Amendment to Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405/A Form 10-K/405A for Cephalon, Inc. 108± 448K
2: EX-10.16(A) Toll Manufacturing and Packaging Agreement 53 168K
4: EX-10.16(C) Amend. #2 to Toll Mfg. and Packaging Agreement 2 12K
3: EX-10.16B Amend. #1 to Toll Mfg. and Packaging Agreement 2 10K
5: EX-10.17(A) Research, Development and License Agreement 64 203K
6: EX-10.17(B) Intellectual Property - Anesta 46 140K
7: EX-10.17(C) Intellectual Property - Cephalon France 32 115K
8: EX-10.18 Consulting Agreement 11 37K
9: EX-23.1 Consent of Arthur Andersen LLP 1 7K
10: EX-23.2 Consent of Pricewaterhousecoopers LLP 1 8K
11: EX-99.1 Letter Responsive to Temporary Note 3T 1 8K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-19119
Cephalon, Inc.
(Exact name of registrant as specified in its charter)
[Download Table]
Delaware 23-2484489
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
145 Brandywine Parkway, 19380-4245
West Chester, Pennsylvania (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (610) 344-0200
Securities registered pursuant to Section 12(b) of the Act:
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Title
of
each Name of each
class exchange on which registered
----- ----------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
----------------
Indicate by check mark whether the registrant (1) has filed all reports 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 the 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]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $2,749,374,321. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the Nasdaq National Market on March 20, 2002. For purposes of making this
calculation only, the registrant has defined affiliates as including all
directors, executive officers and beneficial owners of more than ten percent
of the Common Stock of the Company.
The number of shares of the registrant's Common Stock outstanding as of
March 20, 2002 was 55,018,369.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2002 annual
meeting of stockholders are incorporated by reference into Part III.
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TABLE OF CONTENTS
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PART I
ITEM 1. Business....................................................... 3
ITEM 2. Properties..................................................... 15
ITEM 3. Legal Proceedings.............................................. 15
ITEM 4. Submission of Matters to a Vote of Security Holders............ 15
PART II
Market for Registrant's Common Equity and Related Stockholder
ITEM 5. Matters........................................................ 16
ITEM 6. Selected Consolidated Financial Data........................... 17
Management's Discussion and Analysis of Financial Condition and
ITEM 7. Results of Operations.......................................... 19
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk...... 32
ITEM 8. Financial Statements and Supplementary Data.................... 33
Changes In and Disagreements with Accountants on Accounting and
ITEM 9. Financial Disclosure........................................... 55
PART III
ITEM 10. Directors and Executive Officers of the Registrant............. 56
ITEM 11. Executive Compensation......................................... 57
Security Ownership of Certain Beneficial Owners and
ITEM 12. Management..................................................... 57
ITEM 13. Certain Relationships and Related Transactions................. 57
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form 8-
ITEM 14. K.............................................................. 58
SIGNATURES............................................................... 63
2
PART I
ITEM 1. BUSINESS
In addition to historical facts or statements of current condition, this
report contains forward-looking statements. Forward-looking statements provide
our current expectations or forecasts of future events. These may include
statements regarding anticipated scientific progress in our research programs,
development of potential pharmaceutical products, prospects for regulatory
approval, manufacturing capabilities, market prospects for our products, sales
and earnings projections, and other statements regarding matters that are not
historical facts. Some of these forward-looking statements may be identified
by the use of words in the statements such as "anticipate," "estimate,"
"expect," "project," "intend," "plan," "believe" or other words and terms of
similar meaning. Our performance and financial results could differ materially
from those reflected in these forward-looking statements due to general
financial, economic, regulatory and political conditions affecting the
biotechnology and pharmaceutical industries as well as more specific risks and
uncertainties such as those set forth above and in this report. Given these
risks and uncertainties, any or all of these forward-looking statements may
prove to be incorrect. Therefore, you should not rely on any such forward-
looking statements. Furthermore, we do not intend to update publicly any
forward-looking statements, except as may be required by law. Risks that we
anticipate are discussed in more detail in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Certain Risks Related to Our Business." This discussion is permitted by the
Private Securities Litigation Reform Act of 1995.
Cephalon is an international biopharmaceutical company dedicated to the
discovery, development and marketing of products to treat sleep disorders,
neurological disorders, cancer and pain. In addition to conducting an active
research and development program, we market three products in the United
States and a number of products in various countries throughout Europe.
On December 28, 2001, we acquired Laboratoire L. Lafon and its affiliated
entities, which we refer to as Group Lafon. The Group Lafon entities operate
as subsidiaries of Cephalon.
Our corporate and research and development headquarters are in West Chester,
Pennsylvania, and we also have offices in Salt Lake City, Utah, France, the
United Kingdom, Germany and Switzerland. We operate manufacturing facilities
in France for the production of modafinil, which is the active drug substance
in our PROVIGIL(R) (modafinil) tablets [C-IV] and MODIODAL(R) (modafinil)
products, and for which we have worldwide control of the intellectual
property, marketing and manufacturing rights. We operate manufacturing
facilities in Salt Lake City, Utah for the production of ACTIQ(R) (oral
transmucosal fentanyl citrate) [C-II] for distribution and sale in the
European Union.
In the United States, we market three products, which constitute the
majority of our total net sales. Outside of the United States, our commercial
activities are concentrated in France and the United Kingdom. The following
table summarizes by country our significant products:
[Enlarge/Download Table]
Country Product Indication
------------------------ -------------------------------------------- --------------------------------------------------------
United States........... PROVIGIL(R)(modafinil) Excessive daytime sleepiness associated with narcolepsy
GABITRIL(R) (tiagabine hydrochloride) Partial seizures associated with epilepsy
ACTIQ(R) (oral transmucosal fentanyl citrate) Breakthrough cancer pain management
France.................. MODIODAL(R)(modafinil)1 Narcolepsy and hypersomnia
SPASFON(R) (phloroglucinol) Biliary/urinary tract spasm and irritable bowel syndrome
FONZYLANE(R) (buflomedil) Cerebral vascular disorders
ACTIQ/2/ Breakthrough cancer pain management
United Kingdom/3...../.. PROVIGIL Narcolepsy
TEGRETOL(R) (carbamezepine) Epilepsy
RITALIN(R) (methylphenidate) Attention Deficit/Hyperactivity Disorder
--------
1. MODIODAL is the French trade name for modafinil.
2. Expected launch in the second half of 2002.
3. Marketed, along with two other products, under a collaboration agreement
with Novartis Pharma AG.
In the United States, we market our PROVIGIL, ACTIQ and GABITRIL products
through the following specialty sales forces:
. an approximately 185-person sales force that details PROVIGIL and GABITRIL
to neurologists, psychiatrists and sleep specialists; and
. an approximately 60-person sales force that details ACTIQ to pain
specialists and oncologists.
Outside of the United States, we have a sales force in France numbering
approximately 155 persons of which 150 are associated with Group Lafon, and a
sales and marketing organization numbering approximately 25 persons supporting
other European countries.
We continue to explore the utility of PROVIGIL in patients suffering from
sleepiness and fatigue associated with various clinical disorders, including
sleep apnea, shift work sleep disorder, multiple sclerosis and depression. Our
objective in conducting these
3
studies is to expand the approved labeling for PROVIGIL and allow us to market
and promote its use in some or all of these patients. In December 2001, we
acquired additional product rights to GABITRIL and now control rights
worldwide, excluding Canada, Latin America and Japan. Following the transfer
of regulatory approvals, we will begin marketing GABITRIL in France, the
United Kingdom, Germany, Austria and Switzerland. We have initiated a series
of exploratory studies to assess the use of GABITRIL for disorders such as
anxiety and neuropathic pain.
In addition to clinical programs focused on our marketed products, we have
other significant research programs that seek to discover and develop
treatments for neurological and oncological disorders. With respect to
neurology, we have a program with a molecule, CEP-1347, that has entered Phase
2 clinical studies for the treatment of Parkinson's disease. In the cancer
area, we have a program with a lead molecule, CEP-701, which is currently in
Phase 2 clinical studies to treat pancreatic cancer, and a program with a
molecule, CEP-7055, that is currently in Phase 1 clinical studies for the
treatment of solid tumors. As part of our corporate strategy, we seek to share
the risk of our research and development activities with corporate partners
and, to that end, we have entered into a number of agreements to share the
costs of developing and commercializing these compounds.
For the year ended December 31, 2001, our total revenues and loss applicable
to common shares were approximately $266.6 million and $61.1 million,
respectively. The third quarter of 2001 was our first profitable quarter from
commercial operations since inception. Our accumulated deficit at December 31,
2001 was approximately $576.7 million. These accumulated losses have resulted
principally from costs incurred in research and development, including
clinical trials, and from selling, general and administrative costs associated
with our operations. To date, we have funded our operations from the proceeds
of private and public sales of our equity and debt securities. While we seek
to maintain and increase profitability and positive cash flow from commercial
operations, we will need to continue to achieve product sales and other
revenue sufficient for us to attain this objective. Moreover, our continued
profitability may depend, in part, upon our ability to obtain additional
required regulatory approvals, or successfully develop, commercialize,
manufacture and market any other product candidates.
U.S. COMMERCIAL OPERATIONS
In the United States, we market PROVIGIL, ACTIQ and GABITRIL. For the year
ended December 31, 2001, the U.S. revenues from these products accounted for
approximately 98% of our total product sales revenues. Details of our U.S.
product revenues for these three products are as follows:
[Download Table]
Year Ended
December 31, 2001
-----------------
PROVIGIL................................................ $146,282,000
ACTIQ................................................... 50,162,000
GABITRIL................................................ 24,630,000
------------
Total U.S. product sales................................ $221,074,000
============
PROVIGIL
The FDA approved PROVIGIL for the treatment of excessive daytime sleepiness
associated with narcolepsy in December 1998 and we launched the product in the
United States in February 1999. PROVIGIL currently is supported by a dedicated
U.S. sales force of approximately 185 persons. In December 2000, we acquired
worldwide product rights to PROVIGIL through the acquisition of Group Lafon
for approximately $450 million in cash. Through this transaction, we also
acquired certain manufacturing facilities in France where modafinil, the
active drug substance in PROVIGIL, is produced.
Narcolepsy
Narcolepsy is a debilitating, lifelong disorder whose symptoms often first
arise in late childhood. Its most notable symptom is an uncontrollable
propensity to fall asleep during the day. There is no cure for narcolepsy,
which is estimated to affect about 200,000 people in the United States.
Estimates indicate that only 35% of this population is currently diagnosed.
PROVIGIL has been recognized by the American Academy of Sleep Medicine as a
standard for the treatment of excessive daytime sleepiness associated with
narcolepsy.
Before we received FDA approval to market PROVIGIL, we conducted two Phase
3, double-blind, placebo-controlled, nine-week multi-center studies of
PROVIGIL with more than 550 patients who met the American Sleep Disorders
Association criteria for narcolepsy. Both studies demonstrated improvement in
objective and subjective measures of excessive daytime sleepiness compared to
placebo. PROVIGIL was found to be generally well tolerated, with a low
incidence of adverse events relative to placebo. The most commonly observed
adverse events were headache, infection, nausea, nervousness, anxiety and
insomnia.
Market expansion strategies
Due to both the efficacy of PROVIGIL in reducing excessive daytime
sleepiness associated with narcolepsy and the results of completed clinical
trials, we believe that PROVIGIL may be useful in treating sleepiness and
fatigue in disorders other than narcolepsy. The main focus of our ongoing
clinical program is to further explore the potential use of PROVIGIL in
treating excessive sleepiness that may be caused by a variety of clinical
conditions. We have conducted exploratory studies in patients suffering from
4
other disorders that have fatigue as a significant symptom, including the
chronic fatigue often experienced by patients suffering from multiple
sclerosis. We cannot assure you that we will receive regulatory approval for
any indication beyond the current label of excessive daytime sleepiness
associated with narcolepsy. Under current FDA regulations, we cannot promote
PROVIGIL outside its approved use.
Excessive daytime sleepiness may be caused by a number of clinical
conditions in addition to narcolepsy. For example, patients who suffer from
obstructive sleep apnea often are tired during the day as a result of
disturbed nighttime sleep. In addition, many people have work schedules that
conflict with their normal circadian rhythm. Nightshift workers or people
experiencing jet lag often are tired and suffer from impaired performance,
even if they sleep a normal amount of time. Finally, excessive sleepiness is a
significant side effect of many medications that are prescribed for pain or a
variety of conditions such as Parkinson's disease. According to the National
Sleep Foundation, approximately 40 million Americans suffer from excessive
sleepiness. Clinical studies that have been conducted in patients suffering
from obstructive sleep apnea, Parkinson's disease and sleep deprivation, as
well as in shift workers, have shown that PROVIGIL may be useful in
alleviating the excessive sleepiness in these patients. We are conducting
additional clinical studies, specifically in patients suffering from
obstructive sleep apnea and from shift work sleep disorder. The intent is to
file a supplemental new drug application with the FDA that, if approved, may
expand the approved uses of PROVIGIL to include all patients suffering from
excessive daytime sleepiness resulting from clinical conditions. However, we
cannot assure you that the studies we are conducting will have a positive
outcome or that the FDA will grant any request to expand the approved use of
PROVIGIL.
We are also interested in exploring the utility of PROVIGIL in other areas,
especially fatigue associated with multiple sclerosis and certain psychiatric
disorders. A placebo-controlled study was completed in patients suffering from
fatigue associated with multiple sclerosis which showed that 200 mg of
PROVIGIL reduced fatigue in those patients. This reduction was statistically
significant as measured by several validated fatigue rating scales. The most
commonly reported side effects in this study potentially attributable to the
drug were nausea, dry mouth, headache and diarrhea. Approximately 80% of the
250,000-350,000 people diagnosed with multiple sclerosis experience fatigue
caused either by their disease or the therapeutics used to treat it. In many
multiple sclerosis patients, fatigue may be the most prominent and disabling
symptom. During 2002, we expect to conduct a number of pilot studies to
examine whether PROVIGIL is useful in the treatment of other clinical
conditions where the symptoms of excessive sleepiness and fatigue are present.
However, these studies have not been designed and alone will not be sufficient
to permit the expansion of the label to include any such indications.
ACTIQ
The FDA approved ACTIQ in November 1998 for the management of breakthrough
cancer pain in opioid tolerant patients and ACTIQ was launched in the United
States in March 1999 by Abbott Laboratories. In March 2000, Abbott
relinquished the U.S. marketing rights to the product to Anesta Corp. We
acquired Anesta Corp in October 2000, and in February 2001, we relaunched the
product, which is now supported by a dedicated sales force of approximately 60
persons who are responsible for detailing ACTIQ to pain specialists and
oncologists in the United States. Abbott continues to manufacture ACTIQ for
distribution in the United States while we manufacture ACTIQ for markets
outside the United States.
ACTIQ uses our proprietary oral transmucosal delivery system (OTS(TM)) to
deliver fentanyl citrate, a powerful, Schedule II opioid analgesic. Our OTS
consists of a drug matrix that is mounted on a handle. The OTS is designed to
achieve rapid absorption of certain potent drugs through the oral mucosa(the
lining of the mouth) and into the bloodstream, producing rapid onset of the
desired therapeutic effect. OTS allows the caregiver or patient to monitor the
onset of pain relief and to remove the unit and stop administration of the
drug once the desired therapeutic effect has been achieved or if side effects
appear.
Breakthrough Cancer Pain
One of the most challenging components of cancer pain is breakthrough pain.
Breakthrough pain is a sporadic flare of severe pain that "breaks through" the
medication patients use to control their chronic pain. Breakthrough pain may
be related to a specific activity, or may occur spontaneously and
unpredictably. Breakthrough cancer pain typically develops rapidly and often
reaches maximum intensity in three to ten minutes. It has a duration that
varies from 30 minutes to several hours and can be extremely painful and
debilitating. We believe that approximately 800,000 patients, or more than
half of all cancer patients in the United States who experience moderate to
severe pain, suffer from breakthrough pain.
Cancer patients who suffer from breakthrough pain may suffer one to four
episodes every day. Opioid tablets, capsules and elixirs are not optimal to
treat breakthrough cancer pain because they typically require 30 minutes or
more to produce pain relief. Physicians can attempt to manage breakthrough
pain by increasing the dose of the around-the-clock, long-acting opioid
analgesic until the patient no longer experiences breakthrough pain. However,
this approach frequently leads to over-medication and an increase in
undesirable side effects such as drowsiness or severe constipation. With
ACTIQ, the fentanyl citrate is released for rapid absorption through the
mucosal tissues into the blood stream and slower, more prolonged absorption
through the gastro-intestinal tract; pain relief may begin in 15 minutes with
maximum effect occurring in 45 minutes in some patients.
We market ACTIQ under a comprehensive risk management program of educational
and safe use messages that inform health care professionals, patients and
their families of proper use, storage, handling and disposal of the product.
The greatest risk of improper use of ACTIQ is the potential for respiratory
depression, which can be life threatening.
5
Other than ACTIQ, the only currently available treatments that adequately
match the rapid onset of pain relief to the rapid onset of breakthrough cancer
pain are intravenous or subcutaneous infusions or intramuscular injections of
potent opioids. In many settings, infusions or injections are unacceptable
because they are invasive, uncomfortable, inconvenient for patients and
caregivers, and more costly than less invasive methods.
Market expansion strategies
As discussed above, ACTIQ is indicated only for the management of
breakthrough cancer pain in opioid tolerant patients. However, we believe that
it may be effective in the management of breakthrough and other severe pain
associated with other illnesses and conditions, and we are exploring
regulatory requirements to expand the label to cover such uses.
GABITRIL
The FDA approved GABITRIL in September 1997 for the treatment of partial
seizures associated with epilepsy and it was launched in the United States in
1998 by Abbott Laboratories. In late 2000, we acquired all U.S. rights to
GABITRIL from Abbott in exchange for payments totaling $100 million over five
years. We also will make an additional payment to Abbott of up to $10 million
if Abbott obtains an extension of the composition patent covering the active
drug substance contained in GABITRIL beyond its current 2008 expiration date.
The product is currently supported by a 185-person sales force that also
promotes PROVIGIL. In December 2001, we acquired product rights to GABITRIL
worldwide, excluding Canada, Latin America and Japan, from Sanofi-Synthelabo
and the product inventor, Novo Nordisk A/S.
GABITRIL is a selective GABA reuptake inhibitor that is used as adjunctive
therapy in the treatment of partial seizures in epileptic patients. GABA
(gamma-amino butyric acid) is an important inhibitory transmitter in the
central nervous system and is widely distributed in all regions of the brain.
A GABA reuptake inhibitor increases the amount of available GABA in the body,
which can be useful in treating conditions associated with abnormal GABA
levels. The pharmaceutical market for the treatment of epileptic patients
generally is well servedwith a number of available therapeutics, several of
which are new entrants to the market. Growth of pharmaceutical products in
this market tends to be slow both because of the number of therapies available
and also because physicians are unlikely to change the medication of a patient
whose condition is well controlled.
Epilepsy
Epilepsy is a chronic disorder characterized by seizures that cause sudden,
involuntary, time limited alteration in behavior including changes in motor
activities, autonomic functions, consciousness, or sensations, and accompanied
by an abnormal electrical discharge in the brain. A partial seizure arises
from a disorder emanating from a distinct, identifiable region of the brain
and produces a given set of symptoms depending on the area of onset. A general
seizure arises from a general dysfunction of biochemical mechanisms throughout
the brain and may produce different types of convulsions. Epilepsy usually
begins in early childhood, but can appear at any time during an individual's
lifespan. It is estimated that more than 2 million Americans suffer from
epilepsy, of which approximately 1.4 million are treated by physicians.
Market expansion strategies
We intend to conduct pilot clinical studies with GABITRIL in several neuro-
psychological conditions, including anxiety, social phobia, panic disorder,
post traumatic stress disorder, bipolar with co-morbid anxiety, insomnia, and
neuropathic pain to identify whether GABITRIL could have a role in treating
these disorders. Based upon the known mechanism of action of GABITRIL and
preclinical study results, we believe GABITRIL may show an effect in treating
these disorders. However, our studies may not demonstrate any such effect.
Furthermore, the pilot studies that we are conducting are insufficient for us
to apply to the FDA for a broader label that would include such indications.
Based upon the results of these studies, we may decide to conduct larger
controlled studies with GABITRIL with the objective of expanding the product
label.
INTERNATIONAL COMMERCIAL OPERATIONS
In addition to our marketed products in the United States, we are engaged in
the sale and marketing of a number of products in various overseas markets. In
some of these territories we have established our own sales and marketing
groups while in others we rely upon third parties to perform these functions
on our behalf. Two transactions completed in 2001 substantially increased our
international operations. Our acquisition of Group Lafon in December 2001 has
dramatically increased our sales, marketing and manufacturing operations in
France. Our December 2001 acquisition of product rights to GABITRIL worldwide,
excluding Canada, Latin America and Japan, has added another global product to
our portfolio and we expect to begin selling GABITRIL in France, the United
Kingdom, Germany, Austria and Switzerland in 2002. For the year ended December
31, 2001, international operations accounted for approximately 2% of our total
product sales revenues, not including any product sales by Group Lafon or any
sales of GABITRIL outside the U.S.
EUROPEAN COMMERCIAL OPERATIONS
France
We obtained our principal business in France when we acquired Group Lafon in
December 2001. We currently have approximately 500 employees in France,
including a 150-person sales force that details products to hospitals, doctors
and
6
pharmacists. In addition to maintaining executive and research facilities
located outside of Paris, we operate two manufacturing facilities, a packaging
and distribution facility and various warehouses in France. We market a
variety of pharmaceutical products with the most significant being MODIODAL
(the brand name for modafinil in France) indicated for the treatment of
narcolepsy and hypersomnia; SPASFON, a pain drug approved in France for
biliary/urinary tract spasm and irritable bowel syndrome; and FONZYLANE, a
vasodilator indicated for cerebral vascular disorders. In 2001, prior to our
acquisition, Group Lafon generated approximately $98 million of pharmaceutical
sales in France.
In addition to our Group Lafon activities, we expect to launch ACTIQ in
France in 2002. We also promote and market APOKINON(R) (apomorphine
hydrochloride) to neurologists in France. APOKINON, which is injected
subcutaneously by a unique metered dose injection, is indicated for the
treatment of levadopa therapy fluctuations common in late-stage Parkinson's
disease. Cephalon obtained marketing rights to APOKINON in 1997 from
Laboratoire Aguettant S.A. We also market and sell OTRASEL(TM) (selegiline
hydrochloride) in France. OTRASEL utilizes a fast dissolving oral formulation
and is indicated for the treatment of Parkinson's disease. We obtained the
rights to OTRASEL in France in June 2000 from Elan Pharma International
Limited.
United Kingdom
In the United Kingdom, we market and sell five products under an exclusive
collaboration arrangement with Novartis Pharma AG established in November
2000. Under this agreement, we exclusively market PROVIGIL for narcolepsy,
TEGRETOL for epilepsy, RITALIN for Attention Deficit Hyperactivity Disorder,
ANAFRANIL(R) (clomipramine hydrochloride) for depression and obsessive-
compulsive disorders and LIORESAL(R) (baclofen) for spasticity. Under the 10-
year agreement, the companies will share the financial outcome generated from
sales of the Novartis products and PROVIGIL in the United Kingdom.
Germany, Austria and Switzerland
In Germany and Austria, we exclusively market and sell XILOPAR (selegiline
hydrochloride). XILOPAR utilizes a fast dissolving oral formulation, and is
indicated for the treatment of Parkinson's disease. We obtained the rights to
XILOPAR in March 2000 from Elan Pharma International Limited and launched the
product in July 2000. We paid Elan a license fee and have agreed to purchase
all of our requirements for XILOPAR from Elan. The term of this agreement runs
through July 2015.
In Austria and Switzerland, we market and promote PROVIGIL for narcolepsy
under an agreement with Merckle GmbH, a German pharmaceutical company, which
we entered into in October 1998. We receive quarterly compensation based on
sales levels achieved. The agreement with Merckle expires ten years from the
effective date unless extended by the parties.
INTERNATIONAL MARKETING COLLABORATIONS
In territories where we have not established our own sales and marketing
groups, such as Italy, Japan, Korea and Australia, among others, we have
chosen to market our products through a select group of marketing
collaborators with expertise in the development, marketing and sale of
pharmaceuticals in those territories. In each case, we have granted rights to
our collaboration partner to market, sell and distribute our products in its
respective territory, and we supply either bulk or finished product for resale
in the territory. The revenues and net income generated from these
collaborations are not significant to our results of operations at this time.
RESEARCH AND DEVELOPMENT
In addition to our development programs focused on our marketed products,
our research and development efforts focus primarily on two areas:
neurodegenerative disorders and cancers. Neurodegenerative disorders are
characterized by the death of neurons (the specialized conducting cells of the
nervous system) that results in the loss of certain functions such as memory
and motor coordination. Cancers are characterized by the uncontrolled
proliferation of cells that form tumors. Our research strategy has focused on
understanding the intracellular molecular events that underlie the processes
of cell proliferation, cell survival and cell death. We utilize our technical
expertise in molecular biology, molecular pharmacology, biochemistry, cell
biology, tumor biology and chemistry to create novel, orally active, synthetic
molecules to inhibit key targets in intracellular pathways that govern cell
proliferation, survival and death. These novel molecules are designed either
to enhance the survival of neurons in patients suffering from
neurodegenerative diseases such as Alzheimer's and Parkinson's, or facilitate
the death of cancer cells in patients suffering from cancers such as prostate,
pancreatic and other cancers involving the formation of solid tumors as well
as certain leukemias.
Neurology
A growing body of evidence, substantiated by our own research findings,
suggests that neuronal death is caused by a series of biochemical events that
are themselves precipitated by the activation of intracellular signaling
pathways. Our research, and that of others, has demonstrated that one of the
initial events involved in the cell death process is the activation of the
stress activated protein kinase pathway. Thus, we believe inhibition of this
pathway should lead to neuronal survival and result clinically in the
inhibition of the progression of neurodegenerative diseases. Utilizing
molecules we licensed from Kyowa Hakko Kogyo Co., Ltd. in 1992, and developing
our own library of small molecules combined with molecular approaches, we have
identified targets within this pathway known as mixed lineage kinases (MLK),
whose inhibition in preclinical models results in inactivation of the cell
death process. We are pursuing the development of certain potent inhibitors of
the MLK for the treatment of Parkinson's disease, as described below.
7
Parkinson's and Alzheimer's Diseases
We have discovered, in collaboration with H. Lundbeck A/S, a Danish
pharmaceutical company, several proprietary compounds that are potent MLK
inhibitors and that are also efficacious in preclinical models in preventing
neuronal death. We are developing one such MLK inhibitor, CEP-1347, for use as
a potential treatment for Parkinson's disease. Parkinson's disease is a
progressive disorder of the central nervous system affecting over one million
Americans. The primary pathology of the disease is the degeneration of the
dopamine neurons in the substantia nigra region of the brain, which results in
a slowing of spontaneous movements, gait difficulty, postural instability,
rigidity and tremor. In preclinical models of Parkinson's disease, CEP-1347
has demonstrated therapeutic potential in the treatment of this disease.
Specifically, in non-human primate models, CEP-1347 protected against loss of
dopamine neurons in the regions of the brain affected by Parkinson's disease
and prevented the appearance of the associated behavioral symptoms. We
licensed rights to develop and market CEP-1347 from Kyowa Hakko, and have
retained such rights in the United States. We entered into a collaborative
agreement with Lundbeck in 1999 to discover, develop and market in Europe
products to treat neurodegenerative disorders, such as Parkinson's and
Alzheimer's disease. This collaboration covers the development and marketing
of CEP-1347 and other proprietary small molecules that may be useful in
treating these diseases. We recently completed a Phase 1 clinical program, two
pilot Phase 2a studies and plan to initiate a large Phase 2 study later this
year in Parkinson's disease.
CEP-1347 or other small molecules from our research efforts also may be
useful in treating Alzheimer's disease. Alzheimer's disease is an intractable,
chronic, and progressively incapacitating disease characterized by the
presence of core neuritic plaques, neurofibrillary tangles and gliosis in the
brain that are associated with significant death and dysfunction of several
types of neurons. Patients afflicted with this disease become severely
demented. Alzheimer's disease afflicts an estimated 5% to 10% of the
population over the age of 65, or approximately four million Americans, with
more than 100,000 new cases diagnosed each year. The age-dependent nature of
the disorder suggests that an increasing percentage of the population may be
affected as the population ages.
Oncology
In normal tissues, cellular proliferation is balanced by cellular death and
these processes are governed in part by a class of soluble protein molecules
(growth factors) that serve as communication signals between cells. Cancer is
a disease characterized by the uncontrolled proliferation of cells, which may
be linked to inappropriate signaling from growth factors. Many of these growth
factors bind to cell surface receptors (many of which are kinases) and trigger
intracellular signals that maintain cell survival or direct the cell to
proliferate. Inhibition of these kinases provides a unique therapeutic
strategy for treating a variety of oncological disorders without the
undesirable side effects associated with traditional chemotherapeutics.
Pancreatic and Prostate Cancer
We have synthesized a class of small, orally active molecules that are
selective inhibitors of the nerve growth factor receptor tyrosine kinase
(trk). Trk may play an important role in the development and propagation of
prostate and pancreatic cancers; inhibiting trk antagonizes the "survival"
signal elicited by this receptor in such tumors. In preclinical models, we
have demonstrated that trk inhibitors prevent tumor growth in a variety of
prostate and pancreatic cancers. Our lead compound in this area, CEP-701, is
administered orally. We licensed rights to develop and market CEP-701 from
Kyowa Hakko. We have successfully completed a Phase 1 clinical program. We
have initiated a Phase 1/2 study in pancreatic cancer in combination with
gemcitabine, a chemotherapeutic agent. Pancreatic cancer results in
approximately 35,000 deaths in men and women each year in the United States.
We completed a Phase 2 clinical trial in prostate cancer where CEP-701
appeared to confer clinical benefit in some patients, though certain side
effects and a higher than anticipated drop out rate resulted in early
termination of the study. We are continuing to evaluate the results of this
study to determine if further prostate cancer studies are warranted with CEP-
701. We had previously been developing CEP-701 for prostate cancer in the
United States with Takeda Abbott Pharmaceuticals. As of March 31, 2001, we
ended our collaboration with TAP, and all rights to develop and market CEP-701
in the United States have reverted to us. In Europe and certain other
territories outside the United States, we had been developing CEP-701 for
prostate cancer with Schwartz Pharma AG, a German pharmaceutical company. We
agreed to end our collaboration with Schwarz Pharma as of June 30, 2001 and
all rights to develop and market CEP-701 have reverted to us. Prostate cancer
is the most common form of cancer in men, affecting approximately one million
men in the United States, and is the second leading cause of cancer death in
men.
Leukemia
Our scientists recently discovered that CEP-701, in addition to its other
activity, is also a potent inhibitor of the flt-3 kinase. Flt-3 kinase has
been shown to be mutated in certain patients suffering from acute myelogenous
leukemia (AML). Thus, inhibition of this kinase may lead to a novel treatment
for AML. We have initiated Phase 1 clinical studies in AML with CEP-701.
According to the American Cancer Society, approximately 10,000 new cases of
AML are diagnosed in the United States each year.
Solid Tumors
As cancer cells aggregate and form solid tumors, they secrete growth factors
that promote the formation of new blood vessels necessary for providing
nutrients to the growing tumor; this process is called angiogenesis.
Angiogenesis is promoted by a number of such growth factors but appears to be
particularly dependent upon the vascular endothelial growth factor (VEGF).
VEGF acts at its receptor kinase to initiate blood vessel growth into the
tumor. We believe that inhibition of the receptor kinase for VEGF will result
in
8
inhibition of the angiogenesis process thus starving the tumor of needed
nutrients. We believe that this approach has potential utility in the
treatment of solid tumors.
We have synthesized a number of proprietary, orally active molecules that
are potent and selective inhibitors of the VEGF receptor kinase. These
molecules have been shown to slow the growth of a variety of tumors in
preclinical models. Our lead compound in this area is CEP-7055. We have filed
an Investigational New Drug application (IND) and initiated Phase 1 clinical
trials with CEP-7055. In December 2001, we entered into a collaborative
agreement with Sanofi-Synthelabo, a French pharmaceutical company, to
discover, develop and market worldwide products that inhibit angiogenesis,
excluding nervous system and opthalmic disorders. The collaboration covers the
development and marketing of CEP-7055 and other proprietary small molecules.
Neurotrophic Factors
A major advance in neuroscience was the discovery of naturally occurring
proteins, referred to as neurotrophic, trophic or growth factors that promote
the survival of neurons. Several different neurotrophic factors have been
identified that affect the survival of different types of neurons. We have
focused our development efforts in this area on using the neurotrophic factor,
recombinant human insulin-like growth factor (IGF-I), in disorders such as
amyotrophic lateral sclerosis (ALS) and peripheral neuropathies, where the
projections of the damaged neurons lie or extend outside the blood-brain
barrier and are therefore accessible to trophic factors. ALS is a fatal
disorder of the nervous system characterized by the chronic, progressive
degeneration of motor neurons. The loss of the spinal (lower) motor neurons
leads to muscle weakness, muscle atrophy and, eventually, to the patient's
death. ALS usually progresses over a three to five-year period, with death
usually resulting from loss of respiratory muscle control rendering the
patient unable to breathe. ALS affects approximately 15,000-20,000 people in
the United States. We believe that there is a proportionate incidence of ALS
in the populations of Europe and Japan.
Under a collaboration with Chiron Corporation that was terminated in
February 2001, we conducted clinical trials using IGF-I, also known as
MYOTROPHIN(R) (mecasermin) Injection, in ALS patients in North America and
Europe. In February 1997, we submitted a New Drug Application (NDA) to the FDA
for approval to market MYOTROPHIN in the United States for the treatment of
ALS. In May 1998 the FDA issued a letter stating that the NDA was "potentially
approvable," under certain conditions. We do not believe those conditions can
be met without conducting an additional Phase 3 clinical study, and we have no
plans to conduct such a study at this time. However, we have reached agreement
with certain physicians who have obtained governmental and non-governmental
funding to be used to conduct such a study. These physicians expect to
commence the study in 2002. We have agreed to allow reference to our IND and
have agreed to supply MYOTROPHIN in quantities sufficient to conduct the study
in exchange for the right to use any clinical data generated by such study in
support of FDA approval of our pending NDA. Even if this additional study is
concluded, the results will not be available for several years and may not be
sufficient to obtain regulatory approval to market the product.
In August 1992, we exclusively licensed our rights to MYOTROPHIN for human
therapeutic use within the United States, Canada and Europe to Cephalon
Clinical Partners, L.P. (CCP). We developed MYOTROPHIN on behalf of CCP under
a research and development agreement. Under this agreement, CCP granted an
exclusive license to manufacture and market MYOTROPHIN for human therapeutic
use within the United States, Canada and Europe, and we agreed to make royalty
payments equal to a percentage of product sales and a milestone payment of
approximately $16 million upon regulatory approval. We have a contractual
option, but not an obligation, to purchase all of the limited partnership
interests of CCP, which is exercisable upon the occurrence of certain events
following the first commercial sale of MYOTROPHIN. If, and only if, we decide
to exercise this purchase option, we would make an advance payment of
approximately $40.3 million in cash or, at our election, approximately $42.4
million in shares of common stock or a combination thereof. Should we
discontinue development of MYOTROPHIN, or if we do not exercise this purchase
option, our license will terminate and all rights to manufacture or market
MYOTROPHIN in the United States, Canada and Europe will revert to CCP, which
may then commercialize MYOTROPHIN itself or license or assign its rights to a
third party. In that event, we would not receive any benefits from such
commercialization, license or assignment of rights.
Oral Transmucosal System
We are continuing our preclinical research and development of our OTS
technology in several therapeutic areas. We expect to continue to evaluate
additional products and compounds using the OTS technology and other related
buccal delivery systems. We have developed our proprietary OTS products in
collaboration with the University of Utah Research Foundation and Abbott. We
currently have a research collaboration with a member of the Novartis group
relating to our novel delivery technologies and expect that future development
projects may involve collaboration with other research organizations and other
established pharmaceutical companies. Our primary emphasis is on basic and
applied research, product and process development, clinical research,
regulatory interactions and filings and commercial market development and
preparation.
LYOC Delivery System
We continue to develop our LYOC technology, which is used to create fast-
dissolving oral tablets. We currently manufacture and sell several drugs using
LYOC technology, including SPASFON LYOC, and are considering other compounds
that may be suitable for formulation using the technology.
Other Early Stage Research Efforts
From our inception, we have been engaged in research to discover innovative
medicines. To date, we have focused our efforts on neurodegenerative diseases
and cancer. However, these efforts also have resulted in discoveries that may
have the potential to
9
treat illnesses outside of these core research areas. In such cases, we seek
to establish collaborative partnerships with companies whose clinical
development and marketing capabilities will maximize the value of these
discoveries. For example, in 2000, we entered into a research collaboration
and license agreement with Johnson & Johnson Pharmaceutical Research &
Development, L.L.C. to discover and develop selective inhibitors of certain
protein kinases that may have applications extending beyond neurology and
oncology. As described above, we have discovered a proprietary platform for
the design of agents to inhibit or activate specific components of signaling
pathways. These agents may be useful in the treatment of a number of diseases,
including inflammatory disorders.
INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGIES
An important part of our product development strategy is to seek protection
for our products and technologies through the use of U.S. and foreign patents
and trademarks. As described below, we hold rights to issued patents and have
filed applications for various U.S. and foreign patents. However, we cannot be
certain that any of these patent applications will issue, or if issued, that
any issued patent will not be challenged by third parties on the basis of
invalidity or non-infringement, or that we will not be found to have infringed
upon the rights of others.
PROVIGIL
PROVIGIL is a licensed trademark used in connection with pharmaceutical
products containing the active drug substance modafinil. We hold exclusive
license rights to the composition-of-matter patent claiming modafinil. This
patent expired in the United States in November 2001. We have been granted a
Supplemental Protection Certificate for the corresponding U.K. patent covering
modafinil, extending the protection afforded by this patent until March 2003.
This patent expired in the Republic of Ireland, Japan, Italy and Mexico in
1998. Other than Italy, where a patent extension remains possible based upon
an earlier request filed with the regulatory authorities, we do not believe
that extension of the protection conferred by the modafinil composition-of-
matter patent is possible in any other of our licensed territories where
modafinil products are currently approved.
We hold worldwide patent rights to pharmaceutical formulations and uses of
certain particle-sized modafinil claimed in a U.S. patent that was issued in
1997 and reissued in January 2002 as well as in issued and pending European
patents. These patents are currently set to expire in 2014 and 2015,
respectively. Other foreign patents claiming pharmaceutical formulations of
modafinil also are pending or issued in other territories and will also expire
in 2015. We also hold rights to other patents and patent applications directed
to further pharmaceutical formulations and uses of modafinil.
Since modafinil is a new chemical entity, the FDA has granted us a period of
market exclusivity that prevents the submission of an abbreviated new drug
application for any pharmaceutical product containing modafinil until December
2003 (or December 2002 if the ANDA applicant certifies that the patents
covering PROVIGIL are invalid or will not be infringed by the ANDA product).
The FDA also has designated PROVIGIL as an orphan drug for use in treatment of
excessive sleepiness associated with narcolepsy, which prevents the approval
of an ANDA or NDA for modafinil in this indication until December 2005.
ACTIQ
ACTIQ is our trademark used in connection with pharmaceuticals for oral
transmucosal delivery containing fentanyl as the active drug substance. This
product is covered by U.S. and foreign patents that are held by the University
of Utah and its assignee, the University of Utah Research Foundation. We have
exclusive worldwide licenses to these patents. Specifically, there are two
U.S. patents covering the currently approved product that claim the approved
formulation and methods for administering fentanyl via this formulation and a
method of producing the approved product. Both of these patents are currently
set to expire in 2005. We also hold patents to the compressed powder
formulation that is currently being developed in the U.S. that will expire in
2006. Corresponding patents in foreign countries are set to expire between
2009 and 2010. The three-year period of market exclusivity for ACTIQ granted
by the FDA for a new formulation of fentanyl expired in November 2001.
Other issued patents and pending patent applications in the United States
and foreign countries that are owned or licensed by us are directed to various
processes of manufacturing the product, methods of using the product and
disposal containers required by the FDA to be provided as part of the product.
GABITRIL
GABITRIL is our trademark that is used in connection with pharmaceuticals
containing tiagabine as the active drug substance. This product is covered by
U.S. and foreign patents that are held by Novo-Nordisk A/S and that were
licensed in the United States exclusively to Abbott Laboratories. We have an
exclusive sublicense from Abbott to these patents in the United States and
exclusive licenses from Novo-Nordisk to corresponding foreign patents.
There are two U.S. composition-of-matter patents covering the currently
approved product: a patent claiming tiagabine, the active drug substance in
GABITRIL; and a patent claiming crystalline tiagabine hydrochloride
monohydrate and its use as an anti-epileptic agent. These patents are
currently set to expire in 2008 and 2012, respectively. An extension of the
tiagabine composition-of-matter patent under the terms of the U.S. Drug Price
Competition and Patent Term Restoration Act of 1984, as amended, to extend the
term of this patent until 2011 is being sought. We cannot be certain that this
patent extension will be obtained or that we will be able to take advantage of
any other patent benefits of the patent restoration act. Supplemental
Protection Certificates based upon corresponding foreign patents covering this
product are set to expire in 2011.
10
MYOTROPHIN
MYOTROPHIN is our trademark for IGF-I. We own or have licensed issued
patents and pending patent applications directed to uses of IGF-I for the
treatment of various diseases and to manufacturing and purification processes
for IGF-I. These patents expire in the United States between 2009 and 2016.
We are aware of a granted European patent and two issued U.S. patents, owned
by Genentech, Inc. and Auckland Uniservices Limited, claiming the use of IGF-I
in treating neuronal damage. We have successfully opposed the granted European
patent resulting in the complete revocation of this patent by the European
Patent Office. This decision has been appealed. We also have initiated
interference proceedings against the U.S. patents. We cannot predict the
outcome of the appeal of the European Patent Office decision or of the
interference proceeding at this time. If the appeal overturns the European
Patent Office revocation or the interference proceeding is unsuccessful, we
could be prevented from selling MYOTROPHIN in Europe and/or the United States
unless we obtain a license to any granted or issued patents. We may be unable
to obtain a license at all or under terms acceptable to us.
We are aware of other third party patents or patent applications directed to
various manufacturing processes of IGF-I. If necessary, we intend to either
seek licenses under such patents or modify the current manufacturing process.
We may be unable to obtain any required licenses at all or on acceptable
terms, and it may be difficult or impossible to successfully implement a
modified manufacturing process. If neither approach is feasible, we could be
prevented from manufacturing or selling this product.
Other Programs
We also own issued and pending U.S. patents and applications claiming
compositions and/or uses of certain kinase inhibitors including two novel
classes of small molecules referred to as "indolocarbazoles" and "fused
pyrrolocarbazoles." We have filed foreign counterparts of these patents in
other countries, as appropriate. We also own issued and pending U.S. and
foreign patents and applications claiming compositions and/or uses of
inhibitors of certain proteases, including novel classes of small molecules
for inhibition of calpain, and novel classes of small molecules for inhibition
of the multicatalytic protease.
Through collaborative agreements with researchers at several academic
institutions, we have licenses to or the right to license, generally on an
exclusive basis, patents and patent applications issued or filed in the United
States and certain other countries arising under or related to such
collaborations. We also have licensed U.S. and European composition-of-matter
and use patents and applications for novel compositions under our
collaborative agreement with Kyowa Hakko, including compositions and uses of
certain indolocarbazoles for the treatment of pathological conditions of the
prostate (including prostate cancer) and for the treatment of neurological
disorders.
Additional patents may never be issued on any of the patent applications we
own or license from third parties. Furthermore, even if such patents are
issued, the validity of the patents might be successfully challenged by a
third party. The patents might not provide protection against competitive
products or otherwise be commercially valuable, or the applications filed by
others might result in patents that would be infringed by the manufacture, use
or sale of our products.
Our products could infringe the patent rights of others. If licenses
required under any such patents or proprietary rights of third parties are not
obtained, we could encounter delays in product market introductions, or could
find that the development, manufacture or sale of products requiring such
licenses is foreclosed. In addition, patent litigation is both costly and
time-consuming, even if the outcome is favorable to us. In the event that we
are a defendant in such litigation, an adverse outcome would subject us to
significant liabilities to third parties, require us to license disputed
rights from third parties, or require us to stop selling our products.
We also rely on trade secrets, know-how and continuing technological
advancements to support our competitive position. Although we have entered
into confidentiality and invention rights agreements with our employees,
consultants, advisors and collaborators, these parties could fail to honor
such agreements or we could be unable to effectively protect our rights to our
unpatented trade secrets and know-how. Moreover, others could independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets and know-how. In addition, many of
our scientific and management personnel have been recruited from other
biotechnology and pharmaceutical companies where they were conducting research
in areas similar to those that we now pursue. As a result, we could be subject
to allegations of trade secret violations and other claims.
MANUFACTURING AND PRODUCT SUPPLY
Our ability to conduct clinical trials on a timely basis, to obtain
regulatory approvals and to commercialize our products will depend in part
upon our ability to manufacture our products, either directly or through third
parties, at a competitive cost and in accordance with applicable FDA and other
regulatory requirements, including current Good Manufacturing Practice
regulations.
At our three manufacturing facilities in France, we produce the active drug
substance modafinil and certain other commercial products. At our facility in
Salt Lake City, Utah, we manufacture ACTIQ for international markets. For the
remainder of our products, we rely on third parties for product manufacturing.
Abbott is required to supply us with ACTIQ and GABITRIL for the United
States until at least March 2003 and October 2005, respectively. After those
dates, we may have to make other arrangements to provide such supply, which
could include the
11
manufacture of ACTIQ and/or GABITRIL in-house for the United States, or
establishing supply arrangements with third parties. We depend upon sole
suppliers for active drug substances contained in most of our products, and we
depend upon single manufacturers that are qualified to manufacture finished
commercial supplies of most products. We have two qualified manufacturers for
finished commercial supplies of PROVIGIL.
We rely solely upon Abbott to supply a key chemical intermediate found in
several important compounds now in clinical development, including CEP-1347
and CEP-701. This intermediate is supplied to Lundbeck for use in the
synthesis of clinical and commercial supplies of CEP-1347, or is used by
Abbott to manufacture CEP-701 for clinical trials. We rely upon Chiron for all
of our manufacturing requirements for MYOTROPHIN.
COMPETITION
We face intense competition and rapid technological change in the
pharmaceutical marketplace. Large and small companies, academic institutions,
governmental agencies, and other public and private research organizations
conduct research, seek patent protection, and establish collaborative
arrangements for product development in competition with us. Products
developed by any of these entities may compete directly with those we develop
or sell. In addition, many of the companies and institutions that compete
against us have substantially greater capital resources, research and
development staffs and facilities than we have, and substantially greater
experience in conducting clinical trials, obtaining regulatory approvals and
manufacturing and marketing pharmaceutical products. These entities represent
significant competition for us. In addition, competitors who are developing
products for the treatment of neurological or oncological disorders might
succeed in developing technologies and products that are more effective than
any that we develop or sell or that would render our technology and products
obsolete or noncompetitive. Competition and innovation from these or other
sources potentially could negatively affect sales of our products or make them
obsolete. Advances in current treatment methods also may adversely affect the
market for such products. In addition, we may be at a competitive marketing
disadvantage against companies that have broader product lines and whose sales
personnel are able to offer more complementary products than we can. Any
failure to maintain our competitive position could adversely affect our
business and results of operations.
All of the products we market in the United States face competition in the
market place. We cannot be sure that we will be able to demonstrate the
potential advantages of our products to prescribing physicians and their
patients on an absolute basis and/or in comparison to other presently marketed
products. With respect to PROVIGIL, there are several other products used for
the treatment of narcolepsy in the United States, including methylphenidate,
and in our other licensed territories, all of which have been available for a
number of years and many of which are available in inexpensive generic forms.
With respect to ACTIQ, we face competition from inexpensive oral opioid
tablets and more expensive but quick-acting invasive (intravenous,
intramuscular and subcutaneous) opioid delivery systems. Other technologies
for rapidly delivering opioids to treat breakthrough pain are being developed,
at least one of which is in clinical trials. With respect to GABITRIL, there
are several products, including gabapentin, used as adjunctive therapy for the
partial seizure market. Some are well-established therapies that have been on
the market for several years while others have recently entered the partial
seizure marketplace. In addition, several treatments for partial seizures are
available in inexpensive generic forms. Thus we will need to demonstrate to
physicians, patients and third party payors that the cost of our products is
reasonable and appropriate in the light of their safety and efficacy, the
price of competing products and the related health care benefits to the
patient.
With respect to the collaboration with Novartis Pharma AG in the United
Kingdom, we now face potential competition from generic versions of the
branded products included in the collaboration. In most cases, these generic
versions are priced below our branded version. European Union pricing laws
allow the parallel importation of branded drugs between member countries. Due
to pricing variations within the European Union, it is possible that we will
face competition in one country from our own branded drug that is imported
from other member countries.
GOVERNMENT REGULATION
The manufacture and sale of therapeutics are subject to extensive regulation
by U.S. and foreign governmental authorities. In particular, pharmaceutical
products are subject to rigorous preclinical and clinical trials and other
approval requirements as well as other post-approval requirements by the FDA
under the Federal Food, Drug, and Cosmetic Act and by analogous agencies in
countries outside the United States.
As an initial step in the FDA regulatory approval process, preclinical
studies are typically conducted in animals to identify potential safety
problems and, in some cases, to evaluate potential efficacy. The results of
the preclinical studies are submitted to regulatory authorities as a part of
an IND that is filed with regulatory agencies prior to beginning studies in
humans. However, for several of our drug candidates, no animal model exists
that is potentially predictive of results in humans. As a result, no in vivo
indication of efficacy is available until these drug candidates progress to
human clinical trials.
Clinical trials are typically conducted in three sequential phases, although
the phases may overlap. Phase 1 typically begins with the initial introduction
of the drug into human subjects prior to introduction into patients. In Phase
1, the compound is tested for safety, dosage tolerance, absorption,
biodistribution, metabolism, excretion and clinical pharmacology, as well as,
if possible, to gain early information on effectiveness. Phase 2 typically
involves studies in a small sample of the intended patient population to
assess the efficacy of the drug for a specific indication, determine dose
tolerance and the optimal dose range, and to gather additional
12
information relating to safety and potential adverse effects. Phase 3 trials
are undertaken to further evaluate clinical safety and efficacy in an expanded
patient population, generally at multiple study sites, to determine the
overall risk-benefit ratio of the drug and to provide an adequate basis for
physician labeling. Each trial is conducted in accordance with certain
standards under protocols that detail the objectives of the study, the
parameters to be used to monitor safety and the efficacy criteria to be
evaluated. In the United States, each protocol must be submitted to the FDA as
part of the IND. Further, one or more independent Institutional Review Boards
must evaluate each clinical study. The Institutional Review Board considers,
among other things, ethical factors, the safety of the study, the adequacy of
informed consent by human subjects, and the possible liability of the
institution. Similar procedures and requirements must be fulfilled to conduct
studies in other countries. The process of completing clinical trials for a
new drug is likely to take a number of years and require the expenditure of
substantial resources.
Promising data from preclinical and clinical trials are submitted to the FDA
in an NDA for marketing approval and to foreign regulatory authorities under
applicable requirements. Preparing an NDA or foreign application involves
considerable data collection, verification, analyses and expense, and there
can be no assurance that the applicable regulatory authority will accept the
application or grant an approval on a timely basis, if at all. The marketing
of pharmaceuticals in the United States may not begin without FDA approval.
The approval process is affected by a number of factors, including primarily
the safety and efficacy demonstrated in clinical trials and the severity of
the disease. Regulatory authorities may deny an application in their sole
discretion, if they determine that applicable regulatory criteria have not
been satisfied or if additional testing or information is required. One of the
conditions for initial marketing approval, as well as continued post-approval
marketing, is that a prospective manufacturer's quality control and
manufacturing procedures conform to the current Good Manufacturing Practice
regulations of the regulatory authority. In complying with these regulations,
a manufacturer must continue to expend time, money and effort in the area of
production, quality control and quality assurance to ensure full compliance.
Manufacturing establishments, both foreign and domestic, also are subject to
inspections by or under the authority of the FDA and by other federal, state,
local or foreign agencies. Discovery of previously unknown problems with a
product or manufacturer may result in restrictions on such product or
manufacturer, including withdrawal of the product from the market.
Even after regulatory approval has been obtained, further studies, including
Phase 4 post-marketing studies, may be required to provide additional data on
safety, to validate surrogate efficacy endpoints, or for other reasons, and
the failure of such studies can result in expedited market withdrawal. Further
studies will be required to gain approval for the use of a product as a
treatment for clinical indications other than those for which the product was
initially approved. Results of post-marketing programs may limit or expand the
further marketing of the products. Further, if there are any modifications to
the drug, including any change in indication, manufacturing process, labeling
or manufacturing facility, it may be necessary to submit an application
seeking approval of such changes to the FDA or foreign regulatory authority.
Finally, the FDA can place restrictions on approval and marketing utilizing
its authority under applicable regulations. For example, ACTIQ was approved
subject to these restrictions, which include mandating compliance with a
rigorous Risk Management Program. This program gives the FDA authority to pre-
approve promotional materials and permits an expedited market withdrawal
procedure if issues arise regarding the safe use of ACTIQ. Moreover, marketed
products are subject to continued regulatory oversight and the failure to
comply with applicable regulations could result in financial penalties or
other sanctions.
Whether or not FDA approval has been obtained, approval of a product by
regulatory authorities in foreign countries must be obtained prior to the
commencement of commercial sales of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals
vary widely from country to country, and the time required for approval may be
longer or shorter than that required for FDA approval. Although there are
procedures for unified filings for most European countries, in general, each
country also has its own additional procedures and requirements, especially
related to pricing of new pharmaceuticals. Further, the FDA regulates the
export of products produced in the United States and, in some circumstances,
may prohibit the export even if such products are approved for sale in other
countries.
In the United States, the Orphan Drug Act provides incentives to drug
manufacturers to develop and manufacture drugs for the treatment of either
rare diseases, currently defined as diseases that affect fewer than 200,000
individuals in the United States, or for a disease that affects more than
200,000 individuals in the United States, where the sponsor does not
realistically anticipate its product becoming profitable. The FDA has granted
PROVIGIL orphan drug status for use in treating excessive daytime sleepiness
associated with narcolepsy and has designated MYOTROPHIN as an orphan drug for
use in treating ALS, because each indication currently affects fewer than
200,000 individuals in the United States. Under the Orphan Drug Act, a
manufacturer of a designated orphan product can seek certain tax benefits, and
the holder of the first FDA approval of a designated orphan product will be
granted a seven-year period of marketing exclusivity for that product for the
orphan indication. While the marketing exclusivity of an orphan drug would
prevent other sponsors from obtaining approval of the same drug compound for
the same indication unless the subsequent sponsors could demonstrate clinical
superiority or a market shortage occurs, it would not prevent other sponsors
from obtaining approval of the same compound for other indications or the use
of other types of drugs for the same use as the orphan drug. Orphan drug
designation generally does not confer any special or preferential treatment in
the regulatory review process. The U.S. Congress has considered, and may
consider in the future, legislation that would restrict the duration or scope
of the market exclusivity of an orphan drug and, thus, we cannot be sure that
the benefits of the existing statute will remain in effect. Additionally, we
cannot be sure that other governmental regulations applicable to our products
will not change.
In addition to the market exclusivity period under the Orphan Drug Act, the
U.S. Drug Price Competition and Patent Term Restoration Act of 1984 permits a
sponsor to apply for a maximum five-year extension of the term of a patent for
a period of time following the initial FDA approval of an NDA for a New
Chemical Entity (NCE). The statute specifically allows a patent owner acting
13
with due diligence to extend the term of the patent for a period equal to one-
half the period of time elapsed between the approval of the IND and the filing
of the corresponding NDA, plus the period of time between the filing of the
NDA and FDA approval, up to a maximum of five years of patent term extension.
Any such extension, however, cannot extend the patent term beyond a maximum
term of fourteen years following FDA approval and is subject to other
restrictions. Additionally, under this statute, five years of marketing
exclusivity is granted for the first approval of an NCE. During this period of
exclusivity, sponsors generally may not file and the FDA may not approve an
abbreviated New Drug Application or a 505(b)(2) application for a drug product
equivalent or identical to the NCE. An ANDA is the application form typically
used by manufacturers seeking approval of a generic version of an approved
drug. Under the statute, subsequent approved indications for the NCE are
eligible if certain criteria are met, to three years of limited marketing
exclusivity for the indication. During any three-year exclusivity period, a
third party may file an ANDA or a 505(b)(2) application seeking approval of
their version of the drug for the original indication, if the five-year
exclusivity granted to the NCE has expired. However, the third party would not
obtain marketing approval for a subsequently developed indication for the
three years of exclusivity. We intend to seek the benefits of this statute as
applicable, but there can be no assurance that we will be able to obtain any
such benefits. There is also a possibility that Congress will revise the
underlying statute in the next few years, which may affect these provisions in
ways that we cannot foresee. Additionally, the FDA regulates the labeling,
storage, record keeping, advertising and promotion of prescription
pharmaceuticals. Drug manufacturing establishments must register with the FDA
and list their products with the FDA.
The Controlled Substances Act imposes various registration, record-keeping
and reporting requirements, procurement and manufacturing quotas, labeling and
packaging requirements, security controls and a restriction on prescription
refills on certain pharmaceutical products. A principal factor in determining
the particular requirements of this act, if any, applicable to a product is
its actual or potential abuse profile. A pharmaceutical product may be listed
as a Schedule I, II, III, IV or V substance, with Schedule I substances
considered to present the highest risk of substance abuse and Schedule V
substances the lowest. Modafinil, the active drug substance in PROVIGIL, has
been scheduled under the Controlled Substances Act as a Schedule IV substance.
Schedule IV substances are allowed no more than five prescription refills
during a six-month period and are subject to special handling procedures
relating to the storage, shipment, inventory control and disposal of the
product. Fentanyl, the active ingredient in ACTIQ, is a Schedule II controlled
substance. Schedule II substances are subject to even stricter handling and
record keeping requirements and prescribing restrictions than Schedule III or
IV products. In addition to federal scheduling, both PROVIGIL and ACTIQ are
subject to state controlled substance regulation, and may be placed in more
restrictive schedules than those determined by the U.S. Drug Enforcement
Agency and FDA. However, to date, neither modafinil nor fentanyl has been
placed in a more restrictive schedule by any state.
In addition to the statutes and regulations described above, we also are
subject to regulation under the Occupational Safety and Health Act, the
Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act and other federal, state and local regulations.
SCIENTIFIC AND MEDICAL ADVISORY BOARD
We maintain a Scientific and Medical Advisory Board consisting of
individuals with expertise in neuroscience and oncology research, as well as
related fields. Members of the Scientific and Medical Advisory Board advise us
on issues concerning long-term scientific planning, research and development,
and also periodically evaluate our research programs, clinical development
plans and clinical trials. We compensate the members for their services. The
current members of our Scientific and Medical Advisory Board are as follows:
Stanley H. Appel, M.D.,
Baylor College of Medicine
Arthur K. Asbury, M.D.,
University of Pennsylvania Medical Center
Robert L. Barchi, M.D., Ph.D.,
University of Pennsylvania Medical Center
Bruce A. Chabner, M.D.,
Massachusetts General Hospital
Stanley Cohen, Ph.D., retired,
Vanderbilt University School of Medicine
Steven T. DeKosky, M.D.,
University of Pittsburgh Medical Center
John T. Isaacs, M.D.,
Johns Hopkins Oncology Center
Richard Johnson, M.D.,
Johns Hopkins Hospital
14
Robert Y. Moore, M.D., Ph.D.,
University of Pittsburgh
Robert H. Roth, Ph.D.,
Yale University School of Medicine
EMPLOYEES
As of December 31, 2001, we had a total of 1,127 full-time employees, of
which 597 were employed in the United States and 530 were located at our
facilities in Europe. We believe that we have been successful in attracting
skilled and experienced personnel; however, competition for such personnel is
intense. Certain of our employees located in France are covered by collective
bargaining agreements.
ITEM 2. PROPERTIES
We own our corporate headquarters which are located in West Chester,
Pennsylvania and which consist of approximately 160,000 square feet of
administrative offices and research facilities. In Salt Lake City, Utah, we
house administrative, research, manufacturing and warehousing operations in
approximately 115,000 square feet that we lease. We lease office space for our
European operations in Surrey, England and also satellite offices in France,
Switzerland and Germany. As part of the acquisition of Group Lafon, we
acquired a headquarters and research facility, two manufacturing facilities, a
packaging facility and various warehouses located in France. We believe that
our current facilities are adequate for our present purposes.
ITEM 3. LEGAL PROCEEDINGS
In August 1999, the U.S. District Court for the Eastern District of
Pennsylvania entered a final order approving the settlement of a class action
alleging that statements made about the results of certain clinical studies of
MYOTROPHIN were misleading. A related complaint has been filed with the Court
by a small number of plaintiffs who decided not to participate in the
settlement. This related complaint alleges that we are liable under common law
for misrepresentations concerning the results of the MYOTROPHIN clinical
trials, and that we and certain of our current and former officers and
directors are liable for the actions of persons who allegedly traded in our
common stock on the basis of material inside information. We believe that we
have valid defenses to all claims raised in this action. Moreover, even if
there is a judgment against us, we do not believe it will have a material
negative effect on our financial condition or results of operations.
In February 2001, a complaint was filed in Utah state court by Zars, Inc.
and one of its research scientists, against us and our subsidiary Anesta Corp.
The plaintiffs are seeking a declaratory judgment to establish their right to
develop transdermal or other products containing fentanyl and other
pharmaceutically active agents under a royalty and release agreement between
Zars and Anesta. The complaint also asks for unspecified damages for breach of
contract and interference with economic relations. We believe that we have
valid defenses to all claims raised in this action. In any event, we do not
believe any judgment against us will have a material negative effect on our
financial condition or results of operations.
We are a party to certain other litigation in the ordinary course of our
business, including matters alleging employment discrimination, product
liability and breach of commercial contract. However, we are vigorously
defending ourselves in all of these actions and do not believe these matters,
even if adversely adjudicated or settled, would have a material adverse effect
on our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to the vote of security holders during the
fourth quarter of fiscal 2001.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the NASDAQ National Market under the symbol
"CEPH." The following table sets forth the range of high and low sale prices
for the common stock as reported on the NASDAQ National Market for the periods
indicated below.
[Download Table]
High Low
2000
-----------------------------------------------------------------------------
First Quarter................................................ $74.38 $29.88
Second Quarter............................................... 66.88 32.50
Third Quarter................................................ 83.63 36.50
Fourth Quarter............................................... 63.38 40.13
2001
---------------------------------------------------------------
First Quarter................................................ $64.50 $36.38
Second Quarter............................................... 72.80 39.50
Third Quarter................................................ 73.92 43.40
Fourth Quarter............................................... 78.40 47.05
As of March 20, 2002, there were 679 holders of record of our common stock.
On March 20, 2002, the last reported sale price of our common stock as
reported on the NASDAQ National Market was $66.14 per share.
In December 2001, we issued and sold in a private placement $500,000,000
aggregate principal amount of 2.50% convertible subordinated notes due 2006.
In connection with this private placement, we granted the initial purchasers
of the notes an option to purchase an additional $100,000,000 in aggregate
principal amount of notes, which was exercised in December 2001, bringing the
total amount sold to $600,000,000 in aggregate principal amount of notes. The
commissions, discounts and other debt issuance costs in connection with this
sale totaled approximately $21,250,000.
The maturity date of the notes is December 15, 2006. We are obligated to pay
interest at a rate of 2.50% per year on each of June 15 and December 15,
beginning June 15, 2002. The notes are subordinated to our existing and future
senior indebtedness.
The notes are convertible into our common stock, at the option of the
holder, at a price of $81.00 per share, subject to adjustment upon certain
events. This is equivalent to a conversion rate of approximately 12.3458
shares per $1,000 principal amount of notes. The notes are redeemable by us at
any time on or after December 20, 2004 at a redemption price equal to 100% of
the principal amount of notes to be redeemed. Additionally, upon a change in
control or upon the occurrence of an event of default, the holders may require
us to repurchase the notes at 100% of the principal amount of the notes
submitted for repurchase, plus accrued and unpaid interest.
The notes were issued and sold in transactions exempt from registration
requirements of the Securities Act of 1933 as amended, to persons reasonably
believed by the initial purchasers to be "qualified institutional buyers" as
defined in Rule 144A under the Securities Act. On February 14, 2002, we filed
a registration statement on Form S-3 to register the resale of the notes and
the shares of common stock issuable upon conversion thereof.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
In October 2000, we completed a merger with Anesta under which we acquired
all of the outstanding shares of Anesta in a tax-free, stock-for-stock
transaction. The merger has been accounted for as a pooling-of-interests and,
accordingly, all of our prior period consolidated financial statements have
been restated to include the results of operations, financial position, and
cash flows of Anesta. Information concerning common stock and per share data
has been restated on an equivalent share basis.
On December 28, 2001, we completed the acquisition of the outstanding shares
of capital stock of Group Lafon. This acquisition has been accounted for as a
purchase and, accordingly, the estimated fair value of assets acquired and
liabilities assumed has been recorded as of the date of the acquisition. The
results of operations for Group Lafon from the date of acquisition have not
been included in our consolidated financial statements since operations
between the date of acquisition and December 31, 2001 were immaterial.
[Enlarge/Download Table]
Year Ended December 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
Statement of Operations Data:
-----------------------------------------------------------------------------------------------
Total revenues.......... $266,643,000 $ 111,790,000 $ 51,434,000 $ 16,330,000 $ 23,329,000
Gross profit on product
sales.................. 181,186,000 73,869,000 23,681,000 867,000 132,000
Loss before dividends on
preferred stock,
extraordinary gain
(charge) and cumulative
effect of a change in
accounting principle... (58,500,000) (93,744,000) (68,245,000) (71,124,000) (72,968,000)
Dividends on preferred
stock.................. (5,664,000) (9,063,000) (3,398,000) -- --
Extraordinary gain
(charge) for early
extinguishment of
debt................... 3,016,000 -- (11,187,000) -- --
Cumulative effect of
adopting Staff
Accounting Bulletin 101
(SAB 101).............. -- (7,434,000) -- -- --
------------ ------------- ------------ ------------ ------------
Loss applicable to
common shares.......... $(61,148,000) $(110,241,000) $(82,830,000) $(71,124,000) $(72,968,000)
============ ============= ============ ============ ============
Basic and diluted loss
per common share:
Loss before
extraordinary gain
(charge) and cumulative
effect of adopting SAB
101.................... $ (1.33) $ (2.51) $ (2.00) $ (2.15) $ (2.42)
Extraordinary gain
(charge)............... 0.06 -- (.31) -- --
Cumulative effect of
adopting SAB 101....... -- (.19) -- -- --
------------ ------------- ------------ ------------ ------------
$ (1.27) $ (2.70) $ (2.31) $ (2.15) $ (2.42)
============ ============= ============ ============ ============
Weighted average number
of shares outstanding.. 48,292,000 40,893,000 35,887,000 33,129,000 30,165,000
============ ============= ============ ============ ============
The reconciliation of loss applicable to common shares to adjusted net
income (loss) is presented below in order to highlight certain charges that
materially impact the comparability of the information contained within the
selected consolidated financial data. Items affecting 2001 include an
extraordinary gain realized on the early payment of debt, and the following
charges associated with the financing and acquisition of Group Lafon: (i)
$1,500,000 attributable to the costs of obtaining short term financing, (ii)
$20,000,000 attributable to the write off of acquired in-process research and
development, and (iii) $52,444,000 attributable to the conversion of
$217,000,000 of previously issued 5.25% convertible notes into common stock.
Year Ended December 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
Reconciliation of loss
applicable to common
shares to adjusted net
income (loss):......... $(61,148,000) $(110,241,000) $(82,830,000) $(71,124,000) $(72,968,000)
Certain charges:
Royalty pre-payment on
extinguished revenue
sharing notes.......... -- 6,600,000 -- -- --
Short-term bridge
financing and other
merger related
expenses............... 1,550,000 13,811,000 -- -- --
Acquired in-process
research and
development............ 20,000,000 22,200,000 -- -- --
Debt conversion
expense................ 52,444,000 -- -- -- --
Extraordinary (gain)
charge on early
extinguishment of
debt................... (3,016,000) -- 11,187,000 -- --
Cumulative effect of
adopting SAB 101....... -- 7,434,000 -- -- --
------------ ------------- ------------ ------------ ------------
Adjusted net income
(loss)................. $ 9,830,000 $ (60,196,000) $(71,643,000) $(71,124,000) $(72,968,000)
============ ============= ============ ============ ============
17
[Enlarge/Download Table]
As of December 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
Balance Sheet Data:
----------------------------------------------------------------------------------------------
Cash, cash equivalents
and investments........ $ 603,884,000 $ 97,384,000 $272,340,000 $148,151,000 $147,363,000
Total assets............ 1,389,087,000 308,435,000 312,262,000 179,802,000 183,920,000
Long-term debt.......... 866,589,000 55,138,000 15,701,000 16,596,000 29,337,000
Accumulated deficit..... (576,691,000) (515,543,000) (405,302,000) (322,472,000) (251,348,000)
Stockholders' equity.... 398,731,000 165,193,000 230,783,000 137,621,000 129,536,000
PRO FORMA RESULTS
The following data represents pro forma financial results assuming a
retroactive adoption of a change in accounting principle (SAB 101).
[Download Table]
Year Ended December 31,
-------------------------------------------------------
2000 1999 1998 1997
Statement of Operations Data:
---------------------------------------------------------------------------------
Total revenues.......... $ 111,790,000 $ 44,391,000 $ 16,163,000 $ 23,392,000
Gross profit on product
sales.................. 73,869,000 23,681,000 867,000 132,000
Loss before dividends on
preferred stock,
extraordinary gain
(charge) and cumulative
effect of a change in
accounting principle... (93,744,000) (75,288,000) (71,291,000) (72,905,000)
Dividends on preferred
stock.................. (9,063,000) (3,398,000) -- --
Extraordinary charge for
early extinguishment of
debt................... -- (11,187,000) -- --
Loss applicable to
common shares.......... $(102,807,000) $(89,873,000) $(71,291,000) $(72,905,000)
Basic and diluted loss
per common share....... $ (2.51) $ (2.50) $ (2.15) $ (2.42)
Weighted average number
of shares outstanding.. 40,893,000 35,887,000 33,129,000 30,165,000
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year ended December 31, 2001 compared to year ended December 31, 2000
For the year ended December 31, revenues consisted of the following:
[Download Table]
2001 2000
Product sales:
-----------------------------------------------------------------------------
PROVIGIL.......................................... $150,305,000 $ 72,089,000
ACTIQ............................................. 51,197,000 15,169,000
GABITRIL.......................................... 24,630,000 4,379,000
------------ ------------
Total product sales................................ 226,132,000 91,637,000
------------ ------------
H. Lundbeck A/S................................... 11,941,000 10,395,000
Novartis Pharma AG................................ 10,428,000 --
Sanofi-Synthelabo................................. 5,052,000 --
Other revenues.................................... 13,090,000 9,758,000
------------ ------------
Total other revenues............................... 40,511,000 20,153,000
------------ ------------
Total revenues..................................... $266,643,000 $111,790,000
============ ============
Revenues--Product sales in 2001 increased 147% to $226,132,000. The increase
is attributable to a number of factors including:
. Sales of PROVIGIL increased 108% from $72,089,000 in 2000 to $150,305,000
in 2001. PROVIGIL accounted for 66% and 79% of our 2001 and 2000 product
sales, respectively. The 2001 sales increase was due to higher sales
resulting from increased market acceptance, as well as a 5% domestic
price increase that took effect in the second quarter of 2001.
. Sales of ACTIQ increased 238% from $15,169,000 in 2000 to $51,197,000 in
2001. After our merger with Anesta in October 2000, we established a
dedicated sales force for ACTIQ and significantly changed the marketing
approach. An average domestic 6.6% price increase in the second quarter
of 2001 also contributed to higher recorded sales.
. Sales of GABITRIL increased from $4,379,000 in 2000 to $24,630,000 in
2001. We acquired all U.S. rights to GABITRIL from Abbott Laboratories
during late 2000 and began selling GABITRIL effective January 1, 2001.
Prior to 2001, our GABITRIL revenues represented compensation from Abbott
under a collaborative agreement where we received a percentage of
GABITRIL sales in excess of a base amount. Additionally, an average
increase in domestic prices of 10% in the second quarter of 2001 also
contributed to the sales increase.
. Other revenues increased by $20,358,000, or 101%. This increase was due
primarily to revenues recognized under our U.K. joint marketing agreement
with Novartis Pharma AG, which we entered into in November 2000, and
revenues recognized under our licensing, development and marketing
collaborations with Sanofi-Synthelabo and H. Lundbeck A/S.
Cost of Product Sales--Cost of product sales rose 153% in 2001 to
$44,946,000 from $17,768,000 in 2000 primarily as a result of the increase in
2001 product sales volumes. Aggregate cost of product sales for all three
products remained at 20% of product sales for both 2001 and 2000 due to
decreased costs for U.S. production of ACTIQ offset by GABITRIL revenues of
$4,379,000 in 2000 that did not have corresponding cost of product sales since
it was being sold under a collaborative agreement with Abbott.
Research and Development Expenses--Research and development expenses
increased 24% in 2001 to $84,249,000 from $68,063,000 in 2000. The increase is
attributable to higher expenditures on clinical trials including
infrastructure costs to support the growing number of ongoing clinical trials
including Phase 2 clinical studies for CEP-1347 and studies of PROVIGIL
related to our efforts to expand the label for PROVIGIL beyond its current
indication. In addition, research and development expenses also increased
because of regulatory and intellectual property fees.
Selling, General and Administrative Expenses--Selling, general and
administrative expenses increased 19% in 2001 to $99,615,000 from $83,725,000
in 2000. The increase is primarily due to increases in expenditures of
$13,755,000 associated with the growth of our internal sales force to promote
and support PROVIGIL, ACTIQ, and GABITRIL in the United States.
Depreciation and Amortization Expenses--Depreciation and amortization
expenses increased to $14,434,000 in 2001 from $4,008,000 in 2000 primarily
due to a full year of amortization expense in 2001 on intangible assets
acquired during late 2000 relating to both our acquisition of GABITRIL product
rights in the United States and our U.K. joint marketing agreement with
Novartis.
Debt Exchange Expense--In accordance with Statement of Financial Accounting
Standards No. 84 "Induced Conversions of Convertible Debt," we recorded a non-
cash charge of $52,444,000 in the fourth quarter of 2001 associated with the
exchange of $217,000,000 of our 5.25% convertible notes for our common stock.
Acquired In-Process Research and Development--In connection with our
acquisition of Group Lafon in December 2001, we acquired the rights to certain
early stage technologies. Based on an independent appraisal of the assets
acquired from Group Lafon, the fair value of these technologies of $20,000,000
has been recorded as acquired in-process research and development expenses
because, at the date of the acquisition, the technologies acquired had not
progressed to a stage where they met technological
19
feasibility and there existed a significant amount of uncertainty as to our
ability to complete the development of the technologies and achieve market
acceptance within a reasonable timeframe. In addition, the acquired in-process
technologies did not have an alternative future use to us that had reached
technological feasibility.
During 2000, we acquired U.S. marketing rights to GABITRIL in a transaction
that resulted in us recording $22,000,000 as acquired in-process research and
development expense. During 2001, development efforts on this in-process
research and development have continued. We believe that expenses incurred to
date associated with the development and integration of the in-process
research and development projects are lower than our previous estimates. We
have completed one project at the end of 2001 and will initiate several new
projects in 2002. The majority of the projects are on schedule, but delays
have occurred due to delays in the completion of a clinical plan and inherent
complexity and breadth of the projects. The risks associated with these
efforts are still considered high, and no assurance can be made that the
projects in development will meet with market acceptance.
Other Income and Expense--Interest income decreased to $12,170,000 in 2001
from $16,903,000 in 2000 primarily due to $4,008,000 of interest income
recorded in 2000 associated with the waiver of an interest rate penalty by the
Commonwealth of Pennsylvania on a loan used to finance the purchase of our
West Chester facilities. The remaining decrease in interest income is due to
lower average interest rates in 2001 as compared to 2000, offset in part by
higher average investment balances. Interest expense increased in 2001 to
$20,630,000 from $5,189,000 in 2000 due to interest on our convertible
subordinated notes issued in May and December of 2001, a $1,500,000 fee
associated with establishing a line of credit for the Group Lafon acquisition
and interest recognized on our obligations to Abbott and Novartis. These
increases were partially offset by a decrease in interest expense due to the
retirement of revenue-sharing notes in the first quarter of 2000. A decrease
in the exchange rate loss from $1,027,000 in 2000 to $545,000 in 2001, due to
an increase in currency exchange value of the pound Sterling (GBP) relative to
both the U.S. dollar and to our other foreign operations' currencies that are
remeasured into the GBP for financial reporting purposes, is recorded as other
expense.
Dividends on Convertible Exchangeable Preferred Stock--Preferred dividends
in 2001 were less than in 2000 due to the conversion during the second and
third quarters of 2001 of all outstanding shares of preferred stock into an
aggregate of 6,974,998 shares of our common stock. As of December 31, 2001,
there were no shares of preferred stock outstanding.
Extraordinary Gain on Early Extinguishment of Debt--In May 2001, we paid
$24,438,000 to Novartis Pharma AG for deferred obligations due to them under
our continuing November 2000 collaboration agreement. In connection with this
payment, we recorded an extraordinary gain on the early extinguishment of debt
of $3,016,000.
Year ended December 31, 2000 compared to year ended December 31, 1999
Revenues--Total revenues increased 117% to $111,790,000 in 2000 as compared
to $51,434,000 in 1999. This increase was primarily due to a $64,035,000, or
232%, increase in product sales, of which $46,719,000 was attributed to a
PROVIGIL sales increase and $12,937,000 was attributed to an ACTIQ sales
increase. This increase was offset slightly by a 15% decrease in other
revenues recognized under our collaborative efforts with other companies.
Cost of Product Sales--The cost of product sales associated with PROVIGIL in
2000 increased to 20% of net product sales from 13% in 1999. All of the
PROVIGIL sold in the United States during 1999 was produced prior to its
December 1998 FDA approval and the costs of producing that material were
recorded as research and development expense in those prior periods. As a
result, 2000 was the first year since the commercial launch of PROVIGIL to
include a full year's recognition of product costs. Product sales of PROVIGIL
are recognized upon shipment of product and are recorded net of reserves for
returns and allowances. During 2000, we reduced our reserve for returns and
allowances, which resulted in an increase to PROVIGIL net sales of $4,370,000
without any corresponding cost of product sales. The cost of ACTIQ product
sales as a percentage of ACTIQ sales decreased from 31% in 1999 to 24% in 2000
due to increased recognition of ACTIQ sales as a result of the reacquisition
of full marketing rights to ACTIQ during 2000. In 2000, there were no costs
associated with the sales of GABITRIL since the product was being marketed
under a co-promotion agreement with Abbott.
Research and Development Expenses--For the year ended December 31, 2000,
research and development expenses increased 24% to $68,063,000 from
$54,892,000 in 1999. This change primarily resulted from an increase in
expenditures associated with clinical development studies of PROVIGIL in areas
other than narcolepsy and an increase in drug development and manufacturing
costs for our compounds that have progressed into later stages of development.
Selling, General and Administrative Expenses--The 40% increase in selling,
general and administrative expenses to $83,725,000 for the year ended December
31, 2000 from $59,665,000 for 1999 was primarily due to increases in marketing
expenses associated with the commercialization of PROVIGIL of $1,552,000 and
our collaboration agreement with Abbott to market GABITRIL of $2,649,000,
expenses relating to an increase in the size of our internal sales force to
fully support both PROVIGIL and GABITRIL of $8,242,000, and increases in
expenses associated with the hiring of a contract sales organization to
promote ACTIQ of $6,911,000. This increase was partially offset by a one-time
charge of $4,300,000 in 1999 associated with the settlement of the securities
litigation.
Depreciation and Amortization Expenses--The $1,929,000 increase in
depreciation and amortization expenses in 2000 as compared to 1999 is due
primarily to amortization expense associated with the intangible asset
recorded when the U.S. marketing rights to ACTIQ were purchased from Abbott in
March 2000.
Other Expenses--We recorded a number of certain charges in the fourth
quarter of 2000 including $6,600,000 representing the final royalty payment
associated with the revenue sharing notes, $13,811,000 in merger and
integration costs as a result of the merger
20
with Anesta and $22,200,000 for in-process research and development costs
associated with the acquisition of U.S. product rights to GABITRIL from
Abbott.
Other Income and Expense--The $7,412,000 increase in interest income from
1999 to 2000 is primarily due to the recognition of $4,008,000 of interest
income associated with the waiver of an interest rate penalty by the
Commonwealth of Pennsylvania on a loan used to finance the purchase of our
West Chester facilities. The $3,188,000 decrease in interest expense is due to
the retirement of revenue-sharing notes in the first quarter of 2000. An
increase in the exchange rate loss from $235,000 in 1999 to $1,072,000 in 2000
due to a decline in currency exchange value of the pound Sterling (GBP)
relative to both the U.S. dollar and to our other foreign operations'
currencies that are remeasured into the GBP for financial reporting purposes
is recorded as other expense.
Extraordinary Charge on Early Extinguishment of Debt--In connection with the
restructuring of the revenue sharing notes, we recorded a loss in 1999 on the
extinguishment of the notes of $11,187,000, which includes the prepayment
penalty of $5,500,000 and the write-off of deferred financing costs and the
remaining value of the associated warrants of $5,687,000. These notes were
retired in the first quarter of 2000 for an aggregate payment of $35,500,000.
Cumulative Effect of a Change in Accounting Principle--We adopted the U.S.
Securities and Exchange Commission's Staff Accounting Bulletin No. 101 (SAB
101) on Revenue Recognition and, as a result, we recorded a charge of
$7,434,000 in the fourth quarter of 2000 to defer upfront license fees
associated with our collaborative alliances that were previously recognized in
revenues. These payments will be recognized over the performance periods of
the alliances.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. These estimates and assumptions are
developed, and challenged periodically, by management based on historical
experience and on various other factors that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
Our significant accounting policies are described in Note 1 to the
consolidated financial statements included in Item 8 of this Form 10-K.
Management considers the following policies to be the most critical in
understanding the more complex judgments that are involved in preparing our
consolidated financial statements and the uncertainties that could impact its
results of operations, financial position and cash flows.
Revenue recognition--Product sales are recognized upon shipment of product
and are recorded net of estimated reserves for contractual allowances,
discounts and returns. Contractual allowances result from sales under
contracts with managed care organizations and government agencies. The reserve
for contractual allowances is based on an estimate of prescriptions to be
filled for individuals covered by government agencies and managed care
organizations with whom we have contracts. The reserve for product returns is
determined by reviewing the history of each product's returns and by utilizing
reports purchased from external, independent sources which produce
prescription data, wholesale stocking levels and wholesale sales to retail
pharmacies. This data is reviewed to monitor product movement through the
supply chain to identify remaining inventory in the supply chain that may
result in chargebacks or returns. The reserves are reviewed at each reporting
period and adjusted to reflect data available at that time. To the extent our
estimate of contractual allowances is inaccurate, we will adjust the reserve
which will impact the amount of product sales revenue recognized in the period
of the adjustment. Product returns are permitted with respect to unused
pharmaceuticals based on expiration dating of our product. To date, product
returns have not been material.
Revenue from collaborative agreements may consist of up-front fees, on going
research and development funding and milestone payments. Effective January 1,
2000, we adopted the SEC's Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101). In accordance with SAB 101,
non-refundable up-front fees are deferred and amortized to revenue over the
related performance period. We estimate our performance period based on the
specific terms of each collaborative agreement, but actual performance may
vary. We adjust the performance periods based upon available facts and
circumstances. Periodic payments for research and development activities are
recognized over the period that we perform the related activities under the
terms of the agreements. Revenue resulting from the achievement of milestone
events stipulated in the agreements is recognized when the milestone is
achieved. Milestones are based upon the occurrence of a substantive element
specified in the contract or as measure of substantive progress towards
completion under the contract.
Allowance for uncollectable accounts receivable--Accounts receivable are
reduced by an allowance for amounts that may become uncollectable in the
future. On an ongoing basis, management performs credit evaluations of our
customers and adjusts credit limits based upon the customer's payment history
and creditworthiness, as determined by a review of their current credit
information. We continuously monitor collections and payments from our
customers. Based upon our historical experience and any specific customer
collection issues that are identified, management uses its judgment to
establish and evaluate the adequacy of the our allowance for estimated credit
losses. While such credit losses have been within our expectations and the
allowance provided, we cannot guarantee that it will continue to experience
the same credit loss rates as it has in the past. Also, as of December 31,
2001, approximately 58% of our accounts receivable were due from three
pharmaceutical wholesalers. Any significant changes in the liquidity or
financial position of these wholesalers could have a material adverse impact
on the collectability of our accounts receivable and its future operating
results.
21
Inventories--Our inventories are valued at the lower of cost or market,
determined on a first-in, first-out basis, and include the cost of raw
materials, labor and overhead. The majority of our inventories are subject to
expiration dating. We continually evaluate the carrying value of our
inventories and when in the opinion of management, factors indicate that
impairment has occurred, either a reserve is established against the
inventories' carrying value or the inventories are completely written off.
Management bases these decisions on the level of inventories on hand in
relation to our estimated forecast of product demand, production requirements
over the next twelve months and the expiration dates of raw materials and
finished goods. Although we make every effort to ensure the accuracy of its
forecasts of future product demand, any significant unanticipated changes in
demand could have a material impact on the carrying value of our inventories
and our reported operating results.
Valuation of Fixed Assets, Goodwill and Intangible Assets--Our fixed assets
and intangible assets (which consist primarily of developed technology,
trademarks, and product and marketing rights) have been recorded at cost and
are being amortized on a straight-line basis over the estimated useful life
those assets. In conjunction with acquisitions of businesses or product
rights, we allocate the purchase price based upon the relative fair values of
the assets acquired and liabilities assumed. In certain circumstances, fair
value may be assigned to purchased in-process technology and immediately
expensed. The valuation of goodwill and intangible assets and the estimation
of appropriate useful lives to apply to them requires us to use our judgment.
We continually assess the impairment of intangibles, long-lived assets and
goodwill whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. Our judgments regarding
the existence of impairment indicators are based on legal factors, market
conditions and operating performance of our fixed assets and acquired
businesses and products. Future events could cause us to conclude that
impairment indicators exist and the carrying values of our fixed assets,
intangible assets or goodwill are impaired. Any resulting impairment loss
could have a material adverse impact on our financial position and results of
operations.
Income taxes--We have a history of losses, which has generated significant
federal and state tax net operating loss (NOL) carryforwards of approximately
$344,139,000 and $147,620,000, respectively as of December 31, 2001. Generally
accepted accounting principles require us to record a valuation allowance
against the deferred tax asset associated with this NOL carryforward if it is
more likely than not that we will not be able to utilize the NOL carryforward
to offset future taxes. Due to the size of the NOL carryforward in relation to
our history of unprofitable operations, we have not recognized a net deferred
tax asset.
The third quarter of 2001 was our first profitable quarter from commercial
operations since inception. Continued profitability in future periods could
cause management to conclude that it is more likely than not that we will
realize all or a portion of the NOL carryforward. Upon reaching such a
conclusion, which is subject to management's judgment, we would immediately
record the estimated net realizable value of the deferred tax asset at that
time and would then begin to provide for income taxes at a rate equal to our
combined federal and state effective rates. Subsequent revisions to the
estimated net realizable value of the deferred tax asset could cause our
provision for income taxes to vary significantly from period to period.
JOINT VENTURE
In December 2001, we formed a joint venture with unaffiliated third party
investors to fund additional commercial activities in support of PROVIGIL and
GABITRIL in the United States. In exchange for our transfer to the joint
venture of certain intellectual property and other rights related to these two
products, we received a Class B interest, representing a 50% interest in the
joint venture. In exchange for its contribution of $50,000,000 in cash to the
joint venture, the investors received Class A interests, also representing a
50% interest in the joint venture.
On March 29, 2002, we acquired the investors' Class A interests and ended
the joint venture by issuing to the investors, through a private placement,
$55,000,000 aggregate principal amount of 3.875% convertible subordinated
notes due March 2007. The notes are convertible into our common stock, at the
option of the holder, at a price of $70.36 per share.
As of December 31, 2001, the $50,000,000 investors' Class A interest was
recorded on our balance sheet as a liability, and the joint venture's cash
balance of $50,000,000 was included in our balance of cash and cash
equivalents.
The purchase of the investors' Class A interests in the joint venture will
result in the recognition of a $7,100,000 extraordinary charge during the
first quarter of 2002, which includes the write-off of $4,600,000 of costs
capitalized in connection with the formation of the joint venture. In
addition, our statement of operations for the three months ended March 31,
2002 will include certain charges totaling approximately $7,000,000 related to
the operations of the joint venture.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investments at December 31, 2001 were
$603,884,000, representing 43% of total assets, an increase from $97,384,000
at December 31, 2000.
Net Cash Provided by (Used for) Operating Activities
Net cash provided by operating activities was $12,274,000 in 2001 as
compared to net cash used for operating activities of $106,492,000 in 2000.
The main factors that contributed to the net cash provided by operating
activities in 2001 are as follows:
. The net loss before preferred dividends was $55,484,000 in 2001, as
compared to $101,178,000 in 2000, as a result of the increase in product
sales. In addition, we recognized the following non-cash transactions in
2001: $14,434,000 of depreciation
22
and amortization expense, $5,158,000 of non-cash interest expense on our
convertible subordinated notes, $6,631,000 of non-cash compensation
expense, $20,000,000 of purchased in-process research and development
expense relating to the Group Lafon acquisition, $52,444,000 of debt
exchange expense related to the exchange of $217,000,000 of convertible
subordinated notes and $3,016,000 of gain on the early extinguishment of
debt.
. Accounts receivable increased $30,434,000 due primarily to a 147% increase
in product sales from 2000 to 2001.
. Accounts payable increased $10,310,000 and accrued expenses increased
$9,928,000. The increase in accrued expenses is due primarily to an
increase of $6,413,000 of expenses related to the Lafon acquisition and
$2,789,000 of accrued interest related to the convertible notes.
Net Cash (Used for) Provided by Investing Activities
A summary of net cash (used for) provided by investing activities is as
follows:
[Download Table]
Year ended
December 31,
------------------------------------------
2001 2000 1999
------------- ------------ -------------
Purchases of property and
equipment........................ $ (12,481,000) $ (7,462,000) $ (1,029,000)
Acquisition of Group Lafon, net of
cash acquired.................... (447,717,000) -- --
Acquisition of intangible assets.. (21,063,000) (56,627,000) --
Sales and maturities (purchases)
of investments, net.............. 6,200,000 186,449,000 (162,772,000)
------------- ------------ -------------
Net cash (used for) provided by
investing activities............. $(475,061,000) $122,360,000 $(163,801,000)
============= ============ =============
--Acquisition of Group Lafon, net of cash acquired
The acquisition of Group Lafon effective December 28, 2001 consisted of a
total purchase price of $450,000,000 plus $7,000,000 of direct transaction
costs and other purchase price adjustments, less $9,283,000 of cash acquired.
--Acquisition of intangible assets
[Download Table]
Year ended
December 31,
--------------------------------
2001 2000 1999
------------ ------------ ----
Acquisition of U.S. GABITRIL product rights.. $ -- $(17,800,000) $--
Acquisition of European GABITRIL product
rights...................................... (20,666,000) -- --
Acquisition of ACTIQ marketing rights........ (397,000) (23,850,000) --
Acquisition of Novartis product rights....... -- (14,977,000) --
------------ ------------ ----
Net cash used for acquisition of intangible
assets...................................... $(21,063,000) $(56,627,000) $--
============ ============ ====
The acquisition of intangible assets during the year ended December 31, 2001
primarily consists of amounts paid for the acquisition of European product
rights to GABITRIL.
The acquisition of intangible assets during the year ended December 31, 2000
includes an initial payment of $40,000,000 made to Abbott for the acquisition
of U.S. product rights for GABITRIL, of which $22,200,000 was recorded as in-
process research and development expense and $17,800,000 was recorded as an
intangible asset. Under a separate agreement, we also paid $23,850,000 to
Abbott in 2000 to acquire the U.S. marketing rights to ACTIQ. Additionally, we
also entered into a collaboration agreement with Novartis Pharma AG in 2000 to
consolidate the sales and marketing efforts of four Novartis CNS products with
PROVIGIL in the United Kingdom. In connection with this transaction, we made
an initial payment of $14,977,000 which was recorded as an intangible asset.
Net Cash Provided by (Used for) Financing Activities
A summary of net cash provided by (used for) financing activities is as
follows:
[Download Table]
Year ended
December 31,
----------------------------------------
2001 2000 1999
------------- ----------- ------------
Proceeds from issuance of preferred
stock............................... $ -- $ -- $120,028,000
Proceeds from issuance of common
stock............................... -- -- 12,000,000
Proceeds from exercises of common
stock options, warrants and employee
stock purchase plan................. 28,221,000 39,448,000 36,034,000
Payments to acquire treasury stock... (3,629,000) (2,829,000) (803,000)
Net proceeds from issuance of long-
term debt........................... 1,009,080,000 -- 30,500,000
Preferred dividends paid............. (6,797,000) (9,063,000) (2,265,000)
Principal payments on and retirement
of long-term debt................... (52,300,000) (32,766,000) (1,989,000)
------------- ----------- ------------
Net cash provided by (used for)
financing activities................ $ 974,575,000 $(5,210,000) $193,505,000
============= =========== ============
23
--Proceeds from issuance of preferred stock
During 1999, we completed a sale of 2,500,000 shares of convertible
exchangeable preferred stock at $50 per share. As of December 31, 2001, all
2,500,000 shares have been converted into an aggregate of 6,974,998 shares of
our common stock.
--Proceeds from issuance of common stock
In connection with a May 1999 collaborative agreement, H. Lundbeck A/S
purchased 1,000,000 shares of our common stock at a price of $12.00 per share,
which was the average market price for the five trading days prior to the
closing of the agreement.
--Proceeds from exercises of common stock options and warrants
The following is a summary of proceeds from exercises of common stock
options, warrants and employee stock purchase plan for each of the years ended
December 31:
[Download Table]
2001 2000 1999
Proceeds from exercises of:
-------------------------------------------------------------------------------
Common stock options...................... $25,542,000 $12,934,000 $ 8,958,000
Warrants.................................. 2,679,000 26,436,000 26,984,000
Employee stock purchase plan.............. -- 78,000 92,000
----------- ----------- -----------
$28,221,000 $39,448,000 $36,034,000
=========== =========== ===========
Total number of shares issued.............. 1,605,180 3,458,223 2,751,280
=========== =========== ===========
At December 31, 2001, options to purchase approximately 5,608,000 shares of
our common stock at various exercise prices were outstanding. The extent and
timing of future option exercises, if any, are primarily dependent upon the
market price of our common stock and general financial market conditions, as
well as the exercise prices and expiration dates of the options. At December
31, 2001, no warrants to purchase common stock remained outstanding.
In November 1993, Anesta Corp. adopted the Employee Stock Purchase Plan
authorizing the issuance of 250,000 shares pursuant to purchase rights granted
to employees of Anesta. Participants could elect to use up to 10% of their
compensation to purchase Anesta's common stock at the end of each year at a
price equal to 85% of the lower of the beginning or ending stock price in the
plan period. The plan terminated in October 2000 upon the merger of Cephalon
and Anesta.
--Payments to acquire treasury stock
Under our Equity Compensation Plan, we may grant restricted stock awards to
employees. Upon vesting, shares of Cephalon common stock are withheld from the
employee's stock award and returned to the treasury for the corresponding
dollar value of payroll-related taxes paid on behalf of the employee.
--Net proceeds from issuance of long-term debt
In the second quarter of 2001, we completed a private placement of
$400,000,000 of 5.25% convertible subordinated notes due May 2006. Debt
issuance costs of $14,364,000 have been capitalized and are being amortized
over the term of the notes. In the fourth quarter of 2001, we completed a
private placement of $600,000,000 of 2.50% convertible subordinated notes due
December 2006. Debt issuance costs of $21,250,000 have been capitalized and
are being amortized over the term of the notes. In connection with our joint
venture, $50,000,000 in cash received from the Investor was recorded as a
liability as of December 31, 2001. During 1999, we completed a private
placement $30,000,000 of revenue sharing notes that were subsequently retired
in 2000. In July 1999, we borrowed $500,000 on a term loan in connection with
the remodeling of the facility in Salt Lake City, Utah.
--Preferred dividends paid
These amounts represent preferred dividends paid on our $3.625 convertible
exchangeable preferred stock. As of December 31, 2001, all 2,500,000 shares of
the preferred stock had been converted into an aggregate of 6,974,998 shares
of our common stock.
--Principal payments on long-term debt
In July 2001, we made a payment of $1,667,000 to retire a variable-rate term
note payable. In May 2001, we made a payment of $24,000,000 to Abbott
Laboratories due under our licensing agreement for U.S. product rights to
GABITRIL. Also in May 2001, we paid $24,438,000 to Novartis Pharma AG for
deferred obligations due to them under our continuing November 2000
collaboration agreement. In the first quarter of 2000, we retired $30,000,000
of revenue sharing notes issued in a private placement in 1999. In addition,
for all periods presented, principal payments on long-term debt include
payments on mortgage and building improvements loans and payments on capital
lease obligations.
OUTLOOK
Cash, cash equivalents and investments at December 31, 2001 were
$603,884,000. Prior to 2001, we historically have had negative cash flows from
operations and have used the proceeds of public and private placements of our
equity and debt securities to fund
24
operations. We currently believe that projected increases in sales of our
three U.S. marketed products, PROVIGIL, ACTIQ and GABITRIL, in combination
with other revenues, will allow us to achieve continued profitability and
positive cash flows from operations in 2002. At this time, we cannot
accurately predict the effect of certain developments on future product sales
such as the degree of market acceptance of our products, competition, the
effectiveness of our sales and marketing efforts and our ability to
demonstrate the utility of our products in indications beyond those already
included in the FDA approved labels. Other revenues include receipts from
collaborative research and development agreements and co-promotion agreements.
The continuation of any of these agreements is subject to the achievement of
certain milestones and to periodic review by the parties involved.
We expect to continue to incur significant expenditures associated with
manufacturing, selling and marketing PROVIGIL, ACTIQ and GABITRIL and
conducting additional clinical studies to explore the utility of these
products in treating disorders beyond those currently approved in their
respective labels. We also expect to continue to incur significant
expenditures to fund research and development activities for our other product
candidates. We may seek sources of funding for a portion of these programs
through collaborative arrangements with third parties. However, we intend to
retain a portion of the commercial rights to these programs and, as a result,
we still expect to spend significant funds on our share of the cost of these
programs, including the costs of research, preclinical development, clinical
research and manufacturing.
We may have significant fluctuations in quarterly results based primarily on
the level and timing of:
. product sales and cost of product sales;
.achievement and timing of research and development milestones;
.co-promotion and other collaboration revenues;
.cost and timing of clinical trials; and
.marketing and other expenses.
In December 2001, we acquired Group Lafon, which gave us worldwide control
of the intellectual property, marketing, and manufacturing rights related to
modafinil, the active drug substance in PROVIGIL. PROVIGIL accounted for
approximately 66% of our total product sales for the year ended December 31,
2001. By consolidating our financial results with those of Group Lafon, we
expect to reduce significantly our cost of goods sold related to PROVIGIL.
While the bulk of these cost savings result from eliminating the effect of
preexisting contractual arrangements between us and Group Lafon, there could
be unanticipated costs associated with our operation and management of the
Group Lafon business that could limit these expected cost savings or other
anticipated benefits of the Group Lafon acquisition. As a result, our actual
cost savings, if any, and other anticipated benefits could differ from or
their impact could be delayed compared to our expectations.
In the second quarter of 2001, we completed a private placement of
$400,000,000 of 5.25% convertible subordinated notes due May 2006. In the
fourth quarter of 2001, $217,000,000 of these convertible subordinated notes
were exchanged into 3,691,705 shares of common stock. The annual interest
payments on the remaining notes will be $9,608,000. Additionally, in December
2001, we completed a private placement of $600,000,000 of 2.50% convertible
subordinated notes due December 2006. The annual interest payments on these
notes will be $15,000,000, payable semiannually.
Based on our current level of operations and projected sales of our products
combined with other revenues and interest income, we believe that we will be
able to service our existing debt and meet our capital expenditure and working
capital requirements for the next several years. However, we cannot be sure
that our anticipated revenue growth will be realized or that we will continue
to generate positive cash flow from operations. We may need to obtain
additional funding for our operational needs, or for future significant
strategic transactions, and we cannot be certain that funding will be
available on terms acceptable to us, or at all.
The following table summarizes our obligations to make future payments under
current contracts:
[Enlarge/Download Table]
Payments due by period
------------------------------------------------------------
Less Than 1 After 5
Total Year 1-3 Years 4-5 Years Years
------------ ----------- ----------- ------------ ----------
Long-term debt......... $ 75,545,000 $10,981,000 $53,747,000 $ 3,784,000 $7,033,000
Capital lease
obligations........... 2,852,000 1,027,000 1,243,000 156,000 426,000
Operating leases....... 10,600,000 3,000,000 5,500,000 2,100,000 --
Convertible notes...... 783,000,000 -- -- 783,000,000 --
Other long-term
obligations........... 37,392,000 20,192,000 16,651,000 549,000 --
------------ ----------- ----------- ------------ ----------
Total contractual cash
obligations............ $909,389,000 $35,200,000 $77,141,000 $789,589,000 $7,459,000
============ =========== =========== ============ ==========
The following table summarizes future payments under contingent or other
potential commitments:
[Download Table]
Amount of commitment expiration per period
-----------------------------------------------
Less Than 1 Over 5
Total Year 1-3 Years 4-5 Years Years
-------- ----------- --------- --------- ------
Standby letters of credit...... $800,000 $800,000 $-- $-- $--
Total commitments............... $800,000 $800,000 $-- $-- $--
======== ======== ==== ==== ====
25
COMMITTMENTS AND CONTINGENCIES
Related Party
--Cephalon Clinical Partners, L.P.
In August 1992, we exclusively licensed our rights to MYOTROPHIN for human
therapeutic use within the United States, Canada and Europe to Cephalon
Clinical Partners, L.P. (CCP). Development and clinical testing of MYOTROPHIN
is performed on behalf of CCP under a research and development agreement with
CCP.
CCP has granted us an exclusive license to manufacture and market MYOTROPHIN
for human therapeutic use within the United States, Canada and Europe in
return for royalty payments equal to a percentage of product sales and a
milestone payment of approximately $16,000,000 that will be made if MYOTROPHIN
receives regulatory approval.
We have a contractual option, but not an obligation, to purchase all of the
limited partnership interests of CCP, which is exercisable upon the occurrence
of certain events following the first commercial sale of MYOTROPHIN. If, and
only if, we decide to exercise this purchase option, we would make an advance
payment of approximately $40,275,000 in cash or, at our election,
approximately $42,369,000 in shares of common stock or a combination thereof.
Should we discontinue development of MYOTROPHIN, or if we do not exercise this
purchase option, our license will terminate and all rights to manufacture or
market MYOTROPHIN in the United States, Canada and Europe will revert to CCP,
which may then commercialize MYOTROPHIN itself or license or assign its rights
to a third party. In that event, we would not receive any benefits from such
commercialization, license or assignment of rights.
Legal Proceedings
In August 1999, the U.S. District Court for the Eastern District of
Pennsylvania entered a final order approving the settlement of a class action
in which plaintiffs alleged that statements made about the results of certain
clinical studies of MYOTROPHIN were misleading. A related complaint has been
filed with the Court by a small number of plaintiffs who decided not to
participate in the settlement. This related complaint alleges that we are
liable under common law for misrepresentations concerning the results of the
MYOTROPHIN clinical trials, and that we and certain of our current and former
officers and directors are liable for the actions of persons who allegedly
traded in our common stock on the basis of material inside information. We
believe that we have valid defenses to all claims raised in this action. Even
if there is a judgment against us in this case, we do not believe it will have
a material adverse effect on our financial condition or results of operations.
In February 2001, a complaint was filed in Utah state court by Zars, Inc.
and one of its research scientists, against us and our subsidiary Anesta. The
plaintiffs are seeking a declaratory judgment to establish their right to
develop transdermal or other products containing fentanyl and other
pharmaceutically active agents under a royalty and release agreement between
Zars and Anesta. The complaint also asks for unspecified damages for breach of
contract, interference with economic relations, defamation and slander. We
believe that we have valid defenses to all claims raised in this action. In
any event, we do not believe any judgment against us will have a material
adverse effect on our financial condition or results of operations.
We are a party to certain other litigation in the ordinary course of our
business, including matters alleging employment discrimination, product
liability and breach of commercial contract. However, we are vigorously
defending ourselves in all of these actions and do not believe these matters,
even if adversely adjudicated or settled, would have a material adverse effect
on our financial condition or results of operations.
CERTAIN RISKS RELATED TO OUR BUSINESS
In addition to historical facts or statements of current condition, this
report contains forward-looking statements. Forward-looking statements provide
our current expectations or forecasts of future events. These may include
statements regarding anticipated scientific progress in our research programs,
development of potential pharmaceutical products, prospects for regulatory
approval, manufacturing capabilities, market prospects for our products, sales
and earnings projections, and other statements regarding matters that are not
historical facts. Some of these forward-looking statements may be identified
by the use of words in the statements such as "anticipate," "estimate,"
"expect," "project," "intend," "plan," "believe" or other words and terms of
similar meaning. Our performance and financial results could differ materially
from those reflected in these forward-looking statements due to general
financial, economic, regulatory and political conditions affecting the
biotechnology and pharmaceutical industries as well as more specific risks and
uncertainties such as those set forth above and in this report. Given these
risks and uncertainties, any or all of these forward-looking statements may
prove to be incorrect. Therefore, you should not rely on any such forward-
looking statements. Furthermore, we do not intend to update publicly any
forward-looking statements, except as required by law. This discussion is
permitted by the Private Securities Litigation Reform Act of 1995.
A significant portion of our revenues is derived from U.S. sales of our three
largest products and our future success will depend on the continued
acceptance and growth of these products.
For the year ended December 31, 2001, approximately 83% of our total
revenues were derived from U.S. sales of PROVIGIL, GABITRIL and ACTIQ. We
cannot be certain that these products will continue to be accepted in their
markets. Specifically, the following factors, among others, could affect the
level of market acceptance of PROVIGIL, GABITRIL and ACTIQ, including:
. the perception of the healthcare community of their safety and efficacy,
both in an absolute sense and relative to that of competing products;
26
. the effectiveness of our sales and marketing efforts;
. unfavorable publicity regarding these products or similar products;
. product price relative to other competing drugs or treatments;
. changes in government and other third-party payor reimbursement policies
and practices; and
. regulatory developments affecting the manufacture, marketing or use of
these products.
Any material adverse developments with respect to the sale or use of
PROVIGIL, GABITRIL or ACTIQ could significantly reduce our product revenues
and have a material adverse effect on our ability to generate net income and
positive net cash flow from operations.
We may be unsuccessful in our efforts to expand the number and scope of
authorized uses of PROVIGIL, GABITRIL or ACTIQ, which would hamper sales
growth and make it more difficult to sustain profitability.
The market for the approved indications of our three largest products is
relatively small. We believe that a portion of our product sales is derived
from the use of these products outside of their labeled indications. To a
large degree, our future success depends on expansion of the approved
indications for our products and physicians prescribing our products outside
of the approved indications. Under current FDA and European medical authority
regulations, we are limited in our ability to promote the use of these
products outside their labeled use. Any label expansion will require FDA
approval.
We have initiated clinical studies to examine whether or not PROVIGIL and
GABITRIL are effective and safe when used to treat disorders outside their
currently approved uses. Although some study data has been positive,
additional studies in these disorders will be necessary before we can apply to
regulatory authorities to expand the authorized uses of these products. We do
not know whether these studies will demonstrate safety and efficacy, or if
they do, whether we will succeed in receiving regulatory approval to market
PROVIGIL and GABITRIL for additional disorders. If the results of some of
these studies are negative, or if adverse experiences are reported in these
clinical studies or otherwise in connection with the use of these products by
patients, this could undermine physician and patient comfort with the
products, limit their commercial success, and diminish their acceptance. Even
if the results of these studies are positive, the impact on sales of PROVIGIL
and GABITRIL may be minimal unless we are able to obtain FDA and foreign
medical authority approval to expand the authorized use of these products. FDA
regulations limit our ability to communicate the results of additional
clinical studies to patients and physicians without first obtaining approval
for any expanded uses.
We do not expect to conduct studies for the purpose of requesting an
expansion of the authorized use of ACTIQ. Future sales growth, if any, of
ACTIQ outside of the treatment of breakthrough cancer pain could come only
from physician prescriptions outside this labeled use. Physicians may or may
not prescribe ACTIQ for off-label uses and, in any event, sales from such
prescriptions may not prove to be significant to our results of operations.
As our products are used commercially, unintended side effects, adverse
reactions or incidents of misuse may occur which could result in additional
regulatory controls and reduced sales of our products.
Prior to 1999, the use of our products had been limited principally to
clinical trial patients under controlled conditions and under the care of
expert physicians. The widespread commercial use of our products could produce
undesirable or unintended side effects that have not been evident in our
clinical trials or the relatively limited commercial use to date. In addition,
in patients who take multiple medications, drug interactions could occur that
can be difficult to predict. Additionally, incidents of product misuse may
occur. These events, among others, could result in additional regulatory
controls that could limit the circumstances under which the product is
prescribed or even lead to the withdrawal of the product from the market. More
specifically, ACTIQ has been approved under regulations concerning drugs with
certain safety profiles, under which the FDA has established special
restrictions to ensure safe use. Any violation of these special restrictions
could lead to the imposition of further restrictions or withdrawal of the
product from the market.
We may not be able to maintain adequate protection for our intellectual
property or market exclusivity for certain of our products and therefore
potential competitors may develop competing products, which could result in a
decrease in sales and market share, cause us to reduce prices to compete
successfully, and limit our commercial success.
We place considerable importance on obtaining patent protection for new
technologies, products and processes. To that end, we file applications for
patents covering the composition of matter or uses of our drug candidates or
our proprietary processes. The patent positions of pharmaceutical and
biotechnology companies can be highly uncertain and involve complex legal,
scientific and factual questions. To date, there has emerged no consistent
policy regarding breadth of claims in such companies' patents. Accordingly,
the patents and patent applications relating to our products, product
candidates and technologies may be challenged, invalidated or circumvented by
third parties and might not protect us against competitors with similar
products or technology. Patent disputes are frequent and can preclude
commercialization of products. If we ultimately lose any disputes, we could be
subject to competition or significant liabilities, we could be required to
enter into third party licenses or we could be required to cease using the
technology or product in dispute. In addition, even if such licenses are
available, the terms of the license requested by the third party could be
unacceptable to us.
The composition of matter patent for modafinil expired in 2001. We license
or own U.S. and foreign patent rights covering the particles size
pharmaceutical composition of modafinil that expire between 2014 and 2015.
Ultimately, these particle size patents
27
might be found invalid if challenged by a third party or a potential
competitor could develop a competing product or product formulation that would
avoid infringement of these patents. If a competitor developed a competing
product that avoided infringement, our revenues from our modafinil-based
products could be significantly and negatively impacted.
We also rely on trade secrets, know-how and continuing technological
advancements to support our competitive position. Although we have entered
into confidentiality and invention rights agreements with our employees,
consultants, advisors and collaborators, these parties could fail to honor
such agreements or we could be unable to effectively protect our rights to our
unpatented trade secrets and know-how. Moreover, others could independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets and know-how. In addition, many of
our scientific and management personnel have been recruited from other
biotechnology and pharmaceutical companies where they were conducting research
in areas similar to those that we now pursue. As a result, we could be subject
to allegations of trade secret violations and other claims.
We may incur additional losses.
The quarter ended September 30, 2001 was our first profitable quarter from
commercial operations since inception and our accumulated deficit was
$576,691,000 at December 31, 2001. Our losses have resulted principally from
costs incurred in research and development, including clinical trials, and
from selling, general and administrative costs associated with our operations.
In order for us to maintain profitability from commercial operations, we must
continue to achieve product and other revenue at or above their current
levels. Moreover, our future growth depends, in part, on our ability to obtain
regulatory approvals for future products, or for existing products in new
indications, and our ability to successfully develop, commercialize,
manufacture and market any other product candidates.
Manufacturing, supply and distribution problems may create supply disruptions
that could result in a reduction of product sales revenue, and damage
commercial prospects for our products.
At our two manufacturing facilities in France, we produce the active drug
substance modafinil and certain other commercial products. At our U.S.
facility in Salt Lake City, Utah, we manufacture ACTIQ for international
markets. For the remainder of our products, we rely on third parties for
product manufacturing. In all cases, we must comply with all applicable
regulatory requirements of the FDA and foreign authorities, including cGMP
regulations. In addition, we must comply with all applicable regulatory
requirements of the Drug Enforcement Administration, and analogous foreign
authorities for certain products. The facilities used by us and third parties
to manufacture, store and distribute our products are subject to inspection by
regulatory authorities at any time to determine compliance with regulations.
These regulations are complex, and any failure to comply with them could lead
to remedial action, civil and criminal penalties and delays in production or
distribution of material.
We depend upon sole suppliers for active drug substances contained in our
products, including our own French plant that manufactures modafinil, and
Abbott Laboratories to manufacture finished commercial supplies of ACTIQ and
GABITRIL for the U.S. market. We have two qualified manufacturers, Watson
Pharmaceuticals and DSM Pharmaceuticals, for finished commercial supplies of
PROVIGIL. The process of changing or adding a manufacturer or changing a
formulation requires prior FDA and/or European medical authority approval and
is very time-consuming. If we are unable to manage this process effectively,
we could face supply disruptions that would result in significant costs and
delays, undermine goodwill established with physicians and patients, and
damage commercial prospects for our products. We maintain inventories of
active drug substances and finished products to protect against supply
disruptions. Nevertheless, any disruption in these activities could impede our
ability to sell our products and could reduce sales revenue. We also rely on
third parties to distribute, provide customer service activities and accept
and process returns.
Our activities and products are subject to significant government regulations
and approvals, which are often costly and could result in adverse consequences
to our business if we fail to comply.
We currently have a number of products that have been approved for sale in
either the United States, foreign countries or both. All of our approved
products are subject to extensive continuing regulations relating to, among
other things, testing, manufacturing, quality control, labeling, and
promotion. The failure to comply with any rules and regulations of the FDA or
any foreign medical authority, or the post-approval discovery of previously
unknown problems relating to our products could result in, among others:
. fines, recalls, or seizures of products;
. total or partial suspension of product sales;
. non-approval of product license applications;
. restrictions on our ability to enter into strategic relationships; and
. criminal prosecution.
It can be both costly and time-consuming for us to comply with these
regulations. Additionally, incidents of adverse drug reactions, unintended
side effects or misuse relating to our products could result in additional
regulatory controls or restrictions, or even lead to withdrawal of the product
from the market.
With respect to our product candidates and for new therapeutic indications
for our existing products, we conduct research, preclinical testing and
clinical trials. We cannot market these product candidates or these new
indications in the United States or other countries without receiving approval
from the FDA or the appropriate foreign medical authority. The approval
process requires
28
substantial time, effort and financial resources, and we may never obtain
approval in a timely manner, or at all. We cannot provide you with any
assurance that required approvals will be obtained timely or at all. In
addition, if the FDA or a foreign medical authority determines that we have
not complied with regulations in the research and development of a product
candidate or a new indication, they may not grant approval. Without these
required approvals, our ability to substantially grow revenues in the future
could be adversely affected.
In addition, because PROVIGIL and ACTIQ contain active ingredients that are
controlled substances, we are subject to regulation by the DEA and analogous
foreign organizations relating to the manufacture, shipment, sale and use of
the applicable products. These regulations also are imposed on prescribing
physicians and other third parties, making the use of such products relatively
complicated and expensive. Future products may contain controlled substances.
The increased concern for safety by the FDA and the DEA with respect to
products containing controlled substances can result in the imposition of
restrictions on marketing or even withdrawal of regulatory approval for such
products. In addition, negative publicity may bring about rejection of the
product by the medical community. If the DEA, FDA or a foreign medical
authority withdrew the approval of, or placed additional significant
restrictions on the marketing of any of our products, our products sales and
ability to promote our products could be substantially affected.
The failure to successfully operate Group Lafon could negatively impact our
results of operations.
The operation of Group Lafon following our December 2001 acquisition
involves a number of risks and presents financial, managerial and operational
challenges, including:
. diversion of management attention from our existing business and
operations;
. difficulty with integration of personnel, and financial and other
systems; and
. increased foreign operations that may be difficult to manage, especially
since we have limited experience operating in France.
In light of these challenges, we may not be able to successfully manage the
operations and personnel of Group Lafon. Customer dissatisfaction or
manufacturing, supply, or distribution problems associated with Group Lafon's
products could cause our pharmaceutical business in France to underperform
relative to our expectations, which could have a material adverse effect on
our business. We also could experience financial or other setbacks if Group
Lafon's businesses have problems or liabilities of which we were not aware or
are substantially greater than we anticipated based on our evaluation of the
business prior to the acquisition.
We may not achieve the expected cost savings and other benefits of the Group
Lafon acquisition.
In acquiring Group Lafon, we secured worldwide control of the intellectual
property, marketing, and manufacturing rights related to modafinil, the active
drug substance in PROVIGIL. PROVIGIL accounted for approximately 66% of our
total product sales for the year ended December 31, 2001. By consolidating our
financial results with those of Group Lafon, we expect to reduce our cost of
goods sold related to PROVIGIL from approximately 22% of net sales to
approximately 7% of net sales. While the bulk of these expected cost savings
result from eliminating the effect of preexisting contractual arrangements
between us and Group Lafon, there could be unanticipated costs associated with
our operation and management of the Group Lafon business that could limit or
eliminate these expected cost savings or other anticipated benefits of the
Group Lafon acquisition. As a result, our actual cost savings, if any, and
other anticipated benefits could differ from, or their impact could be delayed
compared to, our expectations as described herein.
The efforts of government entities and third party payors to contain or reduce
the costs of health care may adversely affect our sales and limit the
commercial success of our products.
In certain foreign markets, pricing or profitability of pharmaceutical
products is subject to various forms of direct and indirect governmental
control. In the United States, there have been, and we expect there will
continue to be, various proposals to implement similar government controls.
The commercial success of our products could be limited if federal or state
governments adopt any such proposals. In addition, in the United States and
elsewhere, sales of pharmaceutical products depend in part on the availability
of reimbursement to the consumer from third party payors, such as government
and private insurance plans. Third party and government payors increasingly
challenge the prices charged for products and limit reimbursement levels
offered to consumers for such products. Third party and government payors
could focus their cost control efforts on our products, especially with
respect to prices of and reimbursement levels for products prescribed outside
their labeled indications. In these cases, these efforts could negatively
impact sales of and profits, if any, on our products.
We experience intense competition in our fields of interest, which may
adversely affect our business.
Large and small companies, academic institutions, governmental agencies, and
other public and private research organizations conduct research, seek patent
protection, and establish collaborative arrangements for product development
in competition with us. Products developed by any of these entities may
compete directly with those we develop or sell. The conditions that our
products treat, and some of the other disorders for which we are conducting
additional studies, are currently treated with several drugs, many of which
have been available for a number of years or are available in inexpensive
generic forms. With respect to PROVIGIL, there are several other products used
for the treatment of narcolepsy in the United States including
methylphenidate, and in our other licensed territories, all of which have been
available for a number of years and many of which are available in inexpensive
generic forms. With respect to ACTIQ, we face competition from inexpensive
oral opioid tablets and more expensive but quick-acting invasive
29
(intravenous, intramuscular and subcutaneous) opioid delivery systems. Other
technologies for rapidly delivering opioids to treat breakthrough pain are
being developed, at least one of which is in clinical trials. With respect to
GABITRIL, there are several products, including gabapentin, used as adjunctive
therapy for the partial seizure market. Some are well-established therapies
that have been on the market for several years while others have recently
entered the partial seizure marketplace. In addition, several treatments for
partial seizures are available in inexpensive generic forms. Thus we will need
to demonstrate to physicians, patients and third party payors that the cost of
our products is reasonable and appropriate in the light of their safety and
efficacy, the price of competing products and the related health care benefits
to the patient. In addition, many of our competitors have substantially
greater capital resources, research and development staffs and facilities than
we have, and substantially greater experience in conducting clinical trials,
obtaining regulatory approvals and manufacturing and marketing pharmaceutical
products. These entities represent significant competition for us. In
addition, competitors who are developing products for the treatment of
neurological or oncological disorders might succeed in developing technologies
and products that are more effective than any that we develop or sell or that
would render our technology and products obsolete or noncompetitive.
Competition and innovation from these or other sources, including advances in
current treatment methods, could potentially affect sales of our products
negatively or make them obsolete. In addition, we may be at a competitive
marketing disadvantage against companies that have broader product lines and
whose sales personnel are able to offer more complementary products than we
can. Any failure to maintain our competitive position could adversely affect
our business and results of operations.
We face significant product liability risks, which may have a negative effect
on our financial performance.
The administration of drugs to humans, whether in clinical trials or
commercially, can result in product liability claims whether or not the drugs
are actually at fault for causing an injury. Furthermore, our products may
cause, or may appear to have caused, serious adverse side effects (including
death) or potentially dangerous drug interactions that we may not learn about
or understand fully until the drug has been administered to patients for some
time. As our products are used more widely and in patients with varying
medical conditions, the likelihood of an adverse drug reaction, unintended
side effect or incidence of misuse may increase. Product liability claims can
be expensive to defend and may result in large judgments or settlements
against us, which could have a negative effect on our financial performance.
We maintain product liability insurance in amounts we believe to be
commercially reasonable, but claims could exceed our coverage limits or
purchasing sufficient insurance could be expensive. Even if a product
liability claim is not successful, the adverse publicity and time and expense
of defending such a claim may interfere with our business.
The results and timing of our research and development activities, including
future clinical trials are difficult to predict, subject to future setbacks
and, ultimately, may not result in any additional pharmaceutical products,
which may adversely affect our business.
In order to remain competitive, we are focused on the search for new
pharmaceutical products. These activities include engaging in discovery
research and process development, conducting preclinical and clinical studies,
and seeking regulatory approval in the United States and abroad. In all of
these areas, we have relatively limited resources and compete against larger
multinational pharmaceutical companies. Moreover, even if we undertake these
activities in an effective and efficient manner, regulatory approval for the
sale of new pharmaceutical products remains highly uncertain since the
majority of compounds discovered do not enter clinical studies and the
majority of therapeutic candidates fail to show the human safety and efficacy
necessary for regulatory approval and successful commercialization.
Preclinical testing and clinical trials must demonstrate that a product
candidate is safe and efficacious. The results from preclinical testing and
early clinical trials may not be predictive of results obtained in subsequent
clinical trials, and we cannot be sure that these clinical trials will
demonstrate the safety and efficacy necessary to obtain regulatory approval
for any product candidates. A number of companies in the biotechnology and
pharmaceutical industries have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials. In
addition, certain clinical trials are conducted with patients having the most
advanced stages of disease. During the course of treatment, these patients
often die or suffer other adverse medical effects for reasons that may not be
related to the pharmaceutical agent being tested. Such events can have a
negative impact on the statistical analysis of clinical trial results.
The completion of clinical trials of our product candidates may be delayed
by many factors, including the rate of enrollment of patients. Neither we nor
our collaborators can control the rate at which patients present themselves
for enrollment, and the rate of patient enrollment may not be consistent with
our expectations or sufficient to enable clinical trials of our product
candidates to be completed in a timely manner or at all. In addition, we may
not be permitted by regulatory authorities to undertake additional clinical
trials for any of our product candidates. Even if such trials are conducted,
our product candidates may not prove to be safe and efficacious or receive
regulatory approvals. Any significant delays in, or termination of, clinical
trials of our product candidates could impact our ability to substantially
increase our product sales in the future.
Our research and development and marketing efforts are often dependent on
corporate collaborators and other third parties who may not devote sufficient
time, resources and attention to our programs, and which may limit our efforts
to successfully develop and market potential products.
Because we have limited resources, we have entered into a number of
collaboration agreements with other pharmaceutical companies, most importantly
with Lundbeck and Sanofi-Synthelabo related to our research efforts in
Parkinson's and Alzheimer's disease, and solid tumors, respectively. In some
cases our collaboration agreements call for our partners to control:
. the supply of bulk or formulated drugs for commercial use or for use in
clinical trials;
30
. the design and execution of clinical studies;
. the process of obtaining regulatory approval to market the product;
and/or
. marketing and selling of any approved product.
In each of these areas, our partners may not support fully our research and
commercial interests since our program may compete for time, attention and
resources with the internal programs of our corporate collaborators. As such,
our program may not move forward as effectively, or advance as rapidly as it
might if we had retained complete control of all research, development,
regulatory and commercialization decisions. We also rely on several of these
collaborators and other third parties for the production of compounds and the
manufacture and supply of pharmaceutical products. Additionally, we may find
it necessary from time to time to seek new or additional partners to assist us
in commercializing our products, though we might not be successful in
establishing any such new or additional relationships.
Our product sales and related financial results will fluctuate and these
fluctuations may cause our stock price to fall, especially if they are not
anticipated by investors.
A number of analysts and investors who follow our stock have developed
models to attempt to forecast future product sales and have established
earnings expectations based upon those models. These models, in turn, are
based in part on estimates of projected revenue and earnings that we disclose
publicly. Forecasting revenue growth is difficult, especially when there is
little commercial history and when the level of market acceptance of our
products is uncertain or, in the case of Group Lafon, when we have just
recently acquired a portfolio of products. Forecasting is further complicated
by the difficulties in estimating stocking levels at pharmaceutical
wholesalers and at retail pharmacies and in estimating potential product
returns. As a result, it is likely that there will be significant fluctuations
in revenues, which may not meet with market expectations and which also may
adversely affect our stock price. There are a number of other factors that
could cause our financial results to fluctuate unexpectedly, including:
. the cost of product sales;
. achievement and timing of research and development milestones;
. co-promotion and other collaboration revenues;
. cost and timing of clinical trials;
. marketing and other expenses; and
. manufacturing or supply disruption.
The price of our common stock has been and may continue to be highly volatile.
The market price of our common stock is volatile, and we expect it to
continue to be volatile for the foreseeable future. For example, from January
1, 2001 through February 12, 2002, our common stock traded at a high price of
$78.880 and a low price of $36.375. Negative announcements, including, among
others:
. adverse regulatory decisions;
. disappointing clinical trial results;
. disputes concerning patent or other proprietary rights; or
. operating results that fall below the market's expectations
could trigger significant declines in the price of our common stock. In
addition, external events, such as news concerning our competitors, changes in
government regulations that may impact the biotechnology or pharmaceutical
industries or the movement of capital into or out of our industry, are also
likely to affect the price of our common stock.
A portion of our product sales and certain balance sheet items are subject to
exchange rate fluctuations in the normal course of business that could
adversely affect our reported results of operations.
Historically, a portion of our product sales has been earned in currencies
other than the U.S. dollar. As a result of our acquisition of Group Lafon, we
expect that the portion of our product sales denominated in the euro and other
local currencies will increase. We translate revenue earned from product sales
into U.S. dollars at the average exchange rate applicable during the relevant
period. A strengthening of the dollar could, therefore, reduce our earnings.
Consequently, fluctuations in the rate of exchange between the U.S. dollar and
the euro and other local currencies may affect period-to-period comparisons of
our operating results. In addition, we may face exposure to the extent that
exchange rate fluctuations affect the repayment of certain intercompany
indebtedness. Finally, the balance sheet of our foreign operations will be
translated into U.S. dollars at the period-end exchange rate. This latter
exposure will result in changes to the translated value of assets and
liabilities, with the impact of the translation included as a component of
stockholders' equity.
We are involved in or may become involved in the future in legal proceedings
that, if adversely adjudicated or settled, could materially impact our
financial condition.
As a biopharmaceutical company, we are or may become a party to litigation
in the ordinary course of our business, including matters alleging employment
discrimination, product liability, patent infringement, or breach of
commercial contract, among others.
31
In general, litigation claims can be expensive and time consuming to defend
and could result in settlements or damages that could significantly impact
results of operations and financial condition. We currently are vigorously
defending ourselves against certain litigation matters. However, even if these
existing lawsuits were adversely adjudicated or settled, we do not believe
there would be a material impact on our results of operations or our financial
condition.
Our dependence on key executives and scientists could impact the development
and management of our business.
We are highly dependent upon our ability to attract and retain qualified
scientific, technical and managerial personnel. There is intense competition
for qualified personnel in the pharmaceutical and biotechnology industries,
and we cannot be sure that we will be able to continue to attract and retain
the qualified personnel necessary for the development and management of our
business. Although we do not believe the loss of one individual would
materially harm our business, our research and development programs and our
business might be harmed by the loss of the services of multiple existing
personnel, as well as the failure to recruit additional key scientific,
technical and managerial personnel in a timely manner. Much of the know-how we
have developed resides in our scientific and technical personnel and is not
readily transferable to other personnel. We do not have employment agreements
with any of our key scientific, technical and managerial employees. We do not
maintain "key man" life insurance on any of our employees.
We may be required to incur significant costs to comply with environmental
laws and regulations and our compliance may limit any future profitability.
Our research and development activities involve the controlled use of
hazardous, infectious and radioactive materials that could be hazardous to
human health and safety or the environment. We store these materials and
various wastes resulting from their use at our facility pending ultimate use
and disposal. We are subject to a variety of federal, state and local laws and
regulations governing the use, generation, manufacture, storage, handling and
disposal of these materials and wastes, and we may be required to incur
significant costs to comply with both existing and future environmental laws
and regulations.
We believe that our safety procedures for handling and disposing of these
materials comply with foreign, federal, state and local laws and regulations,
but we cannot completely eliminate the risk of accidental injury or
contamination from these materials. In the event of an accident, we could be
held liable for any resulting damages, which could include fines and remedial
costs. These damages could require payment by us of significant amounts over a
number of years, which would be reflected in our results of operations and
financial condition.
Anti-takeover provisions may delay or prevent changes in control of our
management or deter a third party from acquiring us, limiting our
stockholders' ability to profit from such a transaction.
Our Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock, $0.01 par value, of which 1,000,000 have been reserved for
issuance in connection with our stockholder rights plan, and to determine the
price, rights, preferences and privileges of those shares without any further
vote or action by our stockholders. Our stockholder rights plan could have the
effect of making it more difficult for a third party to acquire a majority of
our outstanding voting stock.
We are subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which prohibits us from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person becomes an
interested stockholder, unless the business combination is approved in a
prescribed manner. The application of Section 203 could have the effect of
delaying or preventing a change of control of Cephalon. We also have adopted a
"poison pill" rights plan that will dilute the stock ownership of an acquirer
of our stock upon the occurrence of certain events. Section 203, the rights
plan, and the provisions of our certificate of incorporation, our bylaws and
Delaware corporate law, may have the effect of deterring hostile takeovers or
delaying or preventing changes in control of our management, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices.
We may be unable to service or repay our substantial indebtedness or other
contingencies.
As of December 31, 2001, we had significant levels of indebtedness that,
among other things, could make it difficult for us to obtain financing in the
future, limit our future flexibility and make us more vulnerable in the event
of a downturn in our business. Unless we are able to generate sufficient cash
flow from operations to service our indebtedness, we will be required to raise
additional funds. Because the financing markets may be unwilling to provide
funding to us or may only be willing to provide funding on terms that we would
consider unacceptable, we may not have either cash available or be able to
obtain funding to permit us to meet our debt service obligations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not hold any derivative financial instruments and we do not engage in
any speculative or derivative trading activities. Therefore, our market risk
exposure is limited to changes in interest rates and foreign currency
fluctuations. Our exposure to market risk for a change in interest rates
relates primarily to our investment portfolio, since all of our outstanding
debt is fixed rate. Our investments are classified as short-term and as
"available for sale." We do not believe that short-term fluctuations in
interest rates would materially affect the value of our securities. Prior to
our acquisition of Group Lafon, our exposure to market risk for fluctuations
in foreign currency has related primarily to the intercompany balance with our
U.K. subsidiary. Exchange gains and losses related to amounts due from the
U.K. subsidiary have been included in our consolidated statement of
operations.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cephalon, Inc.:
We have audited the accompanying consolidated balance sheets of Cephalon,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Anesta Corp., a company acquired during 2000 in a transaction accounted for as
a pooling-of-interests, as discussed in Note 2. Such statements are included
in the consolidated financial statements of Cephalon, Inc. and reflect total
revenues of 13 percent in 1999 of the related consolidated revenues. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to amounts included for Anesta
Corp., is based solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the 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 and the
report of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Cephalon, Inc. and subsidiaries as of
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
February 11, 2002 (except with
respect to the matter discussed in Note 3,
as to which the date is March 29, 2002)
33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Anesta Corp.:
In our opinion, the statements of operations, of stockholder's equity and of
cash flows for the year ended December 31, 1999 of Anesta Corp. (not presented
separately herein) present fairly, in all material respects, the results of
operations and cash flows of Anesta Corp. for the year ended December 31,
1999, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which requires 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion. We have not audited the
financial statements of Anesta Corp. for any period subsequent to December 31,
1999.
/s/ PricewaterhouseCoopers LLP
Salt Lake City, Utah
February 18, 2000, except as to the
information presented in Note 14 (which is not
presented herein) for which the date is March 13, 2000
34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cephalon, Inc.:
We have audited, in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Cephalon, Inc. and
subsidiaries and have issued our report thereon dated February 11, 2002
(except with respect to the matter discussed in Note 3, as to which the date
is March 29, 2002). Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule of valuation
and qualifying accounts is presented for purposes of complying with the
Securities and Exchange Commissions' rules and is not part of the basic
financial statements. This schedule has been subject to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion based on our audit and the report of other auditors, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
February 11, 2002
35
CEPHALON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
[Download Table]
December 31, December 31,
2001 2000
ASSETS
-------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents....................... $ 548,727,000 $ 36,571,000
Investments..................................... 55,157,000 60,813,000
Receivables, net................................ 75,192,000 21,905,000
Inventory....................................... 47,513,000 20,161,000
Other current assets............................ 7,872,000 1,579,000
-------------- ------------
Total current assets............................ 734,461,000 141,029,000
PROPERTY AND EQUIPMENT, net...................... 64,706,000 29,730,000
GOODWILL......................................... 248,911,000 --
INTANGIBLE ASSETS, net........................... 298,269,000 135,794,000
DEBT ISSUANCE COSTS.............................. 26,720,000 --
OTHER ASSETS..................................... 16,020,000 1,882,000
-------------- ------------
$1,389,087,000 $308,435,000
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt............... $ 32,200,000 $ 42,950,000
Accounts payable................................ 24,536,000 3,590,000
Accrued expenses................................ 49,370,000 32,758,000
Current portion of deferred revenues............ 824,000 1,469,000
-------------- ------------
Total current liabilities....................... 106,930,000 80,767,000
LONG-TERM DEBT................................... 866,589,000 55,138,000
DEFERRED REVENUES................................ 6,042,000 7,151,000
OTHER LIABILITIES................................ 10,795,000 186,000
-------------- ------------
Total liabilities............................... 990,356,000 143,242,000
-------------- ------------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000
shares authorized, 2,500,000 issued and
outstanding at December 31, 2000............... -- 25,000
Common stock, $.01 par value, 100,000,000 shares
authorized, 54,909,533 and 42,478,225 shares
issued, and 54,685,792 and 42,340,042 shares
outstanding.................................... 549,000 425,000
Additional paid-in capital...................... 982,123,000 683,004,000
Treasury stock, 223,741 and 138,183 shares
outstanding, at cost........................... (9,523,000) (4,119,000)
Accumulated deficit............................. (576,691,000) (515,543,000)
Accumulated other comprehensive income.......... 2,273,000 1,401,000
-------------- ------------
Total stockholders' equity...................... 398,731,000 165,193,000
-------------- ------------
$1,389,087,000 $308,435,000
============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
36
CEPHALON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
[Download Table]
Year Ended December 31,
-----------------------------------------
2001 2000 1999
REVENUES:
-------------------------------------------------------------------------------
Product sales...................... $226,132,000 $ 91,637,000 $ 27,602,000
Other revenues..................... 40,511,000 20,153,000 23,832,000
------------ ------------- ------------
266,643,000 111,790,000 51,434,000
------------ ------------- ------------
COSTS AND EXPENSES:
------------------------------------
Cost of product sales.............. 44,946,000 17,768,000 3,921,000
Research and development........... 84,249,000 68,063,000 54,892,000
Selling, general and
administrative.................... 99,615,000 83,725,000 59,665,000
Depreciation and amortization...... 14,434,000 4,008,000 2,079,000
Royalty pre-payment on revenue-
sharing notes..................... -- 6,600,000 --
Merger and integration costs....... 50,000 13,811,000 --
Acquired in-process research and
development....................... 20,000,000 22,200,000 --
------------ ------------- ------------
263,294,000 216,175,000 120,557,000
------------ ------------- ------------
INCOME (LOSS) FROM OPERATIONS....... 3,349,000 (104,385,000) (69,123,000)
------------ ------------- ------------
OTHER INCOME AND EXPENSE
Interest income.................... 12,170,000 16,903,000 9,491,000
Interest expense................... (20,630,000) (5,189,000) (8,377,000)
Debt exchange expense.............. (52,444,000) -- --
Other expense...................... (945,000) (1,073,000) (236,000)
------------ ------------- ------------
(61,849,000) 10,641,000 878,000
------------ ------------- ------------
LOSS BEFORE DIVIDENDS ON PREFERRED
STOCK, EXTRAORDINARY GAIN (CHARGE)
AND CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE............ (58,500,000) (93,744,000) (68,245,000)
DIVIDENDS ON CONVERTIBLE
EXCHANGEABLE PREFERRED STOCK....... (5,664,000) (9,063,000) (3,398,000)
------------ ------------- ------------
LOSS BEFORE EXTRAORDINARY GAIN
(CHARGE) AND CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING PRINCIPLE..... (64,164,000) (102,807,000) (71,643,000)
EXTRAORDINARY GAIN (CHARGE) ON EARLY
EXTINGUISHMENT OF DEBT............. 3,016,000 -- (11,187,000)
CUMULATIVE EFFECT OF ADOPTING STAFF
ACCOUNTING BULLETIN 101 (SAB 101).. -- (7,434,000) --
------------ ------------- ------------
LOSS APPLICABLE TO COMMON SHARES.... $(61,148,000) $(110,241,000) $(82,830,000)
============ ============= ============
BASIC AND DILUTED LOSS PER COMMON
SHARE:
Loss per common share before
extraordinary gain (charge) and
cumulative effect of adopting SAB
101............................... $ (1.33) $ (2.51) $ (2.00)
Extraordinary gain (charge) on
early extinguishment of debt...... 0.06 -- (0.31)
Cumulative effect of adopting SAB
101............................... -- (0.19) --
------------ ------------- ------------
$ (1.27) $ (2.70) $ (2.31)
============ ============= ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING................. 48,292,000 40,893,000 35,887,000
============ ============= ============
The following data represents pro forma financial results assuming a
retroactive adoption of a change in accounting principle (SAB 101):
[Download Table]
Pro forma loss applicable to common shares....... $(102,807,000) $(89,873,000)
============= ============
Pro forma basic and diluted loss per common
share........................................... $ (2.51) $ (2.50)
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
37
CEPHALON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
Accumulated
Other Additional
Comprehensive Accumulated Comprehensive Common Preferred Paid-in Treasury
Loss Total Deficit Income Stock Stock Capital Stock
------------- ------------ ------------- ------------- -------- --------- ------------ -----------
BALANCE, JANUARY
1, 1999.......... $137,621,000 $(322,472,000) $ (28,000) $350,000 $ -- $460,258,000 $ (487,000)
Loss............. $ (79,432,000) (79,432,000) (79,432,000) -- -- -- -- --
Foreign currency
translation..... 192,000
Unrealized
investment
gains........... 402,000
-------------
Other
comprehensive
loss............ 594,000 594,000 -- 594,000 -- -- -- --
-------------
Comprehensive
loss............ $ (78,838,000)
=============
Issuance of
common stock.... 12,000,000 -- -- 10,000 -- 11,990,000 --
Employee stock
purchase plan... 92,000 -- -- -- -- 92,000 --
Stock options
exercised....... 9,028,000 -- -- 8,000 -- 9,020,000 --
Stock purchase
warrants
exercised....... 26,984,000 -- -- 19,000 -- 26,965,000 --
Restricted stock
award plan...... 1,023,000 -- -- 1,000 -- 1,022,000 --
Employee benefit
plan............ 453,000 -- -- 1,000 -- 452,000 --
Convertible
preferred stock
issued.......... 120,028,000 -- -- -- 25,000 120,003,000 --
Dividends
declared on
convertible
preferred
stock........... (3,398,000) (3,398,000) -- -- -- -- --
Revenue-sharing
notes issued.... 6,593,000 -- -- -- -- 6,593,000 --
Treasury stock
acquired........ (803,000) -- -- -- -- -- (803,000)
------------ ------------- ---------- -------- ------- ------------ -----------
BALANCE, DECEMBER
31, 1999......... 230,783,000 (405,302,000) 566,000 389,000 25,000 636,395,000 (1,290,000)
Loss............. $(101,178,000) (101,178,000) (101,178,000) -- -- -- -- --
=============
Foreign currency
translation
gain............ 1,015,000
Unrealized
investment
losses.......... (180,000)
-------------
Other
comprehensive
income.......... 835,000 835,000 -- 835,000 -- -- -- --
-------------
Comprehensive
loss............ $(100,343,000)
=============
Employee stock
purchase plan... 78,000 -- -- -- -- 78,000 --
Stock options
exercised....... 13,615,000 -- -- 11,000 -- 13,604,000 --
Stock purchase
warrants
exercised....... 26,436,000 -- -- 24,000 -- 26,412,000 --
Restricted stock
award plan...... 5,625,000 -- -- 1,000 -- 5,624,000 --
Employee benefit
plan............ 891,000 -- -- -- -- 891,000 --
Dividends
declared on
convertible
preferred
stock........... (9,063,000) (9,063,000) -- -- -- -- --
Treasury stock
acquired........ (2,829,000) -- -- -- -- -- (2,829,000)
------------ ------------- ---------- -------- ------- ------------ -----------
BALANCE, DECEMBER
31, 2000......... 165,193,000 (515,543,000) 1,401,000 425,000 25,000 683,004,000 (4,119,000)
Loss............. $ (55,484,000) (55,484,000) (55,484,000) -- -- -- -- --
-------------
Foreign currency
translation
gain............ 368,000
Unrealized
investment
gains........... 504,000
-------------
Other
comprehensive
income.......... 872,000 872,000 -- 872,000 -- -- -- --
-------------
Comprehensive
loss............ $ (54,612,000)
=============
Conversion of
preferred stock
into common
stock........... -- -- -- 70,000 (25,000) (45,000) --
Issuance of
common stock
upon conversion
of convertible
notes........... 262,590,000 -- -- 37,000 -- 262,553,000 --
Stock options
exercised....... 25,542,000 -- -- 13,000 -- 27,304,000 (1,775,000)
Stock purchase
warrants
exercised....... 2,679,000 -- -- 2,000 -- 2,677,000 --
Restricted stock
award plan...... 5,349,000 -- -- 2,000 -- 5,347,000 --
Employee benefit
plan............ 1,283,000 -- -- -- -- 1,283,000 --
Dividends
declared on
convertible
preferred
stock........... (5,664,000) (5,664,000) -- -- -- -- --
Treasury stock
acquired........ (3,629,000) -- -- -- -- -- (3,629,000)
------------ ------------- ---------- -------- ------- ------------ -----------
BALANCE, DECEMBER
31, 2001......... $398,731,000 $(576,691,000) $2,273,000 $549,000 $ -- $982,123,000 $(9,523,000)
============ ============= ========== ======== ======= ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
38
CEPHALON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
[Download Table]
Year Ended December 31,
------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
-------------------------------------------------------------------------------
Loss.............................. $ (55,484,000) $(101,178,000) $(79,432,000)
Adjustments to reconcile loss to
net cash provided by (used for)
operating activities:
Cumulative effect of adoption of
SAB 101.......................... -- 7,434,000 --
Depreciation and amortization..... 14,434,000 3,945,000 2,063,000
Non-cash interest expense......... 5,158,000 -- 2,823,000
Stock-based compensation expense.. 6,632,000 6,516,000 1,476,000
In-process research and
development expense.............. 20,000,000 -- --
Debt exchange expense............. 52,444,000 -- --
Non-cash (gain) charge on early
extinguishment of debt........... (3,016,000) -- 5,687,000
Loss on disposals of property,
plant, and equipment............. 167,000 -- --
Other............................. 14,000 -- --
(Increase) decrease in operating
assets, net of effect of
acquisition:
Receivables...................... (30,434,000) (13,689,000) (1,270,000)
Inventory........................ (8,918,000) (15,903,000) (4,220,000)
Other current assets............. (3,198,000) 417,000 (2,078,000)
Other long-term assets........... (3,935,000) 1,785,000 (2,115,000)
Increase (decrease) in operating
liabilities, net of effect of
acquisition:
Accounts payable................. 10,310,000 (3,041,000) 1,595,000
Accrued expenses................. 9,928,000 12,635,000 4,337,000
Deferred revenues................ (1,754,000) (1,392,000) 2,051,000
Other long-term liabilities...... (74,000) (4,021,000) 712,000
------------- ------------- ------------
Net cash provided by (used for)
operating activities............ 12,274,000 (106,492,000) (68,371,000)
------------- ------------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
-----------------------------------
Purchases of property and
equipment........................ (12,481,000) (7,462,000) (1,029,000)
Acquistion of Group Lafon, net of
cash acquired.................... (447,717,000) -- --
Acquistion of intangible assets... (21,063,000) (56,627,000) --
Sales and maturities (purchases)
of investments, net.............. 6,200,000 186,449,000 (162,772,000)
------------- ------------- ------------
Net cash (used for) provided by
investing activities............ (475,061,000) 122,360,000 (163,801,000)
------------- ------------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
-----------------------------------
Proceeds from issuance of
preferred stock.................. -- -- 120,028,000
Proceeds from issuance of common
stock............................ -- -- 12,000,000
Proceeds from exercises of common
stock options, warrants and
employee stock purchase plan..... 28,221,000 39,448,000 36,034,000
Payments to acquire treasury
stock............................ (3,629,000) (2,829,000) (803,000)
Net proceeds from issuance of
long-term debt................... 1,009,080,000 -- 30,500,000
Preferred dividends paid.......... (6,797,000) (9,063,000) (2,265,000)
Principal payments on and
retirements of long-term debt.... (52,300,000) (32,766,000) (1,989,000)
------------- ------------- ------------
Net cash provided by (used for)
financing activities............ 974,575,000 (5,210,000) 193,505,000
------------- ------------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS......... 368,000 1,015,000 192,000
------------- ------------- ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................. 512,156,000 11,673,000 (38,475,000)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR................. 36,571,000 24,898,000 63,373,000
------------- ------------- ------------
CASH AND CASH EQUIVALENTS, END OF
YEAR.............................. $ 548,727,000 $ 36,571,000 $ 24,898,000
============= ============= ============
Supplemental disclosures of cash
flow information:
-----------------------------------
Cash payments for interest........ 14,092,000 4,352,000 4,191,000
Non-cash investing and financing
activities:
Capital lease additions........... 360,000 2,067,000 931,000
Long-term debt.................... -- 80,846,000 --
Conversion of convertible notes
into common stock................ 217,000,000 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
39
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Cephalon is an international biopharmaceutical company dedicated to the
discovery, development and marketing of products to treat sleep disorders,
neurological disorders, cancer and pain. In addition to conducting an active
research and development program, we market three products in the United
States and a number of products in various countries throughout Europe. We are
headquartered in West Chester, Pennsylvania and have offices in Salt Lake
City, Utah, France, the United Kingdom, Germany and Switzerland. Our research
and development headquarters are located in the United States. We operate
manufacturing facilities in France for the production of modafinil, which is
the active drug substance found in our PROVIGIL and MODIODAL products, and for
which we have worldwide control of the intellectual property, marketing and
manufacturing rights.
Principles of Consolidation
The consolidated financial statements include the results of our operations
and our wholly owned subsidiaries. Intercompany transactions have been
eliminated. In October 2000, we completed a merger with Anesta Corp. in a
transaction accounted for as a pooling-of-interests. In December 2001, we
acquired all of the outstanding shares of capital stock of Financiere Lafon
S.A. and Organisation de Synthese Mondiale Orsymonde S. A. (collectively,
Group Lafon) in a transaction accounted for as a purchase. See Note 2.
Translation of Foreign Financial Statements
In accordance with Statement of Financial Accounting Standards (SFAS) No.
52, "Foreign Currency Translation," assets and liabilities of our foreign
subsidiaries are translated at the year-end rate of exchange and the operating
statements are translated at the average rate of exchange for the year. Gains
or losses from translating foreign currency financial statements are
accumulated in a separate component of stockholders' equity. Transaction gains
and losses are included in other income (expenses) in the results of
operations. The transaction loss for the years ended December 31, 2001 and
2000 was $546,000 and $1,073,000, respectively; amounts in prior years are not
material.
Pervasiveness of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents and Investments
Cash equivalents include investments in liquid securities with original
maturities of three months or less from the date of purchase. In accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," we consider our investments to be "available for sale." We
classify these investments as short-term and carry them at fair market value.
Unrealized gains and losses have been recorded as a separate component of
stockholders' equity. As of December 31, 2001 and 2000, we had $752,000 and
$248,000, respectively, of unrealized gains on our investments. All realized
gains and losses on our available for sale securities are recognized in
results of operations.
Inventory
Inventory is stated at the lower of cost or market value using the first-in,
first-out, or FIFO, method.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, which
range from three to forty years. Property and equipment under capital leases
are depreciated or amortized over the shorter of the lease term or the
expected useful life of the assets. Expenditures for maintenance and repairs
are charged to expense as incurred, while major renewals and betterments are
capitalized.
Fair Value of Financial Instruments
The carrying values of cash, cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued expenses approximate the
respective fair values. None of our debt instruments that were outstanding as
of December 31, 2001 have readily ascertainable market values; however,
management believes that the carrying values approximate the respective fair
values.
40
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
Revenue Recognition
For the year ended December 31, revenues consisted of the following:
[Download Table]
2001 2000 1999
Product sales:
-----------------------------------------------------------------------------
PROVIGIL.............................. $150,305,000 $ 72,089,000 $25,370,000
ACTIQ................................. 51,197,000 15,169,000 2,232,000
GABITRIL.............................. 24,630,000 4,379,000 --
------------ ------------ -----------
Total product sales.................... 226,132,000 91,637,000 27,602,000
Other revenues......................... 40,511,000 20,153,000 23,832,000
------------ ------------ -----------
Total revenues......................... $266,643,000 $111,790,000 $51,434,000
============ ============ ===========
Product sales are recognized upon shipment of product and are recorded net
of estimated reserves for contractual allowances, discounts and returns.
Contractual allowances result from sales under contracts with managed care
organizations and government agencies. The reserve for contractual allowances
is based on an estimate of prescriptions to be filled for individuals covered
by government agencies and managed care organizations with whom we have
contracts. The reserve for product returns is determined by reviewing the
history of each product's returns and by utilizing reports purchased from
external, independent sources which produce prescription data, wholesale
stocking levels and wholesale sales to retail pharmacies. This data is
reviewed to monitor product movement through the supply chain to identify
remaining inventory in the supply chain that may result in chargebacks or
returns. The reserves are reviewed at each reporting period and adjusted to
reflect data available at that time. To the extent our estimate of contractual
allowances is inaccurate, we will adjust the reserve which will impact the
amount of product sales revenue recognized in the period of the adjustment.
Product returns are permitted with respect to unused pharmaceuticals based on
expiration dating of our product. To date, product returns have not been
material and, as a result, we decreased the reserve for returns in 2000 and
recognized $4,370,000 in related PROVIGIL revenue.
Product royalty expense is recognized concurrently with the recognition of
product revenue. Royalty expense included in cost of sales, was $16,050,000,
$6,322,000 and $2,320,000 for the years ended December 31, 2001, 2000 and
1999, respectively.
Revenue from collaborative agreements may consist of up-front fees, on going
research and development funding and milestone payments. Effective January 1,
2000, we adopted the SEC's Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements" (SAB 101). In accordance with SAB 101,
non-refundable up-front fees are deferred and amortized to revenue over the
related performance period. We estimate our performance period based on the
specific terms of each collaborative agreement, but actual performance may
vary. We adjust the performance periods based upon available facts and
circumstances. Periodic payments for research and development activities are
recognized over the period that we perform the related activities under the
terms of the agreements. Revenue resulting from the achievement of milestone
events stipulated in the agreements is recognized when the milestone is
achieved. Milestones are based upon the occurrence of a substantive element
specified in the contract or as a measure of substantive progress towards
completion under the contract.
Costs incurred related to collaborative agreements were $21,771,000,
$15,445,000 and $16,793,000 for the years ended December 31, 2001, 2000 and
1999, respectively.
As of December 31, 2001, we have recorded $6,866,000 of deferred revenues of
which $824,000 is classified as current. These deferred revenues will be
recognized over future periods in accordance with the revenue recognition
policies mentioned above.
Research and Development
All research and development costs are charged to expense as incurred.
Impairment of Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121), if
indicators of impairment exist, we assess the recoverability of the affected
long-lived assets, which include property and equipment and intangible assets,
by determining whether the carrying value of such assets can be recovered
through undiscounted future operating cash flows. If impairment is indicated,
we measure the amount of such impairment by comparing the carrying value of
the assets to the present value of the expected future cash flows associated
with the use of the asset. Management believes the future cash flows to be
received from the long-lived assets will exceed the assets' carrying value,
and, accordingly, we have not recognized any impairment losses through
December 31, 2001.
Other Comprehensive Income (Loss)
We follow SFAS No. 130, "Reporting Comprehensive Income." This statement
requires the classification of items of other comprehensive income (loss) by
their nature and disclosure of the accumulated balance of other comprehensive
income (loss), separately within the equity section of the balance sheet.
41
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
Loss Per Common Share
Basic loss per common share is computed by dividing net loss available to
common stockholders by the weighted-average number of common shares
outstanding during the period. For the years ended December 31, 2001, 2000,
and 1999, diluted loss per common share is the same as basic loss per common
share since the calculation of diluted loss per share excludes stock options,
restricted stock awards, warrants and the conversion of convertible preferred
stock and convertible notes because the inclusion would be antidilutive.
Stock-based Compensation
We account for stock-based compensation in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost is not
required to be recognized for options granted to employees and directors at
the then fair market value. We follow the disclosure requirements with respect
to fair value measurement methods of options issued to employees and directors
prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation."
Reclassifications
Certain reclassifications of prior year amounts have been made to conform to
the current year presentation.
Recent Accounting Pronouncements
In June 2001, the FASB finalized SFAS No. 141, "Business Combinations" (SFAS
141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
which are effective for fiscal years beginning after December 15, 2001. SFAS
141 requires all business combinations initiated after June 30, 2001, to be
accounted for using the purchase method. SFAS 142 no longer requires the
amortization of goodwill; rather, goodwill will be subject to a periodic
assessment for impairment by applying a fair-value-based test. In addition, an
acquired intangible asset should be separately recognized if the benefit of
the intangible asset is obtained through contractual or other legal rights, or
if the intangible asset can be sold, transferred, licensed, rented, or
exchanged, regardless of the acquirer's intent to do so. Such acquired
intangible assets will be amortized over their estimated useful lives or
contractual lives as appropriate.
In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
(SFAS 144). SFAS 144 changes the accounting for long-lived assets by requiring
that all long-lived assets be measured at the lower of the carrying amount or
fair value less cost to sell whether included in reporting continuing
operations or in discontinued operations. SFAS 144, which replaces SFAS 121,
"Accounting for Impairment of Long-Lived Assets and for Assets to be Disposed
of," is effective for fiscal years beginning after December 15, 2001. The
adoption of SFAS 144 did not have an impact on our financial position or
results of operations.
2. MERGERS AND ACQUISITIONS
Anesta Corp.
On October 10, 2000, we completed a merger with Anesta Corp. under which we
acquired all of the outstanding shares of Anesta in a tax-free, stock-for-
stock transaction. Under the terms of the merger agreement, each stockholder
of Anesta received 0.4765 shares of our common stock for each share of Anesta
common stock. The merger has been accounted for as a pooling-of-interests and,
accordingly, all of our prior period consolidated financial statements have
been restated to include the results of operations, financial position, and
cash flows of Anesta. Information concerning common stock, employee stock
plans, and per share data has been restated on an equivalent share basis.
There were no material adjustments required to conform the accounting policies
of the two companies. Certain amounts of Anesta have been reclassified to
conform to our reporting practices.
42
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
The reconciliations of revenues, loss from continuing operations, and loss
applicable to common shares of Cephalon and Anesta for the periods prior to
the merger are as follows. Amounts for the nine months ended September 30,
2000 have been restated to give effect to the implementation of SAB 101 in the
fourth quarter of 2000 retroactively to January 1, 2000.
[Download Table]
Nine Months Ended Year Ended
September 30, December 31,
2000 1999
Revenues:
-----------------------------------------------------------------------------
Cephalon................................... $ 61,442,000 $ 44,919,000
Anesta..................................... 9,654,000 6,515,000
------------ ------------
Combined................................... $ 71,096,000 $ 51,434,000
============ ============
Loss from continuing operations:
--------------------------------------------
Cephalon................................... $(27,373,000) $(58,757,000)
Anesta..................................... (13,359,000) (9,488,000)
------------ ------------
Combined................................... $(40,732,000) $(68,245,000)
============ ============
Loss applicable to common shares:
--------------------------------------------
Cephalon................................... $(34,170,000) $(73,342,000)
Anesta..................................... (13,359,000) (9,488,000)
------------ ------------
Combined................................... $(47,529,000) $(82,830,000)
============ ============
In connection with the merger, we recorded merger and integration costs of
$13,811,000 in the fourth quarter of 2000. The categories of costs incurred,
the actual cash payments made in 2001 and 2000, and the accrued balances at
December 31, 2001 and 2000 are as follows:
[Enlarge/Download Table]
Accrued at Amounts paid Accrued at
Amounts paid December 31, or reversed December 31,
Total in 2000 2000 in 2001 2001
Cash costs:
----------------------------------------------------------------------------------
Merger costs........... $ 8,752,000 $8,752,000 $ -- $ -- $--
Integration costs...... 4,585,000 507,000 4,078,000 4,078,000 --
----------- ---------- ---------- ---------- ----
Total--cash costs...... 13,337,000 $9,259,000 $4,078,000 $4,078,000 $--
========== ========== ========== ====
Non-cash costs.......... 474,000
-----------
Total costs............. $13,811,000
===========
Merger costs of $8,752,000 include investment banking, legal, accounting,
printing, and other direct costs of the merger. All such amounts were incurred
and paid in 2000. Integration costs of $4,585,000 represent severance payments
made to employees whose responsibilities were deemed redundant due to the
merger. Integration costs of $3,769,000 and $507,000 were paid in 2001 and
2000, respectively. The remaining accrued integration costs of $309,000 were
credited to merger and integration costs in the fourth quarter of 2001. The
non-cash costs of $474,000 generally relate to write-offs of fixed assets and
intangibles rendered obsolete due to the merger.
Group Lafon
On December 28, 2001, we completed our acquisition of the outstanding shares
of capital stock of Group Lafon.
With this acquisition, we control worldwide rights to our product PROVIGIL.
The acquisition is expected to increase our product sales, significantly
improve gross margins for PROVIGIL by eliminating payments to Group Lafon,
improve profitability and provide us with an important research, commercial
and manufacturing infrastructure in France.
The results of operations for Group Lafon have not been included in our
consolidated statements since operations between the acquisition date and
December 31, 2001 were immaterial.
The purchase price consisted of approximately $457,000,000. The purchase
price was funded in part by the proceeds of our December 11, 2001 offering of
$600,000,000 of our 2.50% convertible subordinated notes. Of the purchase
price, $450,000,000 was paid in cash to the sellers, $8,500,000 represents
transaction costs of the acquisition and severance payments for the
involuntary termination of a Group Lafon employee, and $1,500,000 represents
an estimate of the amount expected to be refunded by the seller under the
terms of the acquisition agreement. At December 31, 2001, $6,413,000 of the
$8,500,000 transaction costs were accrued, and the $1,500,000 was recorded as
a receivable in our consolidated balance sheets. All such amounts are expected
to be paid or received in 2002.
43
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
The following table summarizes the estimated fair values of assets acquired
and liabilities assumed at the date of acquisition. The allocation of the
purchase price is based in part on estimates and is subject to refinement.
[Download Table]
At December 31,
2001
---------------
Current assets........................................... $ 63,407,000
Property, plant and equipment............................ 25,281,000
Intangible assets........................................ 148,000,000
Acquired in-process research and development............. 20,000,000
Goodwill................................................. 248,911,000
Other assets............................................. 4,898,000
------------
Total assets acquired................................... 510,497,000
------------
Current liabilities...................................... (38,148,000)
Other liabilities........................................ (15,349,000)
------------
Total liabilities assumed............................... (53,497,000)
------------
Net assets acquired..................................... $457,000,000
============
Of the $148,000,000 of acquired intangible assets, $16,000,000 was assigned
to trademarks and tradenames with an estimated useful life of 15 years with
the remaining $132,000,000 assigned to developed technology for existing
pharmaceutical products with a weighted average estimated useful life of
approximately 14 years. The $248,911,000 of goodwill was assigned to the
European pharmaceutical segment.
In accordance with SFAS 142, goodwill is not amortized, but will be subject
to a periodic assessment for impairment by applying a fair-value-based test.
None of this goodwill is expected to be deductible for income tax purposes.
In connection with the acquisition of Group Lafon, we allocated
approximately $20,000,000 of the purchase price to in-process research and
development projects. This allocation represented the estimated fair value
based on risk-adjusted cash flows related to the incomplete research and
development projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility, and the research and
development in progress had no alternative future uses. Accordingly, these
costs were charged to expense as of the acquisition date.
At the acquisition date, Group Lafon's ongoing research and development
initiatives included next-generation Modiodal drug delivery technologies; a
Phase IV clinical trial for Fonzylane; CRL 41789, an innovative anti-
depressant drug candidate ready for Phase II clinical trials; and several
other ongoing research and development projects.
At the acquisition date, Group Lafon had spent approximately $10,000,000 on
the in-process research and development projects, and expected to spend
significantly more to complete all phases of the research and development.
Completion dates for the development work are anticipated to range from 2004
through 2006, at which time we expect to begin benefiting from the developed
technologies. The estimated revenues for the in-process projects were expected
to peak within 10-12 years of acquisition.
In determining the purchase price allocation, management considered present
value calculations of income, an analysis of project accomplishments and
remaining outstanding items, an assessment of overall contributions, as well
as project risks. The value assigned to purchased in-process technology was
determined by estimating the costs to develop the acquired technology into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present value. The
revenue projections used to value the in-process research and development
were, in some cases, reduced based on the probability of developing a new
drug, and considered the relevant market sizes and growth factors, expected
trends in technology, and the nature and expected timing of new product
introductions by Cephalon and our competitors. The resulting net cash flows
from such projects are based on management's estimates of cost of sales,
operating expenses, and income taxes from such projects.
The rates utilized to discount the net cash flows to their present value
were based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability
of the developmental projects, discount rates ranging from 25 to 40 percent
were considered appropriate for the in-process research and development. These
discount rates were commensurate with the projects' stage of development and
the uncertainties in the economic estimates described above.
If these projects are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may
become impaired. We believed that the foregoing assumptions used in the in-
process research and development analysis were reasonable at the time of the
acquisition. No assurance can be given, however, that the underlying
assumptions used to estimate expected project sales, development costs or
profitability, or the events associated with such projects, will transpire as
estimated.
44
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
The following unaudited pro forma information shows the results of the our
operations for the years ended December 31, 2001 and 2000 as though the
acquisition had occurred as of the beginning of the years presented:
[Download Table]
For the years ended
December 31,
---------------------------
2001 2000
------------ -------------
Total revenues................................... $364,691,000 $ 217,678,000
Net loss before cumulative effect of accounting
change.......................................... $(73,333,000) $(106,371,000)
Net loss......................................... $(73,333,000) $(113,805,000)
Basic and diluted net loss per common share:
Before cumulative effect of accounting change... $ (1.52) $ (2.60)
Net loss........................................ $ (1.52) $ (2.78)
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisition taken place as of the beginning of the periods presented, or the
results that may occur in the future. Furthermore, the pro forma results do
not give effect to all cost savings or incremental costs that may occur as a
result of the integration and consolidation of the acquisition.
In connection with the acquisition, we recorded merger and acquisition costs
of $359,000 in the fourth quarter of 2001. These amounts represent negotiation
and consulting costs that were incurred during this period.
3. JOINT VENTURE
In December 2001, we formed a joint venture with unaffiliated third party
investors to fund additional commercial activities in support of PROVIGIL and
GABITRIL in the United States. In exchange for our transfer to the joint
venture of certain intellectual property and other rights related to these two
products, we received a Class B interest, representing a 50% interest in the
joint venture. In exchange for its contribution of $50,000,000 in cash to the
joint venture, the investors received Class A interests, also representing a
50% interest in the joint venture.
On March 29, 2002, we acquired the investors' Class A interests and ended
the joint venture by issuing to the investors, through a private placement,
$55,000,000 aggregate principal amount of 3.875% convertible subordinated
notes due March 2007. The notes are convertible into our common stock, at the
option of the holder, at a price of $70.36 per share.
As of December 31, 2001, the $50,000,000 investors' Class A interest was
recorded on our balance sheet as a liability, and the joint venture's cash
balance of $50,000,000 was included in our balance of cash and cash
equivalents.
The purchase of the investors' Class A interests in the joint venture will
result in the recognition of a $7,100,000 extraordinary charge during the
first quarter of 2002, which includes the write-off of $4,600,000 of costs
capitalized in connection with the formation of the joint venture. In
addition, our statement of operations for the three months ended March 31,
2002 will include certain charges totaling approximately $7,000,000 related to
the operations of the joint venture.
4. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
[Download Table]
For the years ended December 31,
------------------------------------
2001 2000 1999
Revenues from major customers:
----------------------------------------------------------------------------
Pharmaceutical wholesaler #1........... $ 55,515,000 $10,910,000 $ 4,743,000
Pharmaceutical wholesaler #2........... $ 98,805,000 $27,933,000 $10,569,000
Pharmaceutical wholesaler #3........... $ 67,869,000 $19,379,000 $10,100,000
------------ ----------- -----------
Total.................................. $222,189,000 $58,222,000 $25,412,000
============ =========== ===========
Three pharmaceutical wholesalers accounted for approximately 98%, 64% and
92% of revenues from product sales for the years ended December 31, 2001, 2000
and 1999, respectively. During 2001, two major wholesalers merged their
businesses. These same three pharmaceutical wholesalers represented 58% and
38% of net receivables at December 31, 2001 and 2000, respectively. We control
credit risk through credit approvals, credit limits and by performing ongoing
credit evaluations of our customers. The loss of one of these customers could
have a material adverse effect on our business.
45
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
5. CASH, CASH EQUIVALENTS AND INVESTMENTS
At December 31, cash, cash equivalents and investments consisted of the
following:
[Download Table]
2001 2000
Cash and cash equivalents:
----------------------------------------------------------------------------
Demand deposits................................... $ 4,364,000 $10,730,000
Repurchase agreements............................. 155,817,000 18,213,000
U.S. government agency obligations................ 79,985,000 --
Commercial paper.................................. 245,158,000 6,628,000
Asset backed securities........................... 4,636,000 --
Bonds............................................. 58,767,000 --
Certificates of deposit........................... -- 1,000,000
------------ -----------
548,727,000 36,571,000
------------ -----------
Short-term investments (at market value):
---------------------------------------------------
U.S. government agency obligations................ 8,076,000 13,569,000
Commercial paper.................................. 17,135,000 17,940,000
Asset backed securities........................... 2,878,000 15,289,000
Bonds............................................. 26,068,000 12,315,000
Certificates of deposit........................... 1,000,000 1,700,000
------------ -----------
55,157,000 60,813,000
------------ -----------
$603,884,000 $97,384,000
============ ===========
The contractual maturities of our investments in cash, cash equivalents, and
investments at December 31, 2001 are as follows:
[Download Table]
Less than one year............................................. $565,952,000
Greater than one year but less than two years.................. 8,581,000
Greater than two years but less than three years............... 29,401,000
------------
$603,884,000
============
Some of our lease agreements contain covenants that obligate us to maintain
minimum cash and investment balances.
6. RECEIVABLES
At December 31, receivables consisted of the following:
[Download Table]
2001 2000
----------- -----------
Trade receivables................................ $40,790,000 $14,951,000
Reserve for sales discounts, returns and allow-
ances........................................... (6,826,000) (1,890,000)
Receivables from collaborations.................. 16,438,000 6,913,000
Other receivables................................ 24,790,000 1,931,000
----------- -----------
$75,192,000 $21,905,000
=========== ===========
7. INVENTORY
At December 31, inventory consisted of the following:
[Download Table]
2001 2000
----------- -----------
Raw material......................................... $19,666,000 $ 6,401,000
Work-in-process...................................... 7,632,000 5,325,000
Finished goods....................................... 20,215,000 8,435,000
----------- -----------
$47,513,000 $20,161,000
=========== ===========
46
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
8. PROPERTY AND EQUIPMENT
At December 31, property and equipment consisted of the following:
[Download Table]
Lives 2001 2000
----------- ----------- -----------
Land and improvements................... $ 3,370,000 $ 850,000
Buildings and improvements.............. 10-40 years 39,554,000 27,647,000
Laboratory, machinery and other
equipment.............................. 3-10 years 36,099,000 19,604,000
Construction in progress................ 6,736,000 534,000
----------- -----------
85,759,000 48,635,000
Less accumulated depreciation and
amortization........................... (21,053,000) (18,905,000)
----------- -----------
$64,706,000 $29,730,000
=========== ===========
Depreciation and amortization expense was $2,979,000, $2,266,000, and
$2,079,000 for the years ended December 31, 2001, 2000, and 1999,
respectively.
9. INTANGIBLE ASSETS
At December 31, intangible assets consisted of the following:
[Download Table]
2001 2000
------------ ------------
Developed technology acquired from Lafon......... $132,000,000 $ --
Trademarks/tradenames acquired from Lafon........ 16,000,000 --
GABITRIL product rights.......................... 92,648,000 71,982,000
Novartis CNS product rights...................... 41,641,000 41,641,000
ACTIQ marketing rights........................... 29,114,000 23,850,000
------------ ------------
311,403,000 137,473,000
Less accumulated amortization.................... (13,134,000) (1,679,000)
------------ ------------
$298,269,000 $135,794,000
============ ============
In March 2000, we agreed to purchase the U.S. marketing rights to ACTIQ from
Abbott, for payments totaling $23,850,000. In 2001, we increased the basis of
this asset by $5,264,000, which represents the net present value of future
minimum royalty payments due to Abbott through 2005 under the purchase. See
Note 11. This asset is being amortized substantially over the 10-year life of
the marketing rights acquired.
In October 2000, we purchased the product rights to market and sell GABITRIL
in the United States from Abbott, effective December 23, 2000, for payments
totaling $100,000,000. In connection with the acquisition of GABITRIL product
rights, we allocated $22,200,000 of the purchase price to in-process research
and development projects. This allocation represented the estimated fair value
based on risk-adjusted cash flows related to the incomplete research and
development projects. At the date of acquisition, the development of these
projects had not yet reached technological feasibility, and the research and
development in progress had no alternative future uses. Accordingly, these
costs were charged to expense as of the acquisition date.
At the acquisition date, we were committed to completing advanced clinical
studies for GABITRIL and developing additional uses for the drug. Ongoing and
proposed projects included plans to develop GABITRIL for additional
indications including the treatment of neuropathic pain, spasticity,
headaches, and other conditions.
At the acquisition date, approximately $5,000,000 had been incurred toward
completion of the in-process research and development projects, and we
expected to spend an additional $25,000,000 to complete clinical testing and
maintain the product. Initial results from the project completed in 2001 are
expected to be released in 2002, at which time we expect to begin benefiting
from the developed technologies. However, development is expected to continue
in these areas for a period of three to five years.
In determining the purchase price allocation, management considered present
value calculations of income, an analysis of project accomplishments and
remaining outstanding items, an assessment of overall contributions, as well
as project risks. The value assigned to purchased in-process projects was
determined by estimating the costs to develop the acquired technologies into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present value. Estimated
sales growth and operating expenses were based on management's experience with
other GABITRIL indications, and were consistent in all material respects with
the historical data.
The rate utilized to discount the net cash flows to their present value was
based on estimated cost of capital calculations. Due to the nature of the
forecast and the risks associated with the projected growth and profitability
of the developmental projects, a discount rate of 25% was considered
appropriate for the in-process research and development. This rate is
substantially higher than our overall weighted average cost of capital due to
the additional risks associated with completing the ongoing clinical trials.
47
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
If these projects are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may
become impaired. We believed that the foregoing assumptions used in the in-
process research and development analysis were reasonable at the time of the
acquisition. No assurance can be given, however, that the underlying
assumptions used to estimate expected project sales, development costs or
profitability, or the events associated with such projects, will transpire as
estimated.
We recorded an intangible asset of $71,982,000 at December 31, 2000 which
represents the net present value of the payments using an incremental
borrowing rate of 7.50%, less the $22,200,000 allocated to acquired in-process
research and development. This asset is being amortized over the 15-year
estimated useful life of the intangible asset acquired.
In December 2001, we acquired expanded rights to GABITRIL from Sanofi-
Synthelabo and Novo Nordisk A/S, the developer of the product, for
$20,666,000. Under the agreements, we assumed rights to GABITRIL worldwide,
excluding Canada, Latin America and Japan, countries that were not included in
Sanofi-Synthelabo territory under its 1997 license with Novo Nordisk A/S. This
intangible asset will be amortized over the 14-year estimated useful life of
the product rights acquired.
In November 2000, we entered into a collaboration agreement with Novartis to
consolidate the sales and marketing efforts of four Novartis CNS products with
PROVIGIL in the United Kingdom, effective January 1, 2001, for payments
totaling approximately $45,000,000. We recognized an intangible asset of
$41,641,000, which represents the net present value of the payments using an
incremental borrowing rate of 7.50%. This asset is being amortized over the
10-year life of the agreement. Under the terms of the agreement, the companies
will share the financial outcome generated from the sale of the five products
in the United Kingdom.
Amortization of intangible assets was $11,455,000 and $1,679,000 for the
years ended December 31, 2001 and 2000, respectively.
10. ACCRUED EXPENSES
At December 31, accrued expenses consisted of the following:
[Download Table]
2001 2000
----------- -----------
Accrued compensation and benefits.................. $ 9,042,000 $ 6,532,000
Accrued professional and consulting fees........... 3,384,000 3,822,000
Accrued clinical trial fees and related expenses... 8,397,000 6,582,000
Accrued payments associated with revenue sharing
notes............................................. -- 2,200,000
Accrued license fees and royalties................. 9,199,000 5,489,000
Accrued merger and integration expenses............ 6,413,000 4,078,000
Accrued dividends on preferred stock............... -- 1,133,000
Accrued interest................................... 2,789,000 --
Other accrued expenses............................. 10,146,000 2,922,000
----------- -----------
$49,370,000 $32,758,000
=========== ===========
11. LONG-TERM DEBT
At December 31, long-term debt consisted of the following:
[Download Table]
2001 2000
------------ -----------
Capital lease obligations......................... $ 2,852,000 $ 2,342,000
Mortgage and building improvement loans........... 12,085,000 14,900,000
Joint venture restructuring....................... 50,000,000 --
Convertible notes................................. 783,000,000 --
Notes payable/Other............................... 13,460,000 --
Due to Abbott/Novartis............................ 37,392,000 80,846,000
------------ -----------
Total debt........................................ 898,789,000 98,088,000
Less current portion.............................. (32,200,000) (42,950,000)
------------ -----------
Total long-term debt.............................. $866,589,000 $55,138,000
============ ===========
Aggregate maturities of long-term debt for the next five years are as
follows: 2002--$32,200,000; 2003--$63,251,000; 2004--$8,390,000; 2005--
$2,551,000; 2006--$784,938,000, 2007 and thereafter--$7,459,000.
Capital Lease Obligations
We currently lease certain property and laboratory, production and computer
equipment with a cost of $10,469,000. Under the terms of the lease agreements,
we must maintain a minimum balance in unrestricted cash and investments of
$30,000,000 or deliver
48
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
to the lessor an irrevocable letter of credit in the amount of the then
outstanding balance due on all equipment leased under the agreements. At
December 31, 2001, the balance due under the lease agreements was $2,852,000.
Our lease agreements provide us with an option to purchase the leased
equipment at the conclusion of the lease.
Mortgage and Building Improvement Loans
In March 1995, we purchased the buildings housing our administrative offices
and research facilities in West Chester, Pennsylvania for $11,000,000. We
financed the purchase through the assumption of an existing $6,900,000 first
mortgage and from $11,600,000 in state funding provided by the Commonwealth of
Pennsylvania. The first mortgage has a 15-year term with an annual interest
rate of 9.625%. The state funding has a 15-year term with an annual interest
rate of 2%. The state loans contained a provision that would have allowed the
rate on the loans to be increased to prime plus 2% if we did not meet targets
for hiring new employees in Pennsylvania by the end of 1999. We were accruing
interest at this higher rate over the life of the loan. Although we did not
meet the hiring target, in April 2000, we and the Commonwealth reached an
agreement under which the Commonwealth waived the interest penalty. As a
result, we recognized interest income in 2000 for the interest differential of
$4,008,000 that was previously accrued. The loans require annual aggregate
principal and interest payments of $1,800,000. The loans are secured by the
buildings and by all our equipment located in Pennsylvania that is otherwise
unsecured.
In July 2001, we paid $1,667,000 to retire a variable-rate term note
payable.
Joint Venture
In connection with our joint venture, $50,000,000 in cash received from the
Investor was recorded as a liability as of December 31, 2001.
Revenue Sharing Notes
In February 1999, we completed a private placement of $30,000,000 of
revenue-sharing notes. In connection with the notes, we issued warrants to
purchase 1,945,000 shares of common stock at an exercise price of $10.08 per
share. The estimated fair value of the warrants of $6,593,000 was recorded as
a discount to the notes and amortized over the term on the notes as interest
expense. In December 1999, the notes were restructured whereby the maturity of
the notes was accelerated and the principal was increased to include a
$5,500,000 prepayment penalty, and, as a result, we recorded a loss in 1999 on
the extinguishment of the notes of $11,187,000, which includes the prepayment
penalty, the write-off of deferred financing costs and the amortization of the
remaining debt discount of $5,687,000. The notes were retired during the first
quarter of 2000 for an aggregate cash payment of $35,500,000. The former
holders of the notes were to receive a payment of 6% of U.S. net sales of
PROVIGIL through December 31, 2001. Under an amendment dated October 31, 2000,
we agreed to pay the noteholders $6,600,000 and, in exchange, the noteholders
agreed to relinquish royalty payments on all PROVIGIL net sales occurring
after December 31, 2000. As of December 31, 2000, $2,200,000 was included in
accrued expenses related to this royalty relinquishment.
Subordinated Convertible Notes
In the second quarter of 2001, we completed a private placement of
$400,000,000 of 5.25% convertible subordinated notes due May 2006. Debt
issuance costs of $14,364,000 have been capitalized in other assets and are
being amortized over the term of the notes. Interest on the notes is payable
each May 1 and November 1. The notes are convertible, at the holder's option,
into our common stock at a conversion price of $74.00 per share, subject to
adjustment in certain circumstances. We may redeem the notes on or after May
5, 2003. Prior to that date, we may redeem the notes if our common stock price
exceeds 150% of the conversion price for a specified period of time. Upon
early redemption, we are required to pay interest that would have been due up
through May 5, 2003.
During the fourth quarter of 2001, certain note holders approached us, and
we agreed, to exchange $217,000,000 of the outstanding notes into 3,691,705
shares of our common stock. We recognized debt exchange expense of $52,444,000
in the fourth quarter of 2001 relating to these early exchanges in accordance
with SFAS No. 84, "Induced Conversion of Convertible Debt."
In December 2001, we completed a private placement of $600,000,000 of 2.50%
convertible subordinated notes due December 2006. Debt issuance costs of
$21,250,000 have been capitalized in other assets and are being amortized over
the term of the notes. Interest on the notes is payable each June 15 and
December 15, beginning June 15, 2002. The notes are convertible into our
common stock at a conversion price of $81.00 per share, subject to adjustment
in certain circumstances. We may redeem the notes on or after December 20,
2004.
Notes Payable/Other
In December 2001, we acquired Group Lafon, which included the assumption of
$13,460,000 of notes payable, bank debt and outstanding amounts under lines of
credit. These amounts have fixed and variable interest rates ranging from 4.2%
to 6.0% at December 31, 2001 and are payable through 2008.
49
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
Due to Abbott/Novartis
In October 2000, we agreed to purchase the product rights to market and sell
GABITRIL in the United States from Abbott for payments totaling $100,000,000
due through 2004, of which $40,000,000 was paid immediately. At December 31,
2000, we recognized $54,182,000 which represents the net present value of the
remaining $60,000,000 obligation based on an incremental borrowing rate of
7.5%. In May 2001, we made a payment of $24,000,000.
In March 2000, we purchased the U.S. marketing rights to ACTIQ from Abbott
for payments totaling $23,850,000. In 2001, we recognized $5,264,000, less a
payment of $397,000, as the net present value of future minimum royalty
payments due to Abbott through 2005 under the purchase agreement based on an
incremental borrowing rate of 5.0%.
In November 2000, we entered into a collaboration agreement with Novartis to
consolidate the sales and marketing efforts of four Novartis CNS products with
PROVIGIL in the United Kingdom. In connection with this agreement, we agreed
to pay Novartis approximately $45,000,000, of which approximately $15,000,000
was paid immediately and approximately $30,000,000 was due in various
installments through 2002. We recognized $26,664,000 at December 31, 2000 as
the net present value of the remaining payments based on an incremental
borrowing rate of 7.5%. In May 2001, we paid $24,438,000 to Novartis to
satisfy our outstanding obligation and recorded an extraordinary gain on the
early extinguishment of debt of $3,016,000.
12. COMMITMENTS AND CONTINGENCIES
Leases
We lease certain of our offices and automobiles under operating leases.
Lease expense under all operating leases totaled $3,275,000, $2,242,000, and
$2,721,000 in 2001, 2000, and 1999, respectively. We will continue to lease
office space and automobiles under operating leases. Under these leases, we
will pay rent of approximately $3,000,000 per year in 2002 and 2003,
$2,500,000 in 2004 and $2,100,000 in 2005.
Related Party
--Cephalon Clinical Partners, L.P.
In August 1992, we exclusively licensed our rights to MYOTROPHIN for human
therapeutic use within the United States, Canada and Europe to Cephalon
Clinical Partners, L.P. (CCP). Development and clinical testing of MYOTROPHIN
is performed on behalf of CCP under a research and development agreement with
CCP.
CCP has granted us an exclusive license to manufacture and market MYOTROPHIN
for human therapeutic use within the United States, Canada and Europe in
return for royalty payments equal to a percentage of product sales and a
milestone payment of approximately $16,000,000 that will be made if MYOTROPHIN
receives regulatory approval.
We have a contractual option, but not an obligation, to purchase all of the
limited partnership interests of CCP, which is exercisable upon the occurrence
of certain events following the first commercial sale of MYOTROPHIN. If, and
only if, we decide to exercise this purchase option, we would make an advance
payment of approximately $40,275,000 in cash or, at our election,
approximately $42,369,000 in shares of common stock or a combination thereof.
Should we discontinue development of MYOTROPHIN, or if we do not exercise this
purchase option, our license will terminate and all rights to manufacture or
market MYOTROPHIN in the United States, Canada and Europe will revert to CCP,
which may then commercialize MYOTROPHIN itself or license or assign its rights
to a third party. In that event, we would not receive any benefits from such
commercialization, license or assignment of rights.
Legal Proceedings
In August 1999, the U.S. District Court for the Eastern District of
Pennsylvania entered a final order approving the settlement of a class action
in which plaintiffs alleged that statements made about the results of certain
clinical studies of MYOTROPHIN were misleading. A related complaint has been
filed with the Court by a small number of plaintiffs who decided not to
participate in the settlement. This related complaint alleges that we are
liable under common law for misrepresentations concerning the results of the
MYOTROPHIN clinical trials, and that we and certain of our current and former
officers and directors are liable for the actions of persons who allegedly
traded in our common stock on the basis of material inside information. We
believe that we have valid defenses to all claims raised in this action. Even
if there is a judgment against us, we do not believe it will have a material
adverse effect on our financial condition or results of operations.
In February 2001, a complaint was filed in Utah state court by Zars, Inc.
and one of its research scientists, against us and our subsidiary Anesta Corp.
The plaintiffs are seeking a declaratory judgment to establish their right to
develop transdermal or other products containing fentanyl and other
pharmaceutically active agents under a royalty and release agreement between
Zars and Anesta. The complaint also asks for unspecified damages for breach of
contract, interference with economic relations, defamation and slander. We
believe that we have valid defenses to all claims raised in this action. In
any event, we do not believe any judgment against us will have a material
adverse effect on our financial condition or results of operations.
50
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
We are a party to certain other litigation in the ordinary course of our
business, including matters alleging employment discrimination, product
liability and breach of commercial contract. However, we are vigorously
defending ourselves in all of these actions and do not believe these matters,
even if adversely adjudicated or settled, would have a material adverse effect
on our financial condition or results of operations.
13. STOCKHOLDERS' EQUITY
Convertible Exchangeable Preferred Stock
During the third quarter of 1999, we completed a private offering to
institutional investors of 2,500,000 shares of convertible exchangeable
preferred stock at $50 per share. Proceeds from the offering, net of fees and
expenses, totaled $120,028,000. Dividends on the preferred stock were payable
quarterly and were cumulative at the annual rate of $3.625 per share. We
recognized $5,664,000, $9,063,000 and $3,398,000 of preferred dividends during
2001, 2000 and 1999, respectively. The preferred stock was convertible into an
aggregate of approximately 6,975,000 shares of our common stock at a
conversion price of $17.92 per share, subject to adjustment in certain
circumstances.
In May 2001, the holders of 2,344,586 shares of the 2,500,000 shares
outstanding of our convertible exchangeable preferred stock converted their
preferred shares into an aggregate of 6,541,394 shares of our common stock. As
an inducement to the holders to convert their preferred stock prior to August
2001, when we were initially permitted to redeem the preferred stock, we
agreed to pay immediately all dividends accrued through the date of conversion
as well as all dividends that would have accrued on the converted shares
through the August 2001 redemption date. In the second quarter of 2001, we
recorded an additional $1,063,000 of dividend expense associated with the
early conversion. In September 2001, the remaining 155,414 shares of our
convertible exchangeable preferred stock were converted into an aggregate of
433,604 shares of our common stock.
Equity Compensation Plans
We have established the Stock Option Plan and the Equity Compensation Plans
for our employees, directors and certain other individuals. All grants and
terms are authorized by the Compensation Committee of our Board of Directors.
We may grant either non-qualified or incentive stock options under the plans,
and also may grant restricted stock awards under the Equity Compensation Plan.
The options and restricted stock awards generally become exercisable or vest
ratably over four years from the grant date, and the options must be exercised
within ten years of the grant date.
The following tables summarize the aggregate option activity under the plans
for the years ended December 31:
[Enlarge/Download Table]
2001 2000 1999
-------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- --------- -------- --------- --------
Outstanding, January
1,..................... 5,253,730 $28.44 4,601,272 $17.07 4,761,915 $14.43
Granted................ 2,035,100 70.32 1,796,200 49.69 1,008,143 24.43
Exercised.............. (1,339,380) 19.71 (945,023) 15.16 (792,989) 11.61
Canceled............... (341,855) 31.88 (198,719) 22.76 (375,797) 15.07
Outstanding, December
31,.................... 5,607,595 $45.36 5,253,730 $28.44 4,601,272 $17.07
Exercisable at end of
year................... 1,937,125 $22.91 2,360,358 $17.95 2,404,025 $15.74
Weighted average fair
value of options
granted during the
year................... $25.69 $29.25 $15.25
[Download Table]
Options
Options Outstanding Exercisable
------------------------------ ------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Price Shares Life (yrs) Price Shares Price
----------------------- --------- ----------- -------- --------- --------
$6.00-$17.99.................. 1,286,392 5.8 $10.69 1,070,868 $11.12
$18.00-$60.00................. 2,329,903 7.7 42.88 859,757 37.27
$60.01-$71.96................. 1,991,300 9.9 70.65 6.500 67.31
--------- --- ------ --------- ------
5,607,595 8.0 $45.36 1,937,125 $22.91
========= === ====== ========= ======
In December 2001, the 2000 Equity Compensation Plan was amended to increase
the number of shares subject to the annual grants awarded under all of the
plans by 1,100,000 shares. At December 31, 2001, 266,109 shares were available
for future grants under all of the plans.
51
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
During 2001, 2000, and 1999, we received net proceeds of $25,542,000,
$12,934,000, and $8,958,000, respectively, from the exercise of stock options.
During 2001, some stock options were exercised by tendering mature shares as
consideration for the exercise price, resulting in the recording of $1,775,000
of treasury stock.
The following table summarizes restricted stock award activity for the years
ended December 31:
[Download Table]
2001 2000 1999
---------- ---------- ----------
Outstanding, January 1,..................... 446,850 496,700 280,425
Granted.................................... -- 119,200 355,550
Vested..................................... (150,650) (146,725) (83,300)
Canceled................................... (27,325) (22,325) (55,975)
---------- ---------- ----------
Outstanding, December 31,................... 268,875 446,850 496,700
---------- ---------- ----------
Compensation expense recognized............. $5,349,000 $5,625,000 $1,023,000
---------- ---------- ----------
We have opted to disclose only the provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," as they pertain to financial statement
recognition of compensation expense attributable to option grants. As such, no
compensation cost has been recognized for our stock option plans. If we had
elected to recognize compensation cost based on the fair value of stock
options as prescribed by SFAS 123, the pro forma loss and loss per share
amounts would have been as follows:
[Download Table]
For the years ended December 31,
-----------------------------------------
2001 2000 1999
------------ ------------- ------------
As reported
Loss applicable to common
shares........................ $(61,148,000) $(110,241,000) $(82,830,000)
Basic and diluted loss per
share......................... $ (1.27) $ (2.70) $ (2.31)
Pro forma
Loss applicable to common
shares........................ $(86,886,000) $(116,971,000) $(92,306,000)
Basic and diluted loss per
share......................... $ (1.80) $ (2.86) $ (2.57)
The fair value of the options granted during 2001, 2000 and 1999 were
estimated on the date of grant using the Black-Scholes option-pricing model
based on the following assumptions:
[Download Table]
2001 2000 1999
------- ------- -------
Risk free interest rate........................... 4.56% 5.87% 5.89%
Expected life..................................... 6 years 6 years 6 years
Expected volatility............................... 27% 56% 56%
Expected dividend yield........................... 0% 0% 0%
Warrants
The following table summarizes warrant activity for the years ended December
31:
[Download Table]
2001 2000 1999
-------- ---------- ----------
Outstanding, January 1,....................... 265,800 2,779,000 2,886,140
Granted...................................... -- -- 1,945,000
Exercised.................................... (265,800) (2,513,200) (1,958,291)
Expired...................................... -- -- (93,849)
-------- ---------- ----------
Outstanding, December 31,..................... -- 265,800 2,779,000
======== ========== ==========
At December 31, 2001, no warrants to purchase common stock remained
outstanding.
During 1999 investors in CCP exercised warrants to purchase 1,958,291 shares
of common stock. Proceeds associated with these exercises totaled $26,984,000.
All outstanding warrants associated with CCP expired on August 31, 1999.
The private placement of the revenue-sharing notes in 1999 included the
issuance of warrants, expiring March 1, 2004, to purchase 1,945,000 shares of
our common stock at an exercise price of $10.08 per share. During 2000,
warrants to purchase 1,679,200 shares of common stock at an exercise price of
$10.08 per share were exercised. During 2001, warrants to purchase the
remaining 265,800 shares of common stock at an exercise price of $10.08 were
exercised.
In February 1994, Chiron was issued a warrant to purchase 750,000 shares of
common stock with an exercise price of $18.50 per share. Chiron exercised this
warrant in 2000.
52
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
In April 1997, we issued warrants to purchase 84,000 shares of our common
stock at an exercise price of $24.77 per share to the placement agent in
connection with the private placement of senior convertible notes. These
warrants were exercised in 2000.
Qualified Savings and Investment Plan
We have a profit sharing plan pursuant to section 401(k) of the Internal
Revenue Code whereby eligible employees may contribute up to 15% of their
annual salary to the plan, subject to statutory maximums. The plan provides
for discretionary matching contributions by us in cash or a combination of
cash and shares of our common stock. Our contribution for the years 1999
through 2001 was 100% of the first 6% of employee salaries contributed in the
ratio of 50% cash and 50% Cephalon stock. We contributed $2,985,000,
$1,837,000, and $1,369,000, in cash and common stock to the plan for the years
2001, 2000, and 1999, respectively. Prior to the merger (see Note 2), Anesta
had a 401(k) Plan whereby eligible employees were able to contribute up to 25%
of their annual salary to the plan. Anesta had the option of making
discretionary contributions equal to 25% of participant contributions up to 6%
of participant compensation. Anesta contributed $58,000 and $53,000 for the
years 2000 and 1999, respectively.
Employee Stock Purchase Plan
In November 1993, Anesta adopted the Employee Stock Purchase Plan
authorizing the issuance of 250,000 shares pursuant to purchase rights granted
to employees of Anesta. Participants could elect to use up to 10% of their
compensation to purchase Anesta's common stock at the end of each year at a
price equal to 85% of the lower of the beginning or ending stock price in the
plan period. This plan terminated in October 2000 upon the merger of Cephalon
and Anesta (see Note 2).
Pro forma Aggregate Conversions or Exercises
At December 31, 2001, the conversion or exercise of outstanding options, and
convertible subordinated notes into shares of Cephalon common stock in
accordance with their terms would increase the outstanding number of shares of
common stock by approximately 15,489,000 shares, or 28%.
Preferred Share Purchase Rights
In November 1993, our Board of Directors declared a dividend distribution of
one right for each outstanding share of common stock. In addition, a right
attaches to and trades with each new issue of our common stock. Each right
entitles each registered holder, upon the occurrence of certain events, to
purchase from us a unit consisting of one one-hundredth of a share of our
Series A Junior Participating Preferred Stock, or a combination of securities
and assets of equivalent value, at a purchase price of $90.00 per unit,
subject to adjustment.
14. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the bases of assets and liabilities recognized for financial reporting
and income tax purposes, and operating loss and tax credit carryforwards.
Significant components of our net deferred taxes as of December 31 are as
follows:
[Download Table]
2001 2000
------------ ------------
Net operating loss carryforwards............... $140,536,000 $130,218,000
Capitalized research and development
expenditures.................................. 69,505,000 52,452,000
Federal research and development tax credits... 12,833,000 9,903,000
Acquired product rights and intangible assets.. 7,544,000 --
Reserves....................................... 2,776,000 754,000
Deferred revenue............................... 2,783,000 3,311,000
Other--net..................................... 5,901,000 630,000
------------ ------------
Total deferred tax assets...................... 241,878,000 197,268,000
Valuation allowance............................ (241,878,000) (197,268,000)
------------ ------------
Net deferred tax assets........................ $ -- $ --
============ ============
The deferred tax asset valuation allowance increased by $44,610,000 during
the year. This increase is primarily the result of our analysis of the
likelihood of realizing the future tax benefit of tax loss carryforwards and
additional temporary differences. A valuation allowance was established for
100% of the deferred tax assets, as realization of the tax benefits is not
assured.
At December 31, 2001, we had net operating loss carryforwards for U.S.
federal income tax purposes of approximately $344,139,000 that will begin to
expire in 2003, and state net operating losses of approximately $147,620,000
that will expire in varying years starting in 2001. We also have international
net operating loss carryforwards of approximately $19,115,000 with indefinite
expirations dates. The net operating loss carryforwards differ from the
accumulated deficit principally due to differences in the
53
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
recognition of certain research and development expenses for financial and
federal income tax reporting. Federal research tax credits of $12,833,000 are
available to offset future tax payments, and begin to expire in 2003. The
amount of U.S. federal net operating loss carryforwards which can be utilized
in any one period will be limited by federal income tax regulations since a
change in ownership as defined in Section 382 of the Internal Revenue Code
occurred in the prior years. We do not believe that such limitation will have
a material adverse impact on the utilization of our carryforwards.
15. SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
[Download Table]
2001 Quarter Ended
-----------------------------------------------------
December 31, September 30, June 30, March 31,
Statement of Operations Data:
--------------------------------------------------------------------------------
Total revenues.......... $ 79,550,000 $83,822,000 $56,199,000 $ 47,072,000
Gross profit on product
sales.................. 54,037,000 59,612,000 35,013,000 32,524,000
Income (loss) before
dividends and
extraordinary gain on
early extinguishment of
debt................... (64,545,000) 21,577,000 (5,990,000) (9,542,000)
Dividends on preferred
stock.................. -- (70,000) (3,328,000) (2,266,000)
Extraordinary gain on
early extinguishment of
debt................... -- -- 3,016,000 --
Income (loss) applicable
to common shares....... $(64,545,000) $21,507,000 $(6,302,000) $(11,808,000)
Basic income (loss) per
common share:
Income (loss).......... $ (1.23) $ 0.43 $ (0.19) $ (0.28)
Extraordinary gain on
early extinguishment
of debt............... -- -- 0.06 --
------------ ----------- ----------- ------------
$ (1.23) $ 0.43 $ (0.13) $ (0.28)
============ =========== =========== ============
Weighted average number
of shares outstanding.. 52,422,000 50,269,000 47,725,000 42,732,000
Diluted income (loss)
per common share:
Income (loss).......... $ (1.23) $ 0.40 $ (0.19) $ (0.28)
Extraordinary gain on
early extinguishment
of debt............... -- -- 0.06 --
------------ ----------- ----------- ------------
$ (1.23) $ 0.40 $ (0.13) $ (0.28)
============ =========== =========== ============
Weighted average number
of shares Outstanding-
assuming dilution...... 52,422,000 53,412,000 47,725,000 42,732,000
============ =========== =========== ============
[Download Table]
2000 Quarter Ended
-------------------------------------------------------
December 31, September 30, June 30, March 31,
Statement of Operations Data:
----------------------------------------------------------------------------------
Total revenues.......... $ 40,694,000 $ 28,056,000 $ 23,385,000 $ 19,655,000
Gross profit on product
sales.................. 26,669,000 18,838,000 14,219,000 14,143,000
Loss before dividends
and cumulative effect
of a change in
accounting principle... (53,012,000) (15,030,000) (13,342,000) (12,360,000)
Dividends on preferred
stock.................. (2,266,000) (2,266,000) (2,265,000) (2,266,000)
Cumulative effect of
adopting Staff
Accounting Bulletin
101(SAB 101)........... -- -- -- (7,434,000)
Loss applicable to
common shares.......... $(55,278,000) $(17,296,000) $(15,607,000) $(22,060,000)
Basic and diluted loss
per common share:
Loss................... $ (1.32) $ (0.42) $ (0.39) $ (0.37)
Cumulative effect of
adopting SAB 101...... -- -- -- (0.19)
------------ ------------ ------------ ------------
$ (1.32) $ (0.42) $ (0.39) $ (0.56)
============ ============ ============ ============
Weighted average number
of shares outstanding.. 41,801,000 41,298,000 40,427,000 39,141,000
============ ============ ============ ============
54
CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--
(Continued)
16. SEGMENT AND SUBSIDIARY INFORMATION
On December 28, 2001, we completed our acquisition of Group Lafon. As a
result, we now have significant sales, manufacturing, and research operations
conducted by several subsidiaries located in Europe. In 2001 and prior years,
European operations were immaterial. United States product sales accounted for
98%, 97% and 98% of total product sales for the years ended December 31, 2001,
2000 and 1999, respectively.
The following summarized information presents our long-lived assets by
geographic segment. The summarized information of the European subsidiaries
has been prepared from the books and records maintained by each subsidiary.
The results of operations for Group Lafon have not been included in our
consolidated statements since operations between the acquisition date and
December 31, 2001 were immaterial.
We have determined that all of our operations have similar economic
characteristics and may be aggregated into a single segment for reporting
purposes. Information concerning our geographic operations is provided below.
Long-lived assets at December 31, 2001:
[Download Table]
United States............................................... $206,697,000
Europe...................................................... 447,929,000
------------
Total....................................................... $654,626,000
============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 on directors and nominees is
incorporated by reference to the information under the caption "Proposal 1--
Nominees for Election" in our definitive proxy statement for the 2002 annual
meeting of stockholders. The names, ages and positions held by our executive
officers as of December 31, 2001 are as follows:
[Enlarge/Download Table]
Name Age Position
---- --- ---------------------------------------------------------------
Frank Baldino, Jr.,
Ph.D................... 48 Chairman and Chief Executive Officer
Paul Blake, F.R.C.P..... 54 Senior Vice President, Clinical Research and Regulatory Affairs
J. Kevin Buchi.......... 46 Senior Vice President and Chief Financial Officer
Peter E. Grebow, Ph.D... 55 Senior Vice President, Business Development
John E. Osborn.......... 44 Senior Vice President, General Counsel and Secretary
Robert P. Roche, Jr..... 46 Senior Vice President, Pharmaceutical Operations
Carl A. Savini.......... 52 Senior Vice President, Human Resources
Jeffry L. Vaught,
Ph.D................... 51 Senior Vice President and President, Research and Development
All executive officers are elected by the Board of Directors to serve in
their respective capacities until their successors are elected and qualified
or until their earlier resignation or removal.
Dr. Baldino founded Cephalon and has served as Chief Executive Officer and a
director since its inception. He was appointed Chairman of the Board of
Directors in December 1999. Dr. Baldino received his Ph.D. degree from Temple
University and holds several adjunct academic appointments. Dr. Baldino
currently serves as a director of, Pharmacopeia, Inc., a developer of
proprietary technology platforms for pharmaceutical companies, ViroPharma,
Inc., a biopharmaceutical company, Acusphere, Inc., a specialty pharmaceutical
company, and NicOx S.A., a company engaged in the research, development and
commercialization of nitric oxide therapeutics.
Dr. Blake joined Cephalon in March 2001 as Senior Vice President, Clinical
Research and Regulatory Affairs. From 1999 to 2001, Dr. Blake served as Chief
Medical Officer for MDS Proteomics Inc., a Canadian health and life sciences
company. From 1998-99 he served as President and Chief Executive Officer of
Proliance Pharmaceuticals, Inc., a drug development company. Prior to that he
spent six years with SmithKline Beecham Pharmaceuticals, most recently as
Senior Vice President and Medical Director. Dr. Blake received his medical
degree from London University, Royal Free Hospital and completed his clinical
training in Internal Medicine and Cardiology. Dr. Blake is a fellow of the
Royal College of Physicians (UK), a fellow of the Faculty of Pharmaceutical
Medicine and a fellow of the American College of Clinical Pharmacology.
Mr. Buchi joined Cephalon as Controller in March 1991 and held several
financial positions with the Company prior to being appointed Senior Vice
President and Chief Financial Officer in April 1996. Between 1985 and 1991,
Mr. Buchi served in a number of financial positions with E.I. duPont de
Nemours and Company. Mr. Buchi received his masters of management degree from
the J.L. Kellogg Graduate School of Management, Northwestern University in
1982.
Dr. Grebow joined Cephalon in January 1991 and served as Senior Vice
President, Drug Development prior to holding his current position as Senior
Vice President, Business Development. From 1988 to 1990, Dr. Grebow served as
Vice President of Drug Development for Rorer Central Research, a division of
Rhone-Poulenc Rorer Pharmaceuticals Inc., a pharmaceutical company. Dr. Grebow
received his Ph.D. degree in Chemistry from the University of California,
Santa Barbara.
Mr. Osborn joined Cephalon in March 1997 as Vice President, Legal Affairs,
was appointed Senior Vice President in September 1998, and has served as
Senior Vice President, General Counsel and Secretary since January 1999. From
1992 to 1997, Mr. Osborn was employed by The DuPont Merck Pharmaceutical
Company. Prior to that, he served in the first Bush administration with the
U.S. Department of State, practiced corporate law with Hale and Dorr in
Boston, and clerked for a U.S. Court of Appeals judge. Mr. Osborn received his
law degree from the University of Virginia and also holds a masters degree in
international studies from The Johns Hopkins University.
Mr. Roche joined Cephalon in January 1995 and has served as Senior Vice
President, Pharmaceutical Operations since November 2000. Prior to that he was
appointed to Senior Vice President of Sales and Marketing in June 1999 and
prior to that as Vice President, Sales and Marketing. Previously, Mr. Roche
was Director and Vice President, Worldwide Strategic Product Development, for
SmithKline Beecham's central nervous system and gastrointestinal products
business, and held senior marketing and management positions with that company
in the Philippines, Canada and Spain. Mr. Roche graduated from Colgate
University and received a master of business administration degree from The
Wharton School, University of Pennsylvania.
Mr. Savini joined Cephalon in June 1993 and has served as Senior Vice
President, Human Resources since January 2000. Prior to that he served as
Director, Human Resources and was appointed Vice President, Human Resources in
January 1995. From 1983 to 1993, Mr. Savini was employed by Bristol-Myers
Squibb Company and from 1981 to 1983 he was employed by Johnson & Johnson's
McNeil Pharmaceuticals. Mr. Savini graduated from Pennsylvania State
University and received a master of business administration degree from La
Salle College.
56
Dr. Vaught has been responsible for Cephalon's research operations since
joining the Company in August 1991, and currently serves as Senior Vice
President and President, Research and Development. Prior to joining Cephalon,
Dr. Vaught was employed by the R. W. Johnson Pharmaceutical Research
Institute, a subsidiary of Johnson & Johnson. Dr. Vaught received his Ph.D.
degree from the University of Minnesota.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
information under the caption "Compensation of Executive Officers and
Directors" in our definitive proxy statement for the 2002 annual meeting of
stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" in our definitive proxy statement for the 2002 annual meeting
of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information under the caption "Certain Relationships and Related Transactions"
in our definitive proxy statement for the 2002 annual meeting of stockholders.
57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
The following is a list of our consolidated financial statements and our
subsidiaries and supplementary data included in this report under Item 8:
Reports of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 2001 and 2000.
Consolidated Statements of Operations for the years ended December 31, 2001,
2000 and 1999.
Consolidated Statements of Stockholders' Equity for the years ended December
31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999.
Notes to Consolidated Financial Statements.
FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts
Schedules, other than those listed above, are omitted because they are not
applicable or are not required, or because the required information is
included in the consolidated financial statements or notes thereto.
REPORTS ON FORM 8-K
During the fiscal quarter ended December 31, 2001, we filed Current Reports
on Form 8-K as follows:
. November 13, 2001 announcing the exchange of $73 million principal amount
of 5 1/4% Convertible Subordinated Notes;
. December 3, 2001 announcing the agreement to acquire the French
pharmaceutical company Group Lafon;
. December 4, 2001 announcing the offering of $300 million convertible
subordinated notes; and
. December 6, 2001 announcing the private placement of $500 million of 2
1/2% Convertible Subordinated Notes.
58
EXHIBITS
The following is a list of exhibits filed as part of this annual report on
Form 10-K. Where so indicated by footnote, exhibits that were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated in parenthesis.
[Download Table]
Exhibit
No. Description
-------- -----------
3.1 Restated Certificate of Incorporation, as amended. (Exhibit 3.1)
(18).
3.2 Bylaws of the Registrant, as amended. (Exhibit 3.1) (18).
4.1 Specimen copy of stock certificate for shares of Common Stock of the
Registrant. (Exhibit 4.1) (10).
4.2(a) Amended and Restated Rights Agreement, dated as of January 1, 1999
between Cephalon, Inc. and StockTrans, Inc. As Rights Agent. (Exhibit
1) (25).
4.2(b) First Amendment to Amended and Restated Rights Agreement, dated July
31, 2000 between Cephalon, Inc. and StockTrans, Inc. as Rights Agent.
(Exhibit 1) (28).
4.3(a) Specimen Preferred Stock Certificate of Cephalon, Inc. (Exhibit 4.1)
(22).
4.3(b) Certificate of the Powers, Designations, Preferences and Rights of
the $3.625 Convertible Exchangeable Preferred Stock filed August 17,
1999. (Exhibit 4.2) (22).
4.3(c) Indenture, dated as of August 18, 1999 between Cephalon, Inc. and
State Street Bank and Trust Company, as Trustee. (Exhibit 4.3) (22).
4.3(d) Form of Series A Warrant to purchasers of Units including a limited
partnership interest in Cephalon Clinical Partners, L.P. (Exhibit
10.4) (6).
4.3(e) Form of Series B Warrant to purchasers of Units including a limited
partnership interest in Cephalon Clinical Partners, L.P. (Exhibit
10.5) (6).
4.3(f) Incentive Warrant to purchase 115,050 shares of Common Stock of
Cephalon, Inc. issued to PaineWebber Incorporated. (Exhibit 10.6)
(6).
4.3(g) Fund Warrant to purchase 19,950 shares of Common Stock of Cephalon,
Inc. issued to PaineWebber R&D Partners III, L.P. (Exhibit 10.7) (6).
4.4(a) Indenture, dated as of May 7, 2001 between Cephalon, Inc. and State
Street Bank and Trust Company, as Trustee. (Exhibit 4.1) (35).
4.4(b) Registration Rights Agreement, dated May 7, 2001 between Cephalon,
Inc. and Robertson Stephens, Inc., Adams, Harkness & Hill, Inc., Banc
of America Securities LLC, CIBC World Markets Corp., SG Cowen
Securities Corporation, UBS Warburg LLC, U.S. Bancorp Piper Jaffray
Inc., as Purchasers. (Exhibit 4.2) (35).
4.5(a) Indenture, dated as of December 11, 2001 between Cephalon, Inc. and
State Street Bank and Trust Company, as Trustee. (Exhibit 4.1) (36).
4.5(b) Registration Rights Agreement, dated as of December 11, 2001 between
Cephalon, Inc. and Credit Suisse First Boston Corporation (the "LEAD
PURCHASER"), Robertson Stephens, Inc., CIBC World Markets Corp., SG
Cowen Securities Corporation, UBS Warburg LLC, U.S. Bancorp Piper
Jaffray Inc., Adams, Harkness & Hill, Inc. and Banc of America
Securities, as the Initial Purchasers. (Exhibit 4.2) (36).
10.1 Letter agreement, dated March 22, 1995 between Cephalon, Inc. and the
Salk Institute for Biotechnology Industrial Associates, Inc. (Exhibit
99.1) (15).
10.2 Deliberately omitted.
10.3 Stock Purchase Agreement, dated July 28, 1995 between Cephalon, Inc.
and Kyowa Hakko Kogyo Co., Ltd. (Exhibit 99.3) (16).
10.4(a) License Agreement, dated May 15, 1992 between Cephalon, Inc. and
Kyowa Hakko Kogyo Co., Ltd. (Exhibit 10.6) (4) (23).
10.4(b) Letter agreement, dated March 6, 1995 amending the License Agreement
between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd. (Exhibit
10.4(b)) (14) (23).
10.4(c) Letter agreement, dated May 11, 1999 amending the License Agreement
between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd. (Exhibit
10.4(c)) (23) (26).
+10.5(a) Cephalon, Inc. Amended and Restated 1987 Stock Option Plan. (Exhibit
10.7) (4).
+10.5(b) Cephalon, Inc. Equity Compensation Plan. (Exhibit 10.6(b)) (17).
+10.5(c) Cephalon, Inc. Non-Qualified Deferred Compensation Plan. (Exhibit
10.6(c)) (10).
+10.5(d) Cephalon, Inc. 2000 Equity Compensation Plan For Employees and Key
Advisors. (Exhibit 99.1) (29).
10.6(a) Amended and Restated Agreement of Limited Partnership, dated as of
June 22, 1992 by and among Cephalon Development Corporation, as
general partner, and each of the limited partners of Cephalon
Clinical Partners, L.P. (Exhibit 10.1) (6).
59
[Download Table]
Exhibit
No. Description
--------- -----------
10.6(b) Amended and Restated Product Development Agreement, dated as of
August 11, 1992 between Cephalon, Inc. and Cephalon Clinical
Partners, L.P. (Exhibit 10.2) (6) (23).
10.6(c) Purchase Agreement, dated as of August 11, 1992 by and between
Cephalon, Inc. and each of the limited partners of Cephalon Clinical
Partners, L.P. (Exhibit 10.3) (6) (23).
10.6(d) Pledge Agreement, dated as of August 11, 1992 between Cephalon
Clinical Partners, L.P. and Cephalon, Inc. (Exhibit 10.8) (6).
10.6(e) Promissory Note, dated as of August 11, 1992 issued by Cephalon
Clinical Partners, L.P. to Cephalon, Inc. (Exhibit 10.9) (6).
10.6(f) Form of Promissory Note, issued by each of the limited partners of
Cephalon Clinical Partners, L.P. to Cephalon Clinical Partners, L.P.
(Exhibit 10.10) (6).
10.7 Supply, Distribution and License Agreement, dated as of July 27,
1993 between Kyowa Hakko Kogyo Co., Ltd. and Cephalon, Inc. (Exhibit
10.3) (11) (25).
10.8(a) Agreement, dated January 7, 1994 between Cephalon, Inc. and Chiron
Corporation. (Exhibit 10.1) (12) (23).
10.8(b) Letter agreement, dated January 13, 1995 amending Agreement between
Cephalon, Inc. and Chiron Corporation. (Exhibit 10.12(b)) (14) (23).
10.8c) Letter agreement, dated May 23, 1995 amending Agreement between
Cephalon, Inc. and Chiron Corporation. (Exhibit 10.12(c)) (17) (23).
10.9(a) Agreement, dated May 17, 1994 between Cephalon, Inc. and TAP
Holdings Inc. (formerly TAP Pharmaceuticals Inc.). (Exhibit 99.2)
(13) (25).
10.9(b) Amendment, dated June 28, 1996 amending Agreement between Cephalon,
Inc. and TAP Holdings Inc. (Exhibit 10.13(b)) (19) (23).
10.10 Toll Manufacturing and Packaging Agreement, dated February 24, 1998
between Cephalon, Inc. and Circa Pharmaceuticals, Inc. (Exhibit
10.12) (20) (23).
10.11(a) Marketing and Development Collaboration Agreement, dated June 10,
1999 between Cephalon, Inc. and Abbott Laboratories Inc. (Exhibit
10.13) (22) (24).
10.11(b) GABITRIL Product Agreement, dated October 31, 2000 between Cephalon,
Inc. and Abbott Laboratories. (Exhibit 10.13(b)) (37) (23).
10.11(c) Toll Manufacturing and Packaging Agreement, dated October 31, 2000
between Cephalon, Inc. and Abbott Laboratories. (Exhibit 10.13(c))
(37) (23).
10.12 Joint Research, Development and License Agreement, dated May 28,
1999 between Cephalon, Inc. and H. Lundbeck A/S. (Exhibit 10.14)
(20) (24).
10.13 Development and License Agreement, dated December 15, 1999 between
Schwarz Pharma AG and Cephalon, Inc. (24).
10.14(a) Managed Services Agreement, dated November 27, 2000 between Cephalon
(UK) Limited and Novartis Pharmaceuticals UK Limited. (Exhibit
10.17(a)) (34) (23).
10.14(b) License Agreement, dated November 27, 2000 between Cephalon, Inc.
and Novartis AG. (Exhibit 10.17(b)) (34) (23).
10.14(c) Collaboration Agreement, dated November 27, 2000 between Cephalon,
Inc. and Novartis AG. (Exhibit 10.17(c)) (34) (23).
10.14(d) Distribution Agreement, dated November 27, 2000 between Cephalon
(UK) Limited and Novartis Pharmaceuticals UK Limited. (Exhibit
10.17(d)) (34) (23).
10.15(a) Agreement and Plan of Merger, dated July 14, 2000 by and among
Cephalon, Inc., Anesta Corp. and C Merger Sub, Inc. (Exhibit 99.1)
(27).
10.15(b) Distribution, License and Supply Agreement, dated December 7, 1999,
between Anesta Corp. and Elan Pharma International Limited. (Exhibit
10.18) (23) (30).
10.15(c) Termination and Asset Sale and Purchase Agreement, dated March 13,
2000 between Abbott Laboratories, Inc. and Anesta Corp. (Exhibit
10.19) (23) (31).
10.15(d) Technology License Agreement, dated September 16, 1985, as amended
through December 3, 1993 between Anesta Corp. and the University of
Utah Research Foundation. (Exhibit 10.6) (23) (32).
10.15(f) Wiley Post Plaza Lease, dated December 7, 1994 between Anesta Corp.
and Asset Management Services. (Exhibit 10.13) (33).
*10.16(a) Toll Manufacturing and Packaging Agreement, dated August 24, 1999
between Cephalon, Inc. and Catalytica Pharmaceuticals, Inc. (24).
*10.16(b) Amendment No. 1 to Toll Manufacturing and Packaging Agreement, dated
July 3, 2001 between Cephalon, Inc. and Catalytica Pharmaceuticals,
Inc. (24).
*10.16(c) Amendment No. 2 to Toll Manufacturing and Packaging Agreement, dated
October 9, 2001 between Cephalon, Inc. and Catalytica
Pharmaceuticals, Inc. (24).
60
[Download Table]
Exhibit
No. Description
--------- -----------
*10.17(a) Research, Development and License Agreement, dated October 31, 2001
between Cephalon, Inc. and Sanofi-Synthelabo Inc. (24).
*10.17(b) Intellectual Property and Other Assets Purchase Agreement, dated
December 13, 2001 between Sanofi-Synthelabo and Anesta GmbH. (24).
*10.17(c) Intellectual Property and Other Asset Purchase Agreement, dated
December 13, 2001 between Sanofi-Synthelabo and Cephalon France.
(24).
*10.18 Consulting Agreement dated October 1, 2001 between Cephalon, Inc.
and Martyn D. Greenacre.
*23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of PricewaterhouseCoopers LLP.
*24 Power of Attorney (included on the signature page to this Form 10-K
Report).
*99.1 Letter responsive to Temporary Note 3T to Article 3 of Regulation S-
X.
--------
* Filed herewith.
+ Compensation plans and arrangements for executives and others.
(1) Filed as an Exhibit to the Registration Statement on Form S-1 filed on
March 15, 1991.
(2) Filed as an Exhibit to Pre-Effective Amendment No. 1 to the Registration
Statement on Form S-1 (Registration No. 33-39413) filed on April 19,
1991.
(3) Filed as an Exhibit to Pre-Effective Amendment No. 2 to the Registration
Statement on Form S-1 (Registration No. 33-39413) filed on April 22,
1991.
(4) Filed as an Exhibit to the Transition Report on Form 10-K for transition
period January 1, 1991 to December 31, 1991, as amended by Amendment No.
1 filed on September 4, 1992 on Form 8.
(5) Filed as an Exhibit to the Company's Current Report on Form 8-K filed on
December 31, 1992.
(6) Filed as an Exhibit to the Registration Statement on Form S-3
(Registration No. 33-56816) filed on January 7, 1993.
(7) Filed as an Exhibit to the Registration Statement on Form S-3
(Registration No. 33-58006) filed on February 8, 1993.
(8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.
(9) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
June 8, 1993.
(10) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
(11) Filed as an Exhibit to the Registration Statement on Form S-3
(Registration No. 33-73896) filed on January 10, 1994.
(12) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
January 10, 1994.
(13) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
May 17, 1994.
(14) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
(15) Filed as an Exhibit to the Registration Statement on Amendment No. 1 to
Form S-3 (Registration No. 33-93964) filed on June 30, 1995.
(16) Filed as an Exhibit to the Registration Statement on Amendment No. 2 to
Form S-3 (Registration No. 33-93964) filed on July 31, 1995.
(17) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
(18) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
(19) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
(20) Filed as an Exhibit to the Company's Current Report on Form 8-K filed
August 3, 1999.
(21) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for
the period ending June 30, 1999.
(22) Filed as an Exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-87421) filed September 20, 1999.
(23) Filed as an Exhibit to the Company's Registration Statement on Form S-3
(Registration No. 333-88985) filed October 14, 1999.
(24) Portions of the Exhibit have been omitted and have been filed
separately pursuant to an application for confidential treatment
granted by the Securities and Exchange Commission.
(25) Portions of the Exhibit have been omitted and have been filed
separately pursuant to an application for confidential treatment filed
with the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended.
(26) Filed as an Exhibit to the Company's Form 8-A/A (12G) filed on January
20, 1999.
(27) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999.
(28) Filed as an Exhibit to the Company's Current Report on Form 8-K filed
July 21, 2000.
(29) Filed as an Exhibit to the Company's Form 8-A/12G filed on August 2,
2000.
(30) Filed as an Exhibit to the Company's Registration Statement on Form S-8
(Registration No. 333-52640) filed on December 22, 2000.
(31) Filed as an Exhibit to Anesta Corp.'s Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
(32) Filed as an Exhibit to Anesta Corp.'s Quarterly Report on Form 10-Q for
the period ending March 31, 2000.
(33) Filed as an Exhibit to Anesta Corp.'s Registration Statement on Form S-
1 (File No. 33-72608) filed May 31, 1996.
(34) Filed as an Exhibit to Anesta Corp.'s Annual Report on Form 10-K (File
No. 0-23160) for the fiscal year ended December 31, 1994.
(35) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.
(36) Filed as an Exhibit to the Company's Registration Statement on Form S-3
(Registration No. 333-62234) filed June 4, 2001.
(37) Filed as an Exhibit to the Company's Registration Statement on Form S-3
(Registration No. 333-82788) filed February 14, 2002.
61
CEPHALON, INC. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
[Download Table]
Balance at Balance at
Beginning of Additions Other End of the
Year Ended December 31, the Year (Deductions) (1) Deductions Year
----------------------- ------------ ---------------- ---------- ----------
Reserve for sales
discounts, returns and
allowances:
2001..................... $1,890,000 $14,459,000 $9,523,000 $6,826,000
2000..................... $5,949,000 $(1,980,000) $2,079,000 $1,890,000
1999..................... $ -- $ 6,607,000 $ 658,000 $5,949,000
--------
(1) Amounts represent charges and reductions to expenses and revenue.
62
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|---|
SIGNATURES
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.
Date: April 1, 2002 CEPHALON, INC.
/s/ FRANK BALDINO, JR.
By: _________________________________
Frank Baldino, Jr., Ph.D.
Chairman and Chief Executive
Officer
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.
Each person in so signing also makes, constitutes and appoints Frank Baldino,
Jr. his true and lawful attorney-in-fact, with full power of substitution, to
execute and cause to be filed with the Securities and Exchange Commission any
or all amendments to this report.
[Download Table]
Signature Title Date
--------- ----- ----
/s/ FRANK BALDINO, JR. Chairman and Chief April 1, 2002
______________________________________ Executive Officer
Frank Baldino, Jr., Ph.D. (Principal executive
officer)
/s/ J. KEVIN BUCHI J. Sr. Vice President and April 1, 2002
______________________________________ Chief Financial Officer
Kevin Buchi (Principal financial and
accounting officer)
/s/ WILLIAM P. EGAN Director April 1, 2002
______________________________________
William P. Egan
/s/ ROBERT J. FEENEY, PH.D. Director April 1, 2002
______________________________________
Robert J. Feeney, Ph.D.
/s/ MARTYN D. GREENACRE Director April 1, 2002
______________________________________
Martyn D. Greenacre
/s/ CHARLES A. SANDERS Director April 1, 2002
______________________________________
Charles A. Sanders, M.D.
/s/ HORST WITZEL Director April 1, 2002
______________________________________
Horst Witzel, Dr.-Ing.
63
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
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| This ‘10-K405/A’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 12/15/06 | | 16 |
| | 12/20/04 | | 16 | | 49 |
| | 3/1/04 | | 52 | | | | | 4 |
| | 5/5/03 | | 49 |
| | 6/15/02 | | 16 | | 49 |
| Filed on: | | 4/1/02 | | 63 | | | | | 10-K405 |
| | 3/31/02 | | 22 | | 45 | | | 10-Q, 10-Q/A |
| | 3/29/02 | | 22 | | 45 |
| | 3/20/02 | | 1 | | 16 |
| | 2/14/02 | | 16 | | 61 | | | S-3, SC 13G/A |
| | 2/12/02 | | 31 |
| | 2/11/02 | | 33 | | 35 |
| For Period End: | | 12/31/01 | | 1 | | 58 | | | 10-K/A, 10-K405, 11-K |
| | 12/28/01 | | 3 | | 55 | | | 8-K, 8-K/A |
| | 12/15/01 | | 42 |
| | 12/13/01 | | 61 | | | | | 424B3 |
| | 12/11/01 | | 43 | | 59 |
| | 12/6/01 | | 58 | | | | | 424B3, 8-K |
| | 12/4/01 | | 58 | | | | | 8-K |
| | 12/3/01 | | 58 | | | | | 8-K |
| | 11/13/01 | | 58 | | | | | 10-Q, 424B3, 8-K |
| | 10/31/01 | | 61 |
| | 10/9/01 | | 60 |
| | 10/1/01 | | 61 |
| | 9/30/01 | | 28 | | | | | 10-Q |
| | 7/3/01 | | 60 |
| | 6/30/01 | | 8 | | 42 | | | 10-Q |
| | 6/4/01 | | 61 | | | | | S-3 |
| | 5/7/01 | | 59 |
| | 3/31/01 | | 8 | | | | | 10-Q |
| | 1/1/01 | | 19 | | 48 |
| | 12/31/00 | | 19 | | 61 | | | 10-K405 |
| | 12/23/00 | | 47 |
| | 12/22/00 | | 61 | | | | | S-8 |
| | 11/27/00 | | 60 | | | | | 8-K |
| | 10/31/00 | | 49 | | 60 |
| | 10/10/00 | | 42 | | | | | 8-K |
| | 9/30/00 | | 43 | | | | | 10-Q |
| | 8/2/00 | | 61 | | | | | 8-A12G |
| | 7/31/00 | | 59 | | | | | 8-K |
| | 7/21/00 | | 61 | | | | | 8-K |
| | 7/14/00 | | 60 | | | | | 8-K |
| | 3/31/00 | | 61 | | | | | 10-Q |
| | 3/13/00 | | 34 | | 60 |
| | 2/18/00 | | 34 |
| | 1/1/00 | | 21 | | 43 |
| | 12/31/99 | | 20 | | 61 | | | 10-K405 |
| | 12/15/99 | | 60 |
| | 12/7/99 | | 60 |
| | 10/14/99 | | 61 | | | | | S-3 |
| | 9/20/99 | | 61 | | | | | S-8 |
| | 8/31/99 | | 52 |
| | 8/24/99 | | 60 |
| | 8/18/99 | | 59 | | | | | 8-K |
| | 8/17/99 | | 59 |
| | 8/3/99 | | 61 | | | | | 8-K/A |
| | 6/30/99 | | 61 | | | | | 10-Q |
| | 6/10/99 | | 60 |
| | 5/28/99 | | 60 |
| | 5/11/99 | | 59 |
| | 1/20/99 | | 61 | | | | | 8-A12G |
| | 1/1/99 | | 38 | | 59 |
| | 12/31/98 | | 61 | | | | | 10-K405, 10-K405/A |
| | 2/24/98 | | 60 |
| | 12/31/96 | | 61 | | | | | 10-K405, 10-K405/A |
| | 6/28/96 | | 60 |
| | 5/31/96 | | 61 |
| | 12/31/95 | | 61 |
| | 7/31/95 | | 61 |
| | 7/28/95 | | 59 |
| | 6/30/95 | | 61 |
| | 5/23/95 | | 60 |
| | 3/22/95 | | 59 |
| | 3/6/95 | | 59 |
| | 1/13/95 | | 60 |
| | 12/31/94 | | 61 |
| | 12/7/94 | | 60 |
| | 5/17/94 | | 60 | | 61 |
| | 1/10/94 | | 61 |
| | 1/7/94 | | 60 |
| | 12/31/93 | | 61 |
| | 12/3/93 | | 60 |
| | 7/27/93 | | 60 |
| | 6/8/93 | | 61 |
| | 2/8/93 | | 61 |
| | 1/7/93 | | 61 |
| | 12/31/92 | | 61 |
| | 9/4/92 | | 61 |
| | 8/11/92 | | 60 |
| | 6/22/92 | | 59 |
| | 5/15/92 | | 59 |
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