
capitalized.
INVESTMENT IN AFFILIATED COMPANIES: At December 31, 2006, the Company held a
total common stock investment of 10,364,864 shares, or approximately 12.3%
ownership in EntreMed, Inc. The Company also holds 3,350,000 shares of EntreMed
voting preferred shares that are convertible into 16,750,000 shares of common
stock and therefore, determined that it has significant influence over EntreMed
and applies the equity method of accounting to its common stock investment.
Investments are reviewed to determine whether an other-than-temporary decline in
value of the investment has been sustained. If it is determined that the
investment has sustained an other-than-temporary decline in its value, the
investment will be written down to its fair value. Such an evaluation is
judgmental and dependent on the specific facts and circumstances. Factors that
the Company considers in determining whether an other-than-temporary decline in
value has occurred include: the market value of the investment, based on either
market-quoted prices or future rounds of financing by the investee, in relation
to its cost basis, the period of time that the market value is below its cost
basis, the financial condition of the investee, including fundamental changes to
its business prospect, and the Company's intent and ability to retain the
investment for a sufficient period of time to allow for recovery in the market
value of the investment. The Company evaluates information that it is aware of
in addition to available quoted market prices, if any, in determining whether an
other-than-temporary decline in value exists.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill represents the excess of purchase
price over the fair value of net assets acquired in an acquisition accounted for
by the purchase method of accounting. Goodwill and acquired intangible assets
having an indefinite useful life are not amortized, but instead are tested for
impairment at least annually. Intangible assets with estimable useful lives are
amortized to their estimated residual values over their respective estimated
useful lives, and reviewed for impairment if certain events occur as described
below.
The Company's intangible assets consist of supply agreements, contract-based
licenses, technology and an acquired workforce. Amortization periods related to
these categories range from 5 to 14 years.
IMPAIRMENT OF LONG-LIVED ASSETS: Long-lived assets, such as property, plant, and
equipment, software costs and purchased intangibles subject to amortization are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future undiscounted net cash flows, an impairment charge
is recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. Assets to be disposed of would be separately
presented in the consolidated balance sheet and reported at the lower of the
carrying amount or fair value less costs to sell, and are no longer depreciated.
The assets and liabilities of a
F-10
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
disposal group classified as held for sale would be presented separately in the
appropriate asset and liability sections of the consolidated balance sheet.
FOREIGN CURRENCY TRANSLATION: Operations in non-U.S. subsidiaries are generally
recorded in local currencies, which are also the functional currencies for
financial reporting purposes. The results of operations for non-U.S.
subsidiaries are translated from local currencies into U. S. dollars using the
average currency rate during each period, which approximates the results that
would be obtained using actual currency rates on the dates of individual
transactions. Assets and liabilities are translated using currency rates at the
end of the period. Adjustments resulting from translating the financial
statements of the Company's foreign subsidiaries into the U.S. dollar are
excluded from the determination of net income and are recorded as a component of
other comprehensive income. Transaction gains and losses are recorded as
incurred in other income (expense), net in the Consolidated Statement of
Operations.
RESEARCH AND DEVELOPMENT COSTS: All research and development costs are expensed
as incurred. These include all internal costs, external costs related to
services contracted by the Company and research services conducted for others.
Upfront and milestone payments made to third parties in connection with research
and development collaborations are expensed as incurred up to the point of
regulatory approval. Payments made to third parties subsequent to regulatory
approval are capitalized and amortized over the remaining useful life of the
related product.
INCOME TAXES: The Company utilizes the asset and liability method of accounting
for income taxes. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect for years in which the temporary differences are expected to reverse. A
valuation allowance is provided when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. Research and
development tax credits will be recognized as a reduction of the provision for
income taxes when realized. The Company recognizes the benefit of an uncertain
tax position that it has taken or expects to take on income tax returns it files
if such tax position is probable of being sustained.
REVENUE RECOGNITION: Revenue from the sale of products is recognized when title
and risk of loss of the product is transferred to the customer, which is
typically upon product shipment. Provisions for discounts, early payments,
rebates, sales returns and distributor charge-backs under terms customary in the
industry are provided for in the same period the related sales are recorded.
Provisions recorded in 2006, 2005 and 2004 totaled approximately $153.5 million,
$103.2 million and $54.5 million, respectively.
Revenue under research contracts is recorded as earned under the contracts, as
services are provided. In accordance with SEC Staff Accounting Bulletin ("SAB")
No. 104, "Revenue Recognition," upfront nonrefundable fees associated with
license and development agreements where the Company has continuing involvement
in the agreement, are recorded as deferred revenue and recognized over the
estimated service period of the last item of performance to be delivered. If the
estimated service period is subsequently modified, the period over which the
up-front fee is recognized is modified accordingly on a prospective basis.
SAB No. 104 requires companies to identify separate units of accounting based on
the consensus reached in Emerging Issues Task Force, or EITF, Issue No. 00-21,
"Revenue Arrangements With Multiple Deliverables", or EITF 00-21. EITF 00-21
provides guidance on how to determine when an arrangement that involves multiple
revenue-generating activities or deliverables should be divided into separate
units of accounting for revenue recognition purposes, and if this division is
required, how the arrangement consideration should be allocated among the
separate units of accounting. EITF 00-21 is effective for revenue arrangements
entered into in quarters beginning after June 15, 2003. If the deliverables in a
revenue arrangement constitute separate units of accounting according to the
EITF's separation criteria, the revenue-recognition policy must be determined
for each identified unit. If the arrangement is a single unit of
F-11
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
accounting, the revenue-recognition policy must be determined for the entire
arrangement. Under arrangements where the license fees and research and
development activities can be accounted for as a separate unit of accounting,
nonrefundable upfront license fees are deferred and recognized as revenue on a
straight-line basis over the expected term of the Company's continued
involvement in the research and development process. Revenues from the
achievement of research and development milestones, if deemed substantive, are
recognized as revenue when the milestones are achieved, and the milestone
payments are due and collectible. Milestones are considered substantive if all
of the following conditions are met: (1) the milestone is nonrefundable; (2)
achievement of the milestone was not reasonably assured at the inception of the
arrangement; (3) substantive effort is involved to achieve the milestone; and,
(4) the amount of the milestone appears reasonable in relation to the effort
expended, the other milestones in the arrangement and the related risk
associated with achievement of the milestone. If any of these conditions are not
met, the Company would recognize a proportionate amount of the milestone payment
upon receipt as revenue that correlates to work already performed and the
remaining portion of the milestone payment would be deferred and recognized as
revenue as the Company completes its performance obligations.
Continuation of certain contracts and grants are dependent upon the Company
achieving specific contractual milestones; however, none of the payments
received to date are refundable regardless of the outcome of the project.
SHARE-BASED COMPENSATION: In December 2004, the FASB issued Statement of
Financial Accounting Standards, or SFAS, No. 123R, "Share-Based Payment", or
SFAS 123R. SFAS 123R, which replaces SFAS 123, and supersedes APB 25, which
requires that compensation cost relating to share-based payment transactions be
recognized in financial statements based on the fair value for all awards
granted after the date of adoption as well as for existing awards for which the
requisite service has not been rendered as of the date of adoption.
The Company adopted SFAS 123R effective January 1, 2006 and has selected the
Black-Scholes method of valuation for share-based compensation. The Company has
adopted the modified prospective application method under which the provisions
of SFAS 123R apply to new awards and to awards modified, repurchased, or
cancelled after the adoption date. Additionally, compensation cost for the
portion of the awards for which the requisite service has not been rendered that
are outstanding as of the adoption date is recognized in the Consolidated
Statement of Operations over the remaining service period after the adoption
date based on the award's original estimate of fair value. SFAS 123R requires
compensation costs to be recognized based on the estimated number of awards
expected to vest. Changes in the estimated forfeiture rates are reflected
prospectively.
Prior to January 1, 2006, the Company applied the intrinsic-value-based method
of accounting for stock-based compensation prescribed by Accounting Principles
Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees," or
APB 25, and related interpretations. As such, compensation expense for grants of
stock options to employees or members of the Board of Directors would be
recorded on the date of grant only if the current market price of the Company's
stock exceeded the exercise price. SFAS No. 123, "Accounting For Stock-Based
Compensation," or SFAS 123, established accounting and disclosure requirements
using a fair-value-based method of accounting for stock-based employee
compensation plans. As permitted by SFAS 123, the Company elected to continue to
apply the intrinsic-value-based method of APB 25 described above, and adopted
only the disclosure requirements of SFAS 123, as amended by SFAS No. 148,
"Accounting For Stock-Based Compensation - Transition and Disclosure."
EARNINGS PER SHARE: Basic earnings per common share is computed by dividing net
income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per common share is computed by dividing net income by
the weighted-average number of common shares outstanding during the period
increased to include all additional common shares that would have been
outstanding assuming potentially dilutive common shares had been issued and any
proceeds thereof used to repurchase common stock at the average market price
during the period. The proceeds used to repurchase
F-12
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
common stock are assumed to be the sum of the amount to be paid to the Company
upon exercise of options, the amount of compensation cost attributed to future
services and not yet recognized and, if applicable, the amount of income taxes
that would be credited to or deducted from capital upon exercise. If the
convertible debt is determined to be dilutive, net earnings is adjusted to add
back the after-tax impact of interest expense recognized on the Company's
convertible debt.
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) represents the change
in equity from non-owner sources and is presented in the Consolidated Statements
of Stockholders' Equity. It consists of net income, changes in net unrealized
gains (losses) on marketable securities classified as available for sale, net of
income taxes and changes in currency translation adjustments.
Accumulated other comprehensive income is summarized as follows:
--------------------------------------------------------------------------------
Net Unrealized Foreign Accumulated
Gains (Losses Currency Other
from Translation Comprehensive
Investments Adjustment Income
--------------------------------------------------------------------------------
Balance January 1, 2005 $ 63,926 $ 4,676 $ 68,602
Period change (59,093) (9,421) (68,514)
---------------------------------------------
Balance December 31, 2005 4,833 (4,745) 88
Period change 10,889 1,380 12,269
---------------------------------------------
Balance December 31, 2006 $ 15,722 $ (3,365) $ 12,357
================================================================================
CAPITALIZED SOFTWARE COSTS: The Company capitalizes software costs incurred in
connection with developing or obtaining internal-use software. Capitalized
software costs are included in property, plant and equipment, net and are
amortized over their estimated useful life of three years from the date the
systems are ready for their intended use.
NEW ACCOUNTING PRINCIPLES: In June 2006, the FASB issued FASB Interpretation No.
48, "Accounting for Uncertainty in Income Taxes--an interpretation of FASB
Statement No. 109" or FIN 48. This Interpretation clarifies the accounting for
uncertainty in income taxes recognized in an enterprise's financial statements
in accordance with SFAS No. 109, "Accounting for Income Taxes," or SFAS 109, and
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. As the provisions of FIN 48 will be applied
to all tax positions upon initial adoption, the cumulative effect of applying
the provisions of FIN 48 will be reported as an adjustment to the opening
balance of retained earnings for that fiscal year. This Interpretation is
effective for the Company beginning January 1, 2007. We are in the process of
analyzing the impact of this Interpretation and believe that it will not have a
material impact on the Company's results of operations. However, the Company
does expect to make certain balance sheet reclassifications to comply with FIN
48.
In September 2006 the FASB, issued SFAS No. 157, "Fair Value Measurements",
which establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. Where applicable, this Statement simplifies and
codifies related guidance within generally accepted accounting principles
(GAAP). This accounting standard is effective for the Company beginning January
1, 2008. The Company has not yet determined the effect, if any, the adoption of
SFAS 157 may have on the its consolidated financial statements.
F-13
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments - an amendment of FASB Statements No. 133 and 140," which
permits a fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that would otherwise require bifurcation. This
accounting standard is effective for the Company beginning January 1, 2007. The
Company has not yet determined the effect, if any, the adoption of SFAS 155 may
have on its financial position and results of operations.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements," or SAB 108, which provides guidance on the consideration of the
effects of prior period misstatements in quantifying current year misstatements
for the purpose of a materiality assessment. SAB 108 provides for the
quantification of the impact of correcting all misstatements, including both the
carryover and reversing effects of prior year misstatements, on the current year
financial statements. SAB 108 is effective for fiscal years ending on or after
November 15, 2006. The Company adopted the provisions of SAB 108 retroactive to
January 1, 2006 and determined that it had no impact on the Company's financial
statements for the year ended December 31, 2006.
(2) ACQUISITION
On October 21, 2004, the Company acquired all of the outstanding shares of Penn
T Limited, or Penn T, a worldwide supplier of THALOMID(R), for a US dollar
equivalency of approximately $117.0 million in cash, net of cash acquired and
including working capital adjustments and transaction costs paid during the
first quarter of 2005.
The following unaudited pro forma information presents a summary of consolidated
results of operations for the year ended December 31, 2004 as if the acquisition
of Penn T had occurred on January 1, 2004. The unaudited pro forma results of
operations is presented for illustrative purposes only and is not necessarily
indicative of the operating results that would have occurred if the transaction
had been consummated at the date indicated, nor is it necessarily indicative of
future operating results of the combined companies and should not be construed
as representative of these amounts for any future dates or periods.
--------------------------------------------------------------------
Pro forma (UNAUDITED) 2004
--------------------------------------------------------------------
Total revenues $394,097
Net income 56,661
Net income per diluted share $ 0.16
====================================================================
The unaudited pro forma information includes an adjustment to reflect the
amortization of intangible assets resulting from the acquisition, which
primarily consists of a product supply agreement that is being amortized over
its useful life of 13 years.
F-14
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(3) EARNINGS PER SHARE (EPS)
------------------------------------------------------------------------------------
2006 2005 2004
------------------------------------------------------------------------------------
Net income $ 68,981 $ 63,656 $ 52,756
Interest expense on convertible debt, net of tax 5,571 5,571 --
--------------------------------
Net income $ 74,552 $ 69,227 $ 52,756
====================================================================================
Weighted average shares:
Basic: 352,217 335,512 327,738
Effect of dilutive securities:
Options, warrants and other incentives 21,949 22,051 17,972
Convertible debt 33,015 33,022 --
--------------------------------
Diluted: 407,181 390,585 345,710
====================================================================================
Net Income Per Share:
Basic $ 0.20 $ 0.19 $ 0.16
Diluted $ 0.18 $ 0.18 $ 0.15
====================================================================================
The potential common shares related to the convertible notes issued June 3, 2003
(see Note 9) were anti-dilutive and were excluded from the diluted earnings per
share computation for 2004. The total number of potential common shares excluded
from the diluted earnings per share computation because their inclusion would
have been anti-dilutive was 3,647,015, 10,223,974 and 41,686,756 shares in 2006,
2005 and 2004, respectively.
(4) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES AVAILABLE-FOR-SALE
Money market mutual funds of $1.401 billion and $83.6 million at December 31,
2006 and 2005, respectively are recorded at cost which approximates fair value
and are included in cash and cash equivalents.
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and estimated fair value of available-for-sale securities by major
security type and class of security at December 31, 2006 and 2005 was as
follows:
-------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2006 Cost Gain Loss Value
-------------------------------------------------------------------------------------------------------
Mortgage-backed obligations 62,137 281 (426) 61,992
U.S. treasury securities 53,260 -- (497) 52,763
Government-sponsored agency securities 349,756 70 (3,771) 346,055
Corporate debt securities 13,477 17 (470) 13,024
Other asset-backed securities 17,315 1,731 -- 19,046
Marketable equity securities 20,212 29,713 -- 49,925
---------------------------------------------------
Total available-for-sale marketable securities $516,157 $ 31,812 $ (5,164) $542,805
=======================================================================================================
F-15
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
-------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2005 Cost Gain Loss Value
-------------------------------------------------------------------------------------------------------
Mortgage-backed obligations $ 86,478 $ 365 $ (524) $ 86,319
U.S. treasury securities 24,391 14 (614) 23,791
Government-sponsored agency securities 183,315 25 (3,538) 179,802
Corporate debt securities 18,526 29 (2,652) 15,903
Other asset-backed securities 29,765 164 (1,842) 28,087
Auction rate notes 232,575 -- -- 232,575
Marketable equity securities 20,212 14,255 -- 34,467
---------------------------------------------------
Total available-for-sale marketable securities $595,262 $ 14,852 $ (9,170) $600,944
=======================================================================================================
Government-sponsored agency securities include fixed asset-backed securities
issued by the Federal National Mortgage Association and the Federal Home Loan
Bank. Other asset-backed securities are securities backed by collateral other
than mortgage obligations. Unrealized losses for mortgage-backed obligations,
U.S. treasury securities and government-sponsored agency securities were
primarily due to increases in interest rates. Unrealized losses for corporate
debt and other asset-backed securities were due to increases in interest rates
as well as widening credit spreads. The Company has sufficient liquidity and the
intent to hold these securities until the market value recovers. Moreover, the
Company does not believe it is probable that it will be unable to collect all
amounts due according to the contractual terms of the individual investments.
The fair value of available-for-sale securities with unrealized losses at
December 31, 2006 was as follows:
------------------------------------------------------------------------------------------------------------------
Less than 12 months 12 months or longer Total
------------------------ ------------------------ ------------------------
Estimated Gross Estimated Gross Estimated Gross
Fair Unrealized Fair Unrealized Fair Unrealized
December 31, 2006 Value Loss Value Loss Value Loss
------------------------------------------------------------------------------------------------------------------
Mortgage-backed
obligations $ 3,253 $ 18 $ 26,957 $ 408 $ 30,210 $ 426
U.S. treasury securities 34,636 232 18,127 265 52,763 497
Government-sponsored agency
securities 71,880 195 165,901 3,576 237,781 3,771
Corporate debt securities -- -- 12,727 469 12,727 469
Other asset-backed securities -- -- 278 1 278 1
------------------------------------------------------------------------------------------------------------------
Total $109,769 $ 445 $223,990 $ 4,719 $333,759 $ 5,164
==================================================================================================================
During the years ended December 31, 2006 and 2005, the Company determined that
certain securities had sustained an other-than-temporary impairment due to a
reduction in their future estimated cash flows and as a result, the Company
recognized impairment losses of $3.8 million and $3.1 million, respectively,
which were recorded in interest and investment income, net.
Duration of debt securities classified as available-for-sale were as follows at
December 31, 2006:
--------------------------------------------------------------------
Amortized Fair
Cost Value
--------------------------------------------------------------------
Duration of one year or less $128,487 $128,453
Duration of one through three years 95,815 95,190
Duration of three through five years 255,740 253,121
Duration of five through seven years 15,903 16,116
--------------------------------------------------------------------
Total $495,945 $492,880
====================================================================
F-16
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(5) INVENTORY
A summary of inventories by major category follows:
--------------------------------------------------------------------------
2006 2005
--------------------------------------------------------------------------
Raw materials $ 10,133 $ 5,044
Work in process 4,715 1,644
Finished goods 10,523 13,554
--------------------------------------------------------------------------
Total $ 25,371 $ 20,242
==========================================================================
(6) PLANT AND EQUIPMENT
Plant and equipment at December 31, 2006 and 2005 consisted of the following:
--------------------------------------------------------------------------
2006 2005
--------------------------------------------------------------------------
Land $ 18,586 $ 17,836
Buildings 19,436 12,509
Building and operating equipment 3,308 2,618
Leasehold improvements 8,505 8,741
Machinery and equipment 66,167 27,603
Furniture and fixtures 6,977 6,751
Computer equipment and software 31,662 22,370
Construction in progress 36,725 7,103
--------------------
191,366 105,531
Less: accumulated depreciation and amortization 44,721 28,054
--------------------
Total $146,645 $ 77,477
==========================================================================
F-17
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(7) INVESTMENT IN AFFILIATED COMPANIES
A summary of the Company's equity investment in affiliated companies follows:
--------------------------------------------------------------------------------
Investment in Affiliated Companies 2006 2005
--------------------------------------------------------------------------------
Investment in EntreMed equity (1) $ 2,609 $ 4,025
Excess of investment over share of EntreMed equity (2) 12,690 12,992
------------------
Investment in EntreMed 15,299 17,017
Investment in Burrill Life Sciences (See Note 17) 1,080 --
------------------
Investment in affiliated companies $16,379 $17,017
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Equity in Losses of Affiliated Companies 2006 2005
--------------------------------------------------------------------------------
Celgene's share of EntreMed, Inc. losses (1) $ 6,779 $ 1,617
Write-off of in-process research and development -- 4,383
Elimination of intercompany transaction (3) 832 687
Amortization of intangibles(2) 302 236
------------------
Equity in losses of EntreMed $ 7,913 $ 6,923
Celgene share of losses in Burrill Life Sciences 320 --
------------------
Equity in losses of affiliated companies $ 8,233 $ 6,923
================================================================================
(1) The Company records its interest and share of losses in EntreMed Inc.
based on its common stock ownership, which was 12.3% and 14.0% at December
31, 2006 and 2005, respectively.
(2) Consists of intangible assets and goodwill of $301 and $12,389 at December
31, 2006 and $603 and $12,389 at December 31, 2005.
(3) Under a license agreement between EntreMed and Royalty Pharma Finance
Trust, EntreMed is entitled to share in the THALOMID(R) royalty payments
that the Company pays to Royalty Pharma on annual THALOMID(R) sales above
a certain threshold. As prescribed by the equity method of accounting, the
Company's share of EntreMed's royalties, based on its ownership percentage
in EntreMed, is eliminated from cost of goods sold and reflected in equity
in losses of affiliated companies.
The fair value of the Company's common stock investment in EntreMed, Inc. at
December 31, 2006 was $16.4 million.
Summarized financial information of EntreMed, Inc is as follows:
--------------------------------------------------------------------------------
December 31,
2006 2005
--------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Total assets $56,024 $36,432
Total liabilities $ 8,875 $ 6,879
Total equity $47,131 $29,536
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Year Ended Nine-Month Period
December, 31 Ended
2006 December 31, 2005
--------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Total revenues $ 7,063 $ 5,893
Operating loss 51,484 11,648
Net loss 49,721 10,792
--------------------------------------------------------------------------------
F-18
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(8) OTHER FINANCIAL INFORMATION
Accrued expenses at December 31, 2006 and 2005 consisted of the following:
--------------------------------------------------------------------------------
2006 2005
--------------------------------------------------------------------------------
Compensation $ 42,422 $ 22,087
Interest, royalties, license fees and milestones 14,741 18,181
Sales returns 9,480 5,017
Rebates, distributor chargebacks and distributor services 18,101 27,738
Clinical trial costs and grants 14,526 10,866
Other 13,722 9,019
--------------------------------------------------------------------------------
Total $112,992 $ 92,908
================================================================================
Other non-current liabilities at December 31, 2006 and 2005 consisted of the
following:
--------------------------------------------------------------------------------
2006 2005
--------------------------------------------------------------------------------
Deferred compensation and long-term incentives $ 19,422 $ 15,420
Notes payable 22,594 --
Deferred income taxes 12,191 11,676
Other 2,788 754
--------------------------------------------------------------------------------
Total $ 56,995 $ 27,850
================================================================================
NOTES PAYABLE: In December 2006, the Company purchased an active pharmaceutical
ingredient, or API, manufacturing facility and certain other assets and
liabilities from Siegfried Ltd. and Siegfried Dienste AG (referred to here
together as "Siegfried") located in Zofingen, Switzerland. The transaction
included a technical service agreement which will allow the Company to retain
the necessary support to operate the plant. The assets were purchased for a U.S.
dollar equivalency of approximately $46.0 million, consisting of payment of
approximately $12.4 million at the closing, $3.4 million payable in each of the
first five following years and $3.3 million in each of the subsequent five
years. The present value of the note payable was a U.S. dollar equivalency of
approximately, $25.9 million at December 31, 2006, of which $3.3 million,
representing the amount due within one-year, was included in other current
liabilities with the remainder included in other non-current liabilities. The
Company imputted interest on the note payable using the effective yield method
with a discount rate of 7.68%. At December 31, 2006, payments totaling a U.S.
dollar equivalency of approximately $16.4 million due over years 6 to 10 are
forgiven if, pursuant to our right, we elect to sell the facility back to
Siegfried.
(9) CONVERTIBLE DEBT
In June 2003, the Company issued an aggregate principal amount of $400.0 million
of unsecured convertible notes. The notes have a five-year term and a coupon
rate of 1.75% payable semi-annually on June 1 and December 1. Each $1,000
principal amount of convertible notes is convertible into 82.5592 shares of
common stock as adjusted, or a conversion rate of $12.1125 per share, which
represented a 50% premium to the closing price on May 28, 2003 of the Company's
common stock of $8.075, after adjusting prices for the two-for-one stock splits
affected on February 17, 2006 and October 22, 2004. The debt issuance costs
related to these convertible notes, which totaled approximately $12.2 million,
are classified under other assets on the consolidated balance sheet and are
being amortized over five years, assuming no conversion. Under the terms of the
purchase agreement, the noteholders can convert the outstanding notes at any
time into 33,014,519 shares of common stock at the conversion price. In
addition, the noteholders have the right to require the Company to redeem the
notes in cash at a price equal to 100% of the principal amount to be
F-19
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
redeemed, plus accrued interest, prior to maturity in the event of a change of
control and certain other transactions defined as a "fundamental change" in the
indenture governing the notes. Subsequent to the June 2003 issuance date, an
immaterial amount of principal has been converted into common stock.
At December 31, 2006 and 2005, the fair value of the Company's convertible notes
outstanding exceeded the carrying value by approximately $1.5 billion and $660.0
million, respectively.
(10) GOODWILL AND INTANGIBLE ASSETS
INTANGIBLE ASSETS: A summary of intangible assets by category follows:
----------------------------------------------------------------------------------------
Gross Intangible Weighted
Carrying Accumulated Assets, Average
December 31, 2006 Value Amortization Net Life (Years)
----------------------------------------------------------------------------------------
Penn T supply agreements $108,462 $(12,296) $ 96,166 12.9
License 4,250 (307) 3,943 13.8
Technology 122 (12) 110 12.0
Acquired workforce 295 (5) 290 5.0
----------------------------------------------------------------------------------------
Total $113,129 $(12,620) $100,509 12.9
========================================================================================
----------------------------------------------------------------------------------------
Gross Intangible Weighted
Carrying Accumulated Assets, Average
December 31, 2005 Value Amortization Net Life (Years)
----------------------------------------------------------------------------------------
Penn T supply agreements $ 95,278 $ (2,659) $ 92,619 12.9
License 4,250 -- 4,250 13.8
Technology 122 (3) 119 12.0
----------------------------------------------------------------------------------------
Total $ 99,650 $ (2,662) $ 96,988 13.0
========================================================================================
The $13.5 million increase in gross carrying value of intangible assets from
December 31, 2005 to December 31, 2006 includes $13.2 million from the impact of
foreign currency translation and $0.3 million from the December 2006 acquisition
of a workforce related to the purchase of the API manufacturing facility in
Switzerland.
Amortization of acquired intangible assets was approximately $9.0 million, $2.1
million and $0.4 million for the years ended December 31, 2006, 2005 and 2004,
respectively. Assuming no changes in the gross carrying amount of intangible
assets, the amortization of intangible assets for the next five fiscal years is
estimated to be approximately $9.3 million per year.
F-20
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
GOODWILL: At December 31, 2006, the Company's recorded goodwill related to the
acquisition of Penn T on October 21, 2004. Goodwill related to the acquisition
of Anthrogenesis Corp. was eliminated during the first quarter of 2005 as
prescribed by SFAS No. 109, "Accounting for Income Taxes," due to reversal of
the valuation allowance for deferred tax assets that had been recorded at time
of acquisition. The changes in the carrying value of goodwill are summarized as
follows:
-------------------------------------------------------------------
Balance, December 31, 2004 $ 41,258
Reversal of deferred tax asset valuations (3,006)
Purchase accounting adjustments (347)
Foreign currency translation (4,090)
--------
Balance, December 31, 2005 33,815
Foreign currency translation 4,679
--------
Balance, December 31, 2006 $ 38,494
===================================================================
(11) RELATED PARTY TRANSACTIONS: Under a license agreement between EntreMed and
Royalty Pharma Finance Trust, EntreMed is entitled to share in the THALOMID(R)
royalty payments that the Company pays to Royalty Pharma on annual THALOMID(R)
sales in the United States above a certain threshold. The Company's share of
EntreMed's royalties, based on its ownership percentage in EntreMed, is
eliminated from cost of goods sold and reflected in equity in losses of
affiliated companies (see Note 7).
In March 2005, the Company licensed to EntreMed rights to develop and
commercialize its tubulin inhibitor compounds. Under the terms of the agreement,
Celgene received an up-front license payment of $1.0 million and is entitled to
additional payments upon successful completion of certain clinical, regulatory
and sales milestones. Under the agreement, EntreMed will provide all resources
needed to conduct clinical research and regulatory activities associated with
seeking marketing approvals of the tubulin inhibitors for oncology applications.
(12) STOCKHOLDERS' EQUITY
PREFERRED STOCK: The Board of Directors is authorized to issue, at any time,
without further stockholder approval, up to 5,000,000 shares of preferred stock,
and to determine the price, rights, privileges, and preferences of such shares.
COMMON STOCK: At December 31, 2006, the Company was authorized to issue up to
575,000,000 shares of common stock. In November 2006, the Company issued an
additional 20,000,000 shares of its common stock at a public offering price of
$51.60 per share with net proceeds to the Company of $1.006 billion. At December
31, 2006, shares of common stock issued totaled 380,092,309.
TREASURY STOCK: During 2006, 2005 and 2004, certain employees exercised stock
options containing a reload feature and, pursuant to the Company's stock option
plan, tendered 2,348,010, 1,932,154 and 21,128 stock split adjusted mature
shares, respectively, related to stock option exercises. Such tendered shares
are reflected as treasury stock. At December 31, 2006, treasury shares totaled
4,057,553.
F-21
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
A summary of changes in common stock issued and treasury stock is presented
below after adjustments of the two-for-one stock splits in October 2004 and
February 2006:
--------------------------------------------------------------------------------------------------------
Common Stock
Balance Common Stock in Treasury
--------------------------------------------------------------------------------------------------------
December 31, 2003 325,644,220 --
--------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants 4,121,316 --
Issuance of common stock for employee benefit plans 392,860 --
Treasury stock - mature shares tendered related to option exercises -- (10,564)
--------------------------------------------------------------------------------------------------------
December 31, 2004 330,158,396 (10,564)
--------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants 13,700,750 --
Issuance of common stock for employee benefit plans 264,692 --
Treasury stock - mature shares tendered related to option exercises -- (1,942,718)
Conversion of long-term convertible notes 1,320 --
--------------------------------------------------------------------------------------------------------
December 31, 2005 344,125,158 (1,953,282)
--------------------------------------------------------------------------------------------------------
Exercise of stock options and warrants 15,839,310 42,575
Issuance of common stock for employee benefit plans -- 201,164
Treasury stock - mature shares tendered related to option exercises -- (2,348,010)
Conversion of long-term convertible notes 7,841 --
Issuance of restricted stock 120,000 --
Issuance of common stock in connection with public offering 20,000,000 --
--------------------------------------------------------------------------------------------------------
December 31, 2006 380,092,309 (4,057,553)
========================================================================================================
RIGHTS PLAN: During 1996, the Company adopted a shareholder rights plan, or
Rights Plan. The Rights Plan involves the distribution of one Right as a
dividend on each outstanding share of the Company's common stock to each holder
of record on September 26, 1996. Each Right shall entitle the holder to purchase
one-tenth of a share of common stock. The Rights trade in tandem with the common
stock until, and are exercisable upon, certain triggering events, and the
exercise price is based on the estimated long-term value of the Company's common
stock. In certain circumstances, the Rights Plan permits the holders to purchase
shares of the Company's common stock at a discounted rate. The Company's Board
of Directors retains the right at all times prior to acquisition of 15% of the
Company's voting common stock by an acquirer, to discontinue the Rights Plan
through the redemption of all rights or to amend the Rights Plan in any respect.
The Rights Plan, as amended on February 17, 2000, increased the exercise price
per Right from $100.00 to $700.00 and extended the final expiration date of the
Rights Plan to February 17, 2010. On August 13, 2003, the Rights Plan was
further amended to permit a qualified institutional investor to beneficially own
up to 17% of the Company's common stock outstanding without being deemed an
"acquiring person," if such institutional investor meets certain requirements.
(13) SHARE-BASED COMPENSATION
The Company has a shareholder approved 1998 equity incentive plan, or the 1998
Incentive Plan, that provides for the granting of options, restricted stock
awards, stock appreciation rights, performance awards and other share-based
awards to employees and officers of the Company. On June 14, 2006, the
stockholders of the Company approved an amendment to the 1998 Incentive Plan to
increase the aggregate number of shares of Common Stock that may be subject to
awards thereunder from 62,000,000 to 84,000,000 shares, subject to adjustment
under certain circumstances. The Management Compensation and Development
Committee of the Board of Directors, or the Compensation Committee, determines
the type, amount and terms, including vesting, of any awards made under the
Incentive Plan. The 1998 Incentive Plan will terminate in 2008.
F-22
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
With respect to options granted under the 1998 Incentive Plan, the exercise
price may not be less than the market price of the common stock on the date of
grant. In general, options granted under the 1998 Incentive Plan vest over
periods ranging from immediate vesting to four-year vesting and expire ten years
from the date of grant, subject to earlier expiration in case of termination of
employment. The vesting period for options granted under the 1998 Incentive Plan
is subject to certain acceleration provisions if a change in control, as defined
in the 1998 Incentive Plan, occurs. Plan participants may elect to exercise
options at any time during the option term. However, any shares so purchased
which have not vested as of the date of exercise shall be subject to forfeiture,
which will lapse in accordance with the established vesting time period.
In June 1995, the stockholders of the Company approved the 1995 Non-Employee
Directors' Incentive Plan, which, as amended, provides for the granting of
non-qualified stock options to purchase an aggregate of not more than 7,700,000
shares of common stock (subject to adjustment under certain circumstances) to
directors of the Company who are not officers or employees of the Company, or
Non-Employee Directors. Each new Non-Employee Director, upon the date of
election or appointment, receives an option to purchase 20,000 shares of common
stock, which vest in four equal annual installments commencing on the first
anniversary of the date of grant. As amended in 2003, continuing Non-Employee
Directors receive quarterly grants of 3,750 options aggregating 15,000 options
annually, which vest in full one year from the date of grant. The 1995
Non-Employee Directors' Incentive Plan also provides for a discretionary grant
upon the date of each annual meeting of an additional option to purchase up to
5,000 shares to a Non-Employee Director who serves as a member (but not a
chairman) of a committee of the Board of Directors and an option to purchase up
to 10,000 shares to a Non-Employee Director who serves as the chairman of a
committee of the Board of Directors. All options are granted at an exercise
price that equals the market value of the Company's common stock at the grant
date and expire ten years after the date of grant. This plan terminates on June
30, 2015.
The Anthrogenesis Corporation Qualified Employee Incentive Stock Option Plan has
not been approved by the Company's stockholders. As a result of the acquisition
of Anthrogenesis on December 31, 2002, the company acquired the Anthrogenesis
Qualified Employee Incentive Stock Option Plan, or the Qualified Plan, and the
Non-Qualified Recruiting and Retention Stock Option Plan, or the Non-Qualified
Plan. No future awards will be granted under the Non-Qualified Plan. The
Qualified Plan authorizes the award of incentive stock options, which are stock
options that qualify for special federal income tax treatment. The exercise
price of any stock option granted under the Qualified Plan may not be less than
the fair market value of the common stock on the date of grant. In general,
options granted under the Qualified Plan vest evenly over a four-year period and
expire ten years from the date of grant, subject to earlier expiration in case
of termination of employment. The vesting period is subject to certain
acceleration provisions if a change in control occurs. No award will be granted
under the Qualified Plan on or after December 31, 2008.
Stock options available for future grants under all plans were 22,042,287 at
December 31, 2006.
The following table illustrates the effect on net income and net income per
common share applicable to common stockholders for the years ended December 31,
2005 and 2004 as if the Company had applied the fair value recognition
provisions for stock-based compensation of SFAS 123, as amended:
------------------------------------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------------------------------
Net income as reported $ 63,656 $ 52,756
Add: stock-based employee compensation expense included in reported
income, net of tax (143) 250
Add: stock-based employee compensation expense determined under
fair-value-based method (1) (52,746) (26,027)
-----------------------
Basic pro forma net income $ 10,767 $ 26,979
Interest expense on convertible debt, net of tax 5,571 --
-----------------------
Diluted, pro forma net income $ 16,338 $ 26,979
-----------------------
Net income per common share:
Basic, as reported $ 0.19 $ 0.16
Basic, pro forma $ 0.03 $ 0.08
Diluted, as reported $ 0.18 $ 0.15
Diluted, pro forma $ 0.03 $ 0.08
================================================================================================
(1) Year 2005 reflects an adjustment recorded in the first quarter of 2005 to
eliminate related valuation allowances of $17.7 million based on the
Company's determination that it was more likely than not that certain
benefits of its deferred tax assets would be realized.
SFAS 123R, which replaces SFAS 123, and supersedes APB 25, requires that
compensation cost relating to share-based payment transactions be recognized in
financial statements based on the fair value for all awards granted after the
date of adoption as well as for existing awards for which the requisite service
has not been
F-23
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
rendered as of the date of adoption. The modified prospective transition method
as prescribed by SFAS 123R does not require restatement of prior periods to
reflect the impact of adopting SFAS 123R.
The Company adopted SFAS 123R effective January 1, 2006 and has selected the
Black-Scholes method of valuation for share-based compensation. The Company has
adopted the modified prospective application method under which the provisions
of SFAS 123R apply to new awards and to awards modified, repurchased, or
cancelled after the adoption date. Additionally, compensation cost for the
portion of the awards for which the requisite service has not been rendered that
are outstanding as of the adoption date is recognized in the Consolidated
Statement of Operations over the remaining service period after the adoption
date based on the award's original estimate of fair value. SFAS 123R requires
compensation costs to be recognized based on the estimated number of awards
expected to vest. Changes in the estimated forfeiture rates are reflected
prospectively.
The following table summarizes the impact of adopting SFAS 123R on 2006 results
of operations:
--------------------------------------------------------------------
2006
--------------------------------------------------------------------
Cost of good sold $ 1,637
Research and development 12,740
Selling, general and administrative 62,266
-------
Total share-based compensation expense 76,643
Tax benefit related to share-based compensation expense 23,447
--------------------------------------------------------------------
Reduction in net income $53,196
--------------------------------------------------------------------
Reduction in earnings per share:
Basic $ 0.15
Diluted $ 0.13
====================================================================
Included in stock-based compensation expense for the year ended December 31,
2006 was compensation expense related to non-qualified stock options of $57.2
million. Stock-based compensation expense totaling $5.2 million was recognized
during the year ended December 31, 2006 resulting from the modification of
certain stock option awards previously granted to the Company's former Chief
Executive Officer in connection with his retirement.
No amounts of share-based compensation cost were capitalized as inventory or
other assets during 2006. As of December 31, 2006, there was $88.8 million of
total unrecognized compensation cost related to stock options granted under the
plans. That cost will be recognized over an expected remaining weighted-average
period of 1.4 years.
In computing the initial APIC Pool of excess tax benefits, the Company will
apply the methodology described in paragraph 81 of SFAS 123R. Paragraph 81 of
SFAS 123R prohibits recognition of a deferred tax asset for excess tax benefits
that have not been realized. The Company has adopted the tax law method as its
accounting policy regarding the ordering of tax benefits to determine whether an
excess tax benefit has been realized.
Prior to the adoption of SFAS 123R, the Company presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows
in the Consolidated Statement of Cash Flows. SFAS 123R requires excess tax
benefits (i.e., the tax benefit recognized upon exercise of stock options in
excess of the benefit recognized from recognizing compensation cost for those
options) to be classified as financing cash flows in the Consolidated Statement
of Cash Flows. Cash received from stock option exercises for the year ended
December 31, 2006 was $113.1 million and the excess tax benefit recognized was
$102.0 million. Cash received from stock option exercises for the years ended
December 31, 2005 and 2004 was $52.6 million and $16.0 million, respectively.
Pursuant to SFAS 123R, tax benefits resulting from the exercise of stock
options, which have been presented as operating cash flows prior to the adoption
of SFAS 123R are not reclassified to financing activities, but rather shall
continue to be presented as operating cash flows.
F-24
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The weighted-average grant-date fair value of the stock options granted during
the years ended December 31, 2006, 2005 and 2004 was $17.54 per share, $9.60 per
share and $5.22 share. The Company estimated the fair value of options granted
using a Black-Scholes option pricing model with the following assumptions:
-------------------------------------------------------------------------------------------------
2006 2005 2004
-------------------------------------------------------------------------------------------------
Risk-free interest rate 4.50%-5.24% 3.37%-4.62% 1.21%-4.69%
Expected volatility 40%-52% 40%-41% 41%-51%
Weighted average expected volatility 47% 41% 47%
Expected term (years) 3.1-5.0 3.5-4.5 3.5-4.2
Expected dividend yield 0% 0% 0%
=================================================================================================
The fair value of stock options granted is estimated using the Black-Scholes
option pricing model. The fair value of stock options granted after January 1,
2006 is amortized on a straight-line basis. The fair value of stock options
granted before January 1, 2006 is amortized using the graded vesting attribution
approach. Compensation cost is amortized over the requisite service periods of
the awards, which are generally the vesting periods.
For grants during the year ended December 31, 2006, the risk-free interest rate
is based on the U.S. Treasury zero-coupon curve. Expected volatility of stock
option awards is estimated based on the implied volatility of the Company's
publicly traded options with settlement dates exceeding one year. The use of
implied volatility was based upon the availability of actively traded options on
the Company's common stock and the assessment that implied volatility is more
representative of future stock price trends than historical volatility. Prior to
the adoption of SFAS 123R, the Company calculated expected volatility using only
historical stock price volatility. The expected term of an employee share option
is the period of time for which the option is expected to be outstanding. The
Company has made a determination of expected term by analyzing employees'
historical exercise experience from its history of grants and exercises in the
Company's option database and management estimates. Forfeiture rates are
estimated based on historical data.
In December 2005, in recognition of the significance of the REVLIMID(R)
regulatory approval, the Board of Directors approved a resolution to grant the
2006 annual stock option awards under the 1998 Incentive Plan in 2005. All stock
options awarded were granted fully vested. Half of the options granted had an
exercise price of $34.05 per option, which was at a 5% premium to the closing
price of the Company's common stock of $32.43 per share on the grant date of
December 29, 2005; the remaining options granted had an exercise price of $35.67
per option, which was at a 10% premium to the closing price of the Company's
common stock of $32.43 per share on the grant date of December 29, 2005. The
Board's decision to grant these options was in recognition of the REVLIMID(R)
regulatory approval and in response to a review of the Company's long-term
incentive compensation programs in light of changes in market practices and
recently issued changes in accounting rules resulting from the issuance of SFAS
123R, which the Company adopted effective in the first quarter of 2006. Granting
these options prior to the adoption of FASB No. 123R resulted in the Company not
being required to recognize cumulative compensation expense of approximately
$70.8 million for the four-year period ending December 31, 2009.
F-25
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
Stock option transactions for the year ended December 31, 2005 and 2004 under
all plans are as follows:
----------------------------------------------------------------------------------------
OPTIONS OUTSTANDING
----------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE EXERCISE
Balance December 31, FOR GRANT SHARES PRICE PER SHARE
----------------------------------------------------------------------------------------
2003 2,600,665 12,011,749 $ 25.28
========================================================================================
Stock split impact 2,600,665 11,324,297 --
Granted (4,073,768) 4,073,768 27.36
Exercised -- (1,300,297) 7.99
Cancelled 793,837 (844,799) 19.27
----------------------------------------------------------------------------------------
2004 1,921,399 25,264,718 $ 15.15
========================================================================================
Authorized 6,250,000 -- --
Granted (7,302,665) 7,302,665 54.32
Exercised -- (6,840,682) 11.16
Cancelled 405,262 (429,512) 23.72
Stock split impact 1,273,996 25,297,189 --
----------------------------------------------------------------------------------------
2005 2,547,992 50,594,378 $ 13.70
========================================================================================
Stock option transactions for the year ended December 31, 2006 under all plans
are as follows:
---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average Aggregate
Exercise Remaining Intrinsic
Price Contractual Value
Options Per Option Term (years) (In Thousands)
---------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2005 50,594,378 $ 13.70 6.9 $ 909,083
Changes during the year:
Granted 3,705,816 43.86 --
Exercised (15,855,841) 10.08 --
Forfeited (1,235,384) 14.94 --
Expired (97,281) 11.71 --
---------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2006 37,111,688 $ 18.18 6.0 $ 959,600
---------------------------------------------------------------------------------------------------------------------------
Vested or expected to vest at December 31, 2006 36,497,433 $ 18.08 5.9 $ 947,017
---------------------------------------------------------------------------------------------------------------------------
Vested at December 31, 2006 27,634,896 $ 17.16 5.3 $ 737,183
===========================================================================================================================
The total intrinsic value of stock options exercised during the years ended
December 31, 2006, 2005 and 2004 was $540.3 million, $243.4 million and $38.5
million, respectively. The Company primarily utilizes newly issued shares to
satisfy the exercise of stock options.
F-26
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The following table summarizes information concerning options outstanding under
the 1998 and 1995 Incentive Plans at December 31, 2006:
---------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Vested
--------------------------------------------- ---------------------------------------------
Weighted Weighted
Average Weighted Average Weighted
Exercise Average Exercise Average
Range of Exercise Number Price Remaining Number Price Remaining
Prices Outstanding Per Option Term (yrs.) Vested Per Option Term (yrs.)
---------------------------------------------------------------------------------------------------------------------------
$ 0.04 - $5.00 5,361,046 $ 1.87 2.9 5,361,046 $ 1.87 2.9
5.01 - 10.00 7,296,723 6.76 4.5 6,559,911 6.68 4.3
10.01 - 15.00 7,337,144 12.87 6.7 3,891,731 12.86 6.1
15.01 - 20.00 3,423,871 16.56 7.0 1,653,743 16.40 5.9
20.01 - 30.00 4,658,241 25.17 6.7 2,780,199 25.82 5.5
30.01 - 40.00 5,739,148 34.70 8.4 5,361,248 34.64 8.4
40.01 - 59.01 3,295,515 44.83 6.0 2,027,018 42.33 4.6
---------------------------------------------------------------------------------------------------------------------------
Total 37,111,688 $ 18.18 6.0 27,634,896 $ 17.16 5.3
===========================================================================================================================
Stock options granted to executives at the vice-president level and above under
the 1998 Incentive Plan, after September 18, 2000, contained a reload feature
which provided that if (1) the optionee exercises all or any portion of the
stock option (a) at least six months prior to the expiration of the stock
option, (b) while employed by the Company and (c) prior to the expiration date
of the 1998 Incentive Plan and (2) the optionee pays the exercise price for the
portion of the stock option exercised or pays minimum statutory applicable
withholding taxes by using common stock owned by the optionee for at least six
months prior to the date of exercise, the optionee shall be granted a new stock
option under the 1998 Incentive Plan on the date all or any portion of the stock
option is exercised to purchase the number of shares of common stock equal to
the number of shares of common stock exchanged by the optionee to exercise the
stock option or to pay withholding taxes thereon. The reload stock option will
be exercisable on the same terms and conditions as apply to the original stock
option except that (x) the reload stock option will become exercisable in full
on the day which is six months after the date the original stock option is
exercised, (y) the exercise price shall be the fair value (as defined in the
1998 Incentive Plan) of the common stock on the date the reload stock option is
granted and (z) the expiration of the reload stock option will be the date of
expiration of the original stock option. As of December 31, 2006, the Company
has issued 10,876,300 stock options to executives that contain the reload
features noted above, of which 1,422,235 options are still outstanding. The 1998
Incentive Plan was amended to eliminate the reload feature for all stock options
granted on or after October 1, 2004.
WARRANTS: In connection with its acquisition of Anthrogenesis, the Company
assumed the Anthrogenesis warrants outstanding, which were converted into
warrants to purchase 867,356 shares of the Company's common stock. Anthrogenesis
had issued warrants to investors at exercise prices equivalent to the per share
price of their investment. As of December 31, 2006, Celgene had 378,652 warrants
outstanding to acquire an equivalent number of shares of Celgene common stock at
a weighted average exercise price of $2.94 per warrant. The number of warrants
exercised in 2006, 2005 and 2004 were 26,044, 19,388, and 153,144, respectively.
These warrants expire on various dates from 2008 to 2012.
(14) EMPLOYEE BENEFIT PLANS
The Company sponsors an investment savings plan, which qualifies under Section
401(k) of the Internal Revenue Code, as amended. The Company's contributions to
the savings plan are discretionary and have historically been made in the form
of the Company's common stock. Such contributions are based on
F-27
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
specified percentages of employee contributions and aggregated a total expense
charged to operations of $8.2 million in 2006, $6.5 million in 2005 and $3.5
million in 2004.
During 2000, the Company's Board of Directors approved a deferred compensation
plan effective September 1, 2000. In February, 2005, the Company's Board of
Directors adopted the Celgene Corporation 2005 Deferred Compensation Plan,
effective as of January 1, 2005, which operates as the Company's ongoing
deferred compensation plan and which is intended to comply with the American
Jobs Creation Act of 2004, which added new Section 409A to the Internal Revenue
Code, changing the income tax treatment, design and administration of certain
plans that provide for the deferral of compensation. The Company's Board of
Directors also froze the 2000 deferred compensation plan, effective as of
December 31, 2004, so that no additional contributions or deferrals can be made
to that plan. Accrued benefits under the frozen plan will continue to be
governed by the terms under the tax laws in effect prior to the enactment of
Section 409A. Eligible participants, which include certain top-level executives
of the Company as specified by the plan, can elect to defer up to 25% of the
participant's base salary, 100% of cash bonuses and restricted stock and stock
options gains (both subject to a minimum deferral of 50% of each award of
restricted stock or stock option gain approved by the Compensation Committee for
deferral). Company contributions to the deferred compensation plan represent a
100% match of the participant's deferral up to a specified percentage (ranging
from 10% to 25%, depending on the employee's position as specified in the plan)
of the participant's base salary. The Company recorded expense of $0.5 million,
$0.4 million and $0.8 million associated with the matching of the deferral of
compensation in 2006, 2005 and 2004, respectively. All amounts are 100% vested
at all times, except with respect to restricted stock, which will not be vested
until the date the applicable restrictions lapse. At December 31, 2006 and 2005,
the Company had a deferred compensation liability included in other non-current
liabilities in the consolidated balance sheets of approximately $15.5 million
and $11.2 million, respectively, which included the participant's elected
deferral of salaries and bonuses, the Company's matching contribution and
earnings on deferred amounts as of that date. The plan provides various
alternatives for the measurement of earnings on the amounts participants defer
under the plan. The measuring alternatives are based on returns of a variety of
funds that offer plan participants the option to spread their risk across a
diverse group of investments.
The Company has established a Long-Term Incentive Plan, or LTIP designed to
provide key officers and executives with performance based incentive
opportunities contingent upon achievement of pre-established corporate
performance objectives covering a three-year period. The Company currently has
three 3-year performance cycles running concurrently ending December 31, 2007,
2008 and 2009. The 2007 performance cycle was approved by the Management
Compensation and Development Committee of the Board of Directors on February 2,
2007 and began on January 1, 2007 and will end on December 31, 2009. Performance
measures for the Plans are based on the following components in the last year of
the 3-year cycle: 25% on earnings per share, 25% on net income and 50% on
revenue.
Payouts may be in the range of 0% to 200% of the participant's salary for the
2007, 2008 and 2009 Plans. The estimated payout for the concluded 2006 Plan is
$4.5 million, which is included in other current liabilities at December 31,
2006, and the maximum potential payout, assuming objectives are achieved at the
200% level for the 2007, 2008 and 2009 Plans are $6.2 million, $6.4 million and
$7.7 million, respectively. Such awards are payable in cash or, at its
discretion, the Company can elect to pay the same value in its common stock
based upon the Company's stock price at the payout date. The Company accrues the
long-term incentive liability over each three-year cycle. Prior to the end of a
three-year cycle, the accrual is based on an estimate of the Company's level of
achievement during the cycle. Upon a change in control, participants will be
entitled to an immediate payment equal to their target award, or, if higher, an
award based on actual performance through the date of the change in control. For
the years ended December 31, 2006, 2005 and 2004, the Company recognized expense
related to the LTIP of $4.6 million, $4.4 million and $3.4 million,
respectively.
F-28
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(15) SPONSORED RESEARCH, LICENSE AND OTHER AGREEMENTS
PHARMION: In November 2001, the Company licensed to Pharmion Corporation
exclusive rights relating to the development and commercial use of its
intellectual property covering thalidomide and S.T.E.P.S(R). Under the terms of
the agreement, the Company receives a royalty of 8% of Pharmion's net
thalidomide sales in countries where Pharmion has received regulatory approval
and a S.T.E.P.S(R) license fee of 8% in all other licensed territories. In
December 2004, following the Company's acquisition of Penn T Limited, the
Company entered into an amended thalidomide supply agreement with Pharmion
whereby, in exchange for a reduction in Pharmion's purchase price of thalidomide
to 15.5% of its net sales of thalidomide, the Company received a one-time
payment of 39.6 million British pounds sterling, or U.S. dollar equivalency of
$77.0 million. Under the December 2004 agreement, as amended, the Company also
received a one-time payment of $3.0 million in return for granting license
rights to Pharmion to develop and market thalidomide in additional territories
and eliminating certain of its license termination rights. Under a separate
letter agreement simultaneously entered into by the parties, Pharmion has also
agreed to provide the Company with an aggregate $8.0 million over a three-year
period commencing January 1, 2005 and ending December 31, 2007 to support the
two companies' existing thalidomide research and development efforts.
Pursuant to EITF 00-21, the Company has determined that the agreements
constitute a single unit of accounting and pursuant to SAB No. 104, the Company
has recorded the payments received as deferred revenue and is amortizing such
payments on a straight-line basis over an estimated useful life of 13 years,
which is the estimated life of the supply agreement. The remaining payments to
be received under the thalidomide research and development letter agreement is
approximately $2.7 million at December 31, 2006 and will be recorded as deferred
revenue in 2007 as such payments are received and amortized over the remaining
useful life of the supply agreement.
NOVARTIS PHARMA AG: In April 2000, the Company entered into an agreement with
Novartis in which it granted to Novartis an exclusive worldwide license
(excluding Canada) to develop and market FOCALIN(TM) (d-methylphenidate, or d-
MPH) and FOCALIN XR(TM), the long-acting drug formulation. The Company has
retained the exclusive commercial rights to FOCALIN(TM) and FOCALIN XR(TM) for
oncology-related disorders, such as chronic fatigue associated with
chemotherapy. The Company also granted Novartis rights to all of its related
intellectual property and patents, including new formulations of the currently
marketed RITALIN(R). Under the agreement, the Company has received upfront and
regulatory achievement milestone payments totaling $55.0 million and is
entitled to additional payments upon attainment of certain other milestone
events. The Company also sells FOCALIN(TM) to Novartis as well as receive
royalties on sales of all of Novartis' FOCALIN XR(TM) and RITALIN(R) family of
ADHD-related products. The research portion of the agreement ended in June 2003.
(16) INCOME TAXES
The income tax provision is based on income before income taxes as follows:
-------------------------------------------------------------------
2006 2005 2004
-------------------------------------------------------------------
U.S $ 252,001 $ 135,048 $ 244,034
Non-U.S (49,106) (50,836) (180,863)
-------------------------------------------------------------------
Income before income taxes $ 202,895 $ 84,212 $ 63,171
===================================================================
F-29
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
The provision/(benefit) for taxes on income from continuing operations is as
follows:
-------------------------------------------------------------------------
2006 2005 2004
-------------------------------------------------------------------------
United States:
Taxes currently payable:
Federal $ 160,553 $ 11,538 $ 6,429
State and local 27,681 8,609 4,067
Deferred income taxes (54,456) (3,430) --
-------------------------------------------------------------------------
Total U.S. tax provision 133,778 16,717 10,496
-------------------------------------------------------------------------
International:
Taxes currently payable 1,171 4,926 23,486
Deferred income taxes (1,035) (1,087) (23,567)
-------------------------------------------------------------------------
Total international tax provision 136 3,839 (81)
-------------------------------------------------------------------------
Total provision $ 133,914 $ 20,556 $ 10,415
=========================================================================
Amounts are reflected in the preceding tables based on the location of the
taxing authorities. As of December 31, 2006, we have not made a U.S. tax
provision on certain unremitted earnings of our international subsidiaries.
These earnings are expected to be reinvested overseas indefinitely. It is not
practicable to compute the estimated deferred tax liability on these earnings.
The Company operates under an incentive tax holiday in Switzerland that expires
in 2015 and exempts the Company from certain Swiss income taxes.
Deferred taxes arise because of different treatment between financial statement
accounting and tax accounting, known as "temporary differences." The company
records the tax effect on these temporary differences as "deferred tax assets"
(generally items that can be used as a tax deduction or credit in future
periods) or "deferred tax liabilities" (generally items for which the company
received a tax deduction but that have not yet been recorded in the consolidated
statement of operations). The Company periodically evaluates the likelihood of
the realization of deferred tax assets, and reduces the carrying amount of these
deferred tax assets by a valuation allowance to the extent it believes a portion
will not be realized. The Company considers many factors when assessing the
likelihood of future realization of deferred tax assets, including its recent
cumulative earnings experience by taxing jurisdiction, expectations of future
taxable income, the carryforward periods available to it for tax reporting
purposes, tax planning strategies and other relevant factors. Significant
judgment is required in making this assessment. At December 31, 2006 and 2005
the tax effects of temporary differences that give rise to deferred tax assets
and liabilities were as follows:
F-30
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
-----------------------------------------------------------------------------------------------------------------
2006 2005
-----------------------------------------------------------------------------------------------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
Federal and state net operating loss carryforwards $ 72,167 $ -- $ 84,161 $ --
Prepaid/deferred items 22,987 -- 30,016 --
Deferred Revenue 22,253 -- 19,533 --
Capitalized research expenses 18,167 -- 6,861 --
Research and experimentation tax credit carryforwards 28,979 -- 19,770 --
Non-qualified stock options 23,447 -- -- --
Plant and equipment, primarily differences in depreciation 1,284 -- 618 (295)
Inventory 2,685 -- 1,607 --
Other Assets -- (216) -- (348)
Intangibles 2,533 (28,850) 7,910 (27,786)
Accrued and other expenses 41,323 -- 13,516 --
Unrealized gains on securities -- (10,924) -- (848)
---------------------------------------------------
Subtotal 235,825 (39,990) 183,992 (29,277)
Valuation allowance (18,999) -- (10,396) --
---------------------------------------------------
Total Deferred Taxes 216,826 (39,990) $ 173,596 $ (29,277)
Net Deferred Tax Asset $ 176,836 -- $ 144,319 $ --
=================================================================================================================
At December 31, 2006 and 2005, deferred tax assets and liabilities were
classified on our balance sheet as follows:
-------------------------------------------------------------------
2006 2005
-------------------------------------------------------------------
Current assets $ 87,979 $ 113,059
Other assets (non-current) 101,048 42,936
Other non-current liabilities (12,191) (11,676)
-------------------------------------------------------------------
Net deferred tax asset $ 176,836 $ 144,319
===================================================================
Reconciliation of the U.S. statutory income tax rate to our effective tax rate
for continuing operations is as follows:
------------------------------------------------------------------------
PERCENTAGES 2006 2005 2004
------------------------------------------------------------------------
US statutory rate 35.0% 35.0% 35.0%
Foreign losses without tax benefit 16.6 27.2 50.5
State taxes, net of federal benefit 9.7 9.6 4.3
Other 4.5 3.2 1.7
Change in valuation allowance 0.2 (50.6) (75.0)
------------------------------------------------------------------------
Effective income tax rate 66.0% 24.4% 16.5%
========================================================================
At December 31, 2006, the Company had federal net operating loss carryforwards
of approximately $401.8 million and combined state net operating loss
carryforwards of approximately $ 387.5 million that will expire in the years
2007 through 2026. Under SFAS 123R, excess tax benefits related to stock option
deductions incurred after December 31, 2005, are recognized in the period in
which the tax deduction is realized through a reduction of income taxes payable.
As a result, the Company has not recorded deferred tax assets for certain stock
option deductions included in its net operating loss carryforwards. At December
31, 2006, stock option deductions included in the federal net operating loss
carryforwards for which no deferred tax assets have been recorded were
approximately $226.1 million and stock option deductions included in the
combined state net operating loss carryforwards for which no deferred tax assets
have been recorded were approximately $209.3 million. The excess tax benefit of
these stock option deductions will be recorded as an
F-31
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
increase in additional paid-in capital when realized. The Company also has
research and experimentation credit carryforwards of approximately $29.0 million
that expire in the years 2007 through 2026.
At March 31, 2005, the Company determined it was more likely than not that
certain benefits of its deferred tax assets would be realized based on favorable
clinical data related to REVLIMID(R) (Lenalidomide) during the quarter in
concert with the Company's nine consecutive quarters of profitability. This led
to the conclusion that it was more likely than not that the Company will
generate sufficient taxable income to realize the benefits of its deferred tax
assets. As a result of eliminating the related valuation allowances, the Company
recorded an income tax benefit in 2005 of $42.6 million and an increase to
additional paid-in capital of $30.2 million. At December 31, 2006, it was more
likely than not that the Company would realize its deferred tax assets, net of
valuation allowances.
The Company realized stock option deduction benefits in 2006 and 2005 for income
tax purposes and has increased additional paid-in capital in the amount of
approximately $114.0 million and $103.6 million, respectively. The Company has
recorded deferred income taxes as a component of accumulated other comprehensive
income resulting in deferred income tax liabilities at December 31, 2006 and
2005 of $10.9 million and $0.9 million, respectively.
The Company's income tax returns are routinely audited by the Internal Revenue
Service and various state and foreign authorities. Significant disputes may
arise with these tax authorities involving issues of the timing and amount of
deductions and allocations of income among various tax jurisdictions because of
differing interpretations of tax laws and regulations. The Company periodically
evaluates its exposures associated with tax filing positions. While the Company
believes its positions comply with applicable laws, it records liabilities based
upon estimates of outcomes of these matters.
(17) COMMITMENTS AND CONTINGENCIES
LEASES: The Company leases office and research facilities under various
operating lease agreements in the United States, Europe, Japan and Australia. At
December 31, 2006, the non-cancelable lease terms for the operating leases
expire at various dates between 2007 and 2015 and include renewal options. In
general, the Company is also required to reimburse the lessors for real estate
taxes, insurance, utilities, maintenance and other operating costs associated
with the leases.
Future minimum lease payments under noncancelable operating leases as of
December 31, 2006 are:
Operating
Leases
---------
2007 $ 5,836
2008 5,212
2009 4,891
2010 4,455
2011 4,222
Thereafter 5,311
---------
Total minimum lease payments $ 29,927
=======================================================
Total facilities rental expense under operating leases was approximately $5.0
million in 2006, $4.5 million in 2005 and $4.3 million in 2004.
In October 2006, the Company invested $1.4 million in Burrill Life Sciences
Capital Fund III, or the Fund, for an 8.6% ownership interest. Pursuant to
Emerging Issues Task Force Topic No. D-46, "Accounting for
F-32
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
Limited Partnership Investments," the Company is accounting for this investment
under the equity method of accounting. As prescribed by the equity method of
accounting, the Company records its share of the Fund's investment gains, losses
and expenses based on the percentage of its investment balance to the total Fund
balance. The Company has committed to invest an additional $18.6 million into
the Fund which is callable any time over the next ten-years. The Fund will
invest in start-up companies conducting business in life sciences such as
biotechnology, pharmaceuticals, medical technology, devices, diagnostics plus
health and wellness. In 2006, the Company recorded equity losses of $0.3 million
for its share of the Fund's expenses and at December 31, 2006, the Company's net
investment was $1.1 million.
In connection with the acquisition of Penn T, the Company entered into a
five-year minimum period Technical Services Agreement with Penn Pharmaceutical
Services Limited, or PPSL, and Penn Pharmaceutical Holding Limited under which
PPSL provides the services and facilities necessary for the manufacture of
THALOMID(R) and other thalidomide formulations. At December 31, 2006, the
remaining cost to be incurred was approximately $6.7 million through October
2009.
In March 2003, the Company entered into a supply and distribution agreement with
GlaxoSmithKline to distribute, promote and sell ALKERAN(R) (melphalan), a
therapy approved by the FDA for the palliative treatment of multiple myeloma and
carcinoma of the ovary. Under the terms of the agreement, we purchase ALKERAN(R)
tablets and ALKERAN(R) for infusion from GSK and distribute the products in the
United States under the Celgene label. The agreement requires us to purchase
certain minimum quantities each year under a take-or-pay arrangement. The
agreement has been extended through March 31, 2009. On December 31, 2006, the
remaining minimum purchase requirements under the agreement totaled $67.3
million, consisting of the following subsequent extensions:
o January 1, 2007 - December 31, 2007 $ 29,050
o January 1, 2008 - December 31, 2008 30,525
o January 1, 2009 - March 31, 2009 7,725
--------
$ 67,300
--------
CONTINGENCIES: The Company believes it maintains insurance coverage adequate for
its current needs. The Company's operations are subject to environmental laws
and regulations, which impose limitations on the discharge of pollutants into
the air and water and establish standards for the treatment, storage and
disposal of solid and hazardous wastes. The Company reviews the effects of such
laws and regulations on its operations and modifies its operations as
appropriate. The Company believes it is in substantial compliance with all
applicable environmental laws and regulations.
FDA regulatory exclusivity for thalidomide has expired so that generic drug
companies can file an ANDA to seek approval to market thalidomide in the United
States. Barr Laboratories, Inc., a generic drug manufacturer located in Pomona,
New York, filed an ANDA for the treatment of ENL in the manner described in the
Company's label and seeking permission from the FDA to market a generic version
of 50mg, 100mg and 200mg THALOMID(R). Under the federal Hatch-Waxman Act of
1984, any generic manufacturer may file an ANDA with a certification (a
"Paragraph IV certification") challenging the validity or infringement of a
patent listed in the FDA's APPROVED DRUG PRODUCTS WITH THERAPEUTIC EQUIVALENCE
EVALUATIONS (the "Orange Book") four years after the pioneer company obtains
approval of its New Drug Application, or an NDA. On or after December 5, 2006,
Barr mailed notices of Paragraph IV certifications alleging that the following
patents listed for THALOMID(R) in the Orange Book are invalid, unenforceable,
and/or not infringed: U.S. Patent Nos. 6,045,501 ("the '501 patent"), 6,315,720
("the '720 patent"), 6,561,976 ("the '976 patent"), 6,561,977 ("the '977
patent"), 6,755,784 ("the '784 patent"), 6,869,399 ("the '399 patent"),
6,908,432 ("the '432 patent"), and 7,141,018 ("the `018 patent"). The '501,
'976, and '432 patents do not expire until August 28, 2018, while the remaining
patents do not expire until October 23, 2020. On January 18, 2007, the Company
filed an infringement action in the United States District Court of New Jersey
against Barr. The Company intends to vigorously enforce its rights under these
patents. If the
F-33
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
ANDA is approved by the FDA, and Barr is successful in challenging the Company's
patents listed in the Orange Book for THALOMID(R), Barr would be permitted to
sell a generic thalidomide product.
On August 19, 2004, the Company, together with its exclusive licensee Novartis,
filed an infringement action in the United States District Court of New Jersey
against Teva Pharmaceuticals USA, Inc., in response to notices of Paragraph IV
certifications made by Teva in connection with the filing of an ANDA for
FOCALINTM. The notification letters contend that United States Patent Nos.
5,908,850, or '850 patent, and 6,355,656, or '656 patent, were invalid. After
the suit was filed, Novartis listed another patent, United States Patent No.
6,528,530, or '530 patent, in the Orange Book in association with the
FOCALIN(TM) NDA. The original 2004 action asserted infringement of the '850
patent. Teva amended its answer during discovery to contend that the '850 patent
was not infringed by the filing of its ANDA, and that the '850 patent is not
enforceable due to an allegation of inequitable conduct. Fact discovery expired
on February 28, 2006. At about the time of the filing of the '850 patent
infringement action, reexamination proceedings for the '656 patent were
initiated in the United States Patent and Trademark Office, or U.S. PTO.
Recently, the U.S. PTO sent to the Company a Notice of Intent to Issue Ex Parte
Reexamination Certificate. On December 21, 2006, Celgene and Novartis filed an
action in the United States District Court of New Jersey against Teva for
infringement of the '656 patent. As a related case, the '656 patent infringement
action has been assigned to the same judge assigned to the '850 patent
infringement action who consolidated it with the previously pending '850 patent
infringement action. No trial date has been set for either case. The statutory
30-month stay of FDA approval of Teva's ANDA expired on January 9, 2007. If Teva
goes to market with a generic version of FOCALIN(TM) prior to trial, or
successfully defends against both patents, the Company's sales of FOCALIN(TM) to
Novartis could be significantly reduced. The '530 patent is not part of the
patent infringement action against Teva. The proceeding does not involve an ANDA
for FOCALIN XR(TM).
On December 4, 2006, the Company, together with its exclusive licensee Novartis,
filed an infringement action in the United States District Court for the
District of New Jersey against Abrika Pharmaceuticals, Inc. and Abrika
Pharmaceuticals, LLP, in response to a notice of a Paragraph IV certification
made by Abrika Pharmaceuticals, Inc. in connection with the filing of an ANDA
for RITALIN LA(TM). The notification letter contends that claims in United
States Patent Nos. 5,837,284 and 6,635,284 are invalid and are not infringed by
the proposed Abrika products. On December 6, 2006, the Company and Novartis
filed a second identical action in the United States District Court for the
District of Delaware as a protective suit and intended to serve the complaint
and summons only in the event that personal jurisdiction in New Jersey was
successfully challenged by Abrika. Abrika filed an answer and counterclaim in
the Delaware court on December 8, 2006. The counterclaim seeks a declaratory
judgment of patent invalidity, noninfringement and unenforceability. The Company
and Novartis have moved the Delaware court to strike Abrika's answer and
counterclaim without prejudice to refiling if the complaint is later served, or
to stay the action pending a determination of personal jurisdiction in the New
Jersey court. The motion is fully briefed and awaiting a decision by the court.
Abrika has moved to dismiss the New Jersey action or to transfer it to the
Delaware court. The Company and Novartis have been granted leave to take
discovery from Abrika prior to filing an opposition brief. The motion is
scheduled to be fully briefed by March 26, 2007. Neither the Delaware court nor
the New Jersey court has set a date for trial. If the Company is unsuccessful in
defending its patents by a Court of final decision, Novartis' sales of RITALIN
LA(TM) could be significantly reduced in the United States by the entrance of a
generic RITALIN LA(TM) product, consequently reducing our revenue from royalties
associated with these sales.
F-34
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
(18) GEOGRAPHIC AND PRODUCT INFORMATION
OPERATIONS BY GEOGRAPHIC AREA: Revenues outside of North America consist
primarily of sales of THALOMID(R) and REVLIMID(R) in France, the United Kingdom
and Switzerland in addition to royalties from Novartis on their international
sales of RITALIN(R) LA.
-----------------------------------------------------------------
REVENUES 2006 2005 2004
-----------------------------------------------------------------
United States $845,418 $510,198 $368,628
Europe 42,970 16,321 2,816
All Other 10,485 10,422 6,058
-----------------------------------------------------------------
Total Revenues $898,873 $536,941 $377,502
=================================================================
---------------------------------------------------
LONG LIVED ASSETS(1) 2006 2005
---------------------------------------------------
United States $ 78,262 $ 73,340
Europe 207,349 134,940
All Other 37 --
---------------------------------------------------
Total Long Lived Assets $285,648 $208,280
===================================================
(1) Long-lived assets consist of net property, plant and equipment,
intangible assets and goodwill.
REVENUES BY PRODUCT: Total revenue from external customers by product for the
years ended December 31, 2006, 2005 and 2004, were as follows:
--------------------------------------------------------------------
2006 2005 2004
--------------------------------------------------------------------
REVLIMID(R) $320,558 $ 2,862 $ --
THALOMID(R) 432,950 387,816 308,577
ALKERAN(R) 50,337 49,748 16,956
FOCALIN(TM) 7,340 4,210 4,177
Other 420 989 861
--------------------------------------------------------------------
Total net product sales $811,605 $445,625 $330,571
Collaborative agreements
and other revenue 18,189 41,334 20,012
Royalty revenue 69,079 49,982 26,919
--------------------------------------------------------------------
Total revenue $898,873 $536,941 $377,502
====================================================================
F-35
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE INDICATED)
MAJOR CUSTOMERS: As is typical in the pharmaceutical industry, the Company sells
its products primarily through wholesale distributors and therefore, wholesale
distributors account for a large portion of the Company's net product sales. In
2006, 2005 and 2004, there were three customers that each accounted for more
than 10% of the Company's total revenue. Total net sales to each such customer
as a percent of total revenue in 2006, 2005 and 2004 were as follows: Cardinal
Health 20.2%, 28.9% and 29.5%; McKesson Corp. 16.0%, 20.3% and 18.6%; and
Amerisource Bergen Corp. 11.9%, 14.8% and 17.9%. These same customers accounted
for the following percentages of accounts receivable for the years ended
December 31, 2006 and 2005, respectively: McKesson Corp. 20.6% and 32.8%;
Cardinal Health 23.0% and 30.0%; and Amerisource Bergen Corp. 10.5% and 13.2%.
(19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------------------------------------------------
1Q 2Q 3Q 4Q Year
-----------------------------------------------------------------------------------------------------
2006
----
Total revenue $ 181,841 $ 197,239 $ 244,839 $ 274,954 $ 898,873
Gross profit (1) 130,099 149,602 188,900 217,112 685,713
Income tax (provision) (15,042) (26,735) (41,139) (50,998) (133,914)
Net income 16,024 9,608 20,437 22,912 68,981
Net income per common share: (2)
basic $ 0.05 $ 0.03 $ 0.06 $ 0.06 $ 0.20
diluted $ 0.04 $ 0.03 $ 0.05 $ 0.06 $ 0.18
Weighted average shares:
basic 343,966 347,696 351,200 365,820 352,217
diluted 400,699 370,360 404,858 419,334 407,181
=====================================================================================================
-----------------------------------------------------------------------------------------------------
1Q 2Q 3Q 4Q Year
-----------------------------------------------------------------------------------------------------
2005
----
Total revenue $ 112,396 $ 145,701 $ 129,506 $ 149,338 $ 536,941
Gross profit (1) 85,041 87,187 90,701 101,969 364,898
Income tax benefit (provision) 34,172 (29,967) (12,975) (11,786) (20,556)
Net income 48,214 10,846 668 3,928 63,656
Net income per common share: (2)
basic $ 0.15 $ 0.03 $ -- $ 0.01 $ 0.19
diluted $ 0.13 $ 0.03 $ -- $ 0.01 $ 0.18
Weighted average shares:
basic 331,225 334,282 336,596 339,839 335,512
diluted 382,216 352,023 359,724 359,998 390,585
=====================================================================================================
(1) Gross profit is computed by subtracting cost of goods sold from net
product sales.
(2) The sum of the quarters may not equal the full year basic and diluted
earnings per share since each period is calculated separately.
F-36
CELGENE CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
-------------------------------------------------------------------------------------------------
Additions
Balance at charged to
beginning of expense or Balance at
Year ended December 31, year sales Deductions end of year
-------------------------------------------------------------------------------------------------
2006
----
Allowance for doubtful accounts $ 2,292 $ 2,169 $ 132 $ 4,329
Allowance for customer discounts 1,447 18,881(1) 18,032 2,296
---------------------------------------------------------
Subtotal 3,739 21,050 18,164 6,625
Allowance for sales returns 5,017 54,551(1) 50,088 9,480
-------------------------------------------------------------------------------------------------
Total $ 8,756 $75,601 $68,252 $16,105
=================================================================================================
2005
----
Allowance for doubtful accounts $ 1,370 $ 1,029 $ 107 $ 2,292
Allowance for customer discounts 837 10,948(1) 10,338 1,447
---------------------------------------------------------
Subtotal 2,207 11,977 10,445 3,739
Allowance for sales returns 9,600 21,256(1) 25,839 5,017
-------------------------------------------------------------------------------------------------
Total $11,807 $33,233 $36,284 $ 8,756
=================================================================================================
2004
----
Allowance for doubtful accounts $ 873 $ 867 $ 370 $ 1,370
Allowance for customer discounts 657 7,448(1) 7,268 837
---------------------------------------------------------
Subtotal 1,530 8,315 7,638 2,207
Allowance for sales returns 8,368 16,279(1) 15,047 9,600
-------------------------------------------------------------------------------------------------
Total $ 9,898 $24,594 $22,685 $11,807
=================================================================================================
(1) Amounts are a reduction from gross sales.
F-37