Annual Report — [x] Reg. S-K Item 405 — Form 10-K
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1: 10-K405 Annual Report -- [x] Reg. S-K Item 405 61 349K
2: EX-4.3(A) Form of Note Purchase Agreement Dated 02/24/99 49 189K
3: EX-4.3(B) Form of Revenue Sharing Senior Secured Note 49 188K
4: EX-4.3(C) Form of Class A Warrant 17 69K
5: EX-4.3(D) Form of Class B Warrant 17 69K
6: EX-4.3(E) Security Agreement Dated 03/01/99 26 82K
7: EX-4.3(F) Patent and Trademark Agreement Dated 03/01/99 35 94K
12: EX-10.12 Toll Mfg. and Packaging Agreement 30 100K
8: EX-10.5(H) Amendment No.5 to License Agreement 3 17K
9: EX-10.5(I) Amendment No.6 to License Agreement 3 16K
10: EX-10.5(J) Amendment No.3 to Trademark Agreement 2 10K
11: EX-10.5(K) Amendment No.4 to Trademark Agreement 2 11K
13: EX-21 Subsidiaries of Cephalon, Inc. 1 7K
14: EX-23.1 Consent of Arthur Andersen 1 8K
15: EX-27 Financial Data Schedule 2 11K
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, 1998
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)
DELAWARE 23-2484489
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
145 BRANDYWINE PARKWAY, 19380
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:
Name of each
exchange
Title of each class 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 $201,828,095. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the Nasdaq National Market on February 19, 1999. For purposes of making this
calculation only, the registrant has defined affiliates as including all
directors 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
February 19, 1999 was 28,820,542.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 1999 annual
meeting of stockholders are incorporated by reference into Part III.
TABLE OF CONTENTS
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PART I
ITEM 1. Business................................................................................. 3
ITEM 2. Properties............................................................................... 21
ITEM 3. Legal Proceedings........................................................................ 21
ITEM 4. Submission of Matters to a Vote of Security Holders...................................... 21
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................... 22
ITEM 6. Selected Consolidated Financial Data..................................................... 23
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 24
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk................................ 37
ITEM 8. Financial Statements and Supplementary Data.............................................. 38
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure..... 54
PART III
ITEM 10. Directors and Executive Officers of the Registrant....................................... 54
ITEM 11. Executive Compensation................................................................... 56
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................... 56
ITEM 13. Certain Relationships and Related Transactions........................................... 56
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................... 57
SIGNATURES......................................................................................... 62
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
the Company's current expectations or forecasts of future events. These may
include statements regarding anticipated scientific progress in the Company's
research programs, development of potential pharmaceutical products, prospects
for regulatory approval, manufacturing capabilities, market prospects for the
Company's 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. The Company's 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 discussed throughout this document. Given these risks and
uncertainties, any or all of these forward-looking statements may prove to be
incorrect. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Certain Risks Related to Cephalon's Business."
Cephalon, Inc., headquartered in West Chester, PA, is an international
biopharmaceutical company dedicated to the discovery, development and marketing
of products to treat neurological disorders and cancer. Cephalon, Inc.,
together with its subsidiaries, is referred to herein as "Cephalon" or the
"Company."
In December 1998, the Company received approval from the U.S. Food and Drug
Administration ("FDA") to market PROVIGIL(R) (modafinil) Tablets [C-IV]
("PROVIGIL Tablets" or "PROVIGIL"), its first approved product in the United
States. PROVIGIL has been approved for treating excessive daytime sleepiness
associated with narcolepsy. Sales of PROVIGIL were initiated in the U.S. in
February 1999 by the Company's U.S. sales organization. Cephalon began marketing
PROVIGIL in the United Kingdom in March 1998 and the Republic of Ireland in
February 1999 through its United Kingdom-based sales organization. Additionally,
Cephalon has rights to commercialize PROVIGIL in Austria, Italy, Mexico and
Switzerland, and applications seeking marketing approval have been filed or are
being prepared in these countries. The Company also has rights to PROVIGIL in
Japan. The Company is highly dependent on the commercial success of PROVIGIL in
the United States. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Risks Related to Cephalon's
Business."
In February 1997, the Company and Chiron Corporation submitted a new drug
application to the FDA for approval to market MYOTROPHIN(R) (mecasermin)
Injection ("MYOTROPHIN Injection" or "MYOTROPHIN") in the United States for the
treatment of amyotrophic lateral sclerosis ("ALS"). In May 1998, the FDA issued
a letter stating that the new drug application was "potentially approvable,"
under certain conditions. The Company cannot predict whether these conditions
can be met to the satisfaction of the FDA, and the prospects for regulatory
approval of MYOTROPHIN continue to be very uncertain in the United States.
Because they believed the application would not be approved, in September 1998,
Cephalon and Chiron withdrew their joint marketing authorization application for
MYOTROPHIN in Europe for the treatment of ALS.
The Company has initiated clinical studies exploring the utility of
PROVIGIL in treating excessive daytime sleepiness and fatigue associated with
disorders other than narcolepsy, such as sleep apnea and multiple sclerosis. The
Company has a significant discovery research program that focuses on discovering
and developing treatments for neurological disorders such as Parkinson's
disease, Alzheimer's disease and stroke, and oncological disorders such as
prostate cancer, pancreatic cancer and a variety of other cancers. Cephalon and
TAP Holdings Inc. have formed an alliance for the development of signal
transduction modulators for the treatment of cancers and prostate disorders in
the United States. TAP is conducting Phase I clinical studies of intravenously
and orally administered compounds.
3
COMMERCIAL OPERATIONS
---------------------
BACKGROUND
Under a 1993 agreement with Laboratoire L. Lafon, a French pharmaceutical
company, Cephalon obtained an exclusive license to develop, market and sell
PROVIGIL in Italy, Japan, the Republic of Ireland, Mexico, the United Kingdom
and the United States. Under a sales and marketing agreement with Merckle GmbH,
the Company obtained the exclusive right to market PROVIGIL in Austria and
Switzerland.
In the United States, the Company conducted preclinical and clinical
studies, including two Phase III clinical studies necessary to obtain FDA
approval, and filed a new drug application with the FDA in December 1996. In
December 1998, the FDA granted clearance to market PROVIGIL for excessive
daytime sleepiness associated with narcolepsy. Sales of PROVIGIL commenced in
the United States in February 1999 upon the scheduling of modafinil, the active
drug substance in PROVIGIL, in Schedule IV of the Controlled Substances Act by
the Drug Enforcement Administration. The Company's U.S. sales organization
markets PROVIGIL to sleep centers, sleep specialists and neurologists. The
Company also has a small department marketing to managed care organizations in
the United States. The U.S. sales organization is also engaged in the co-
promotion of STADOL NS(R) (butorphanol tartrate), a product of Bristol-Myers
Squibb Corporation.
Cephalon's United Kingdom-based sales organization commenced sales of
PROVIGIL tablets for use in treating narcolepsy in the United Kingdom in 1998
and in the Republic of Ireland in 1999. The Company intends to market PROVIGIL
in Austria and Switzerland upon regulatory approval. Additionally, Cephalon has
formed alliances with Dompe Biotech S.p.A. and Azwell, Inc. to develop and
market PROVIGIL in Italy and Japan, respectively, and is seeking a development
and marketing partner in Mexico. Under a sales and marketing agreement with
Laboratoire Aguettant S.A., the Company is marketing APOKINON(R) (apomorphine
hydrocloride) in France for the treatment of levadopa therapy fluctuations
common in late-stage Parkinson's disease.
Cephalon relies on third parties for the manufacture, distribution and
customer service activities related to marketing PROVIGIL and has established a
small commercial management staff to oversee these third parties. See
"Manufacturing and Product Supply."
PROVIGIL
Narcolepsy
Narcolepsy is a debilitating, lifelong disorder that often originates 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 over 125,000 people in the United States, of which 30,000-45,000 are
believed to currently seek treatment from a physician. The Company believes that
there is a proportionate incidence of narcolepsy in the other territories in
which it has obtained a license, but the relative extent of diagnosis and
treatment in those other countries varies and is not as high as it is in the
United States.
The Company conducted two Phase III, double-blind, placebo-controlled,
nine-week multicenter studies of PROVIGIL with more than 550 patients who met
the American Sleep Disorders Association criteria for narcolepsy. Subjects in
both studies were randomized to a daily dose of PROVIGIL 200 mg, PROVIGIL 400
mg, or placebo. Both studies demonstrated improvement in objective and
subjective measures of excess daytime sleepiness for both the 200 mg and 400 mg
doses compared to placebo. PROVIGIL was found to be generally well-tolerated,
with a low incidence of adverse events relative to placebo. Most adverse events
were mild to moderate; the most commonly observed were headache, infection,
nausea, nervousness, anxiety, and insomnia. No specific symptoms of withdrawal
were observed after discontinuation of PROVIGIL therapy. The FDA approved dosing
is 200 mg once daily.
4
Excessive Daytime Sleepiness associated with disorders other than narcolepsy
The Company believes that a significant number of people suffer from
excessive daytime sleepiness and fatigue resulting from or associated with other
disorders. For example, patients suffering from obstructive sleep apnea may be
excessively sleepy because of disruption to their normal sleep cycle, even when
the underlying disease is treated. Sleep apnea is the most common diagnosis in
sleep centers. Patients suffering from multiple sclerosis and Parkinson's
disease, which neurologist treat, may suffer from fatigue and sleepiness caused
either by their disease or by the therapeutics currently used to treat it.
Focusing on disorders treated by sleep specialists and neurologists would allow
the Company to utilize its existing field sales force to market PROVIGIL if it
were to obtain regulatory approval for such indications. Consequently, the
Company has initiated clinical studies to explore the utility of PROVIGIL in
other disorders, including sleep apnea and multiple sclerosis.
Laboratoire L. Lafon
Under a 1993 agreement with Laboratoire L. Lafon, a French pharmaceutical
company, Cephalon obtained an exclusive license to develop, market and sell
PROVIGIL in Italy, Japan, the Republic of Ireland, Mexico, the United Kingdom
and the United States. Under the terms of the agreement, Lafon supplies bulk
modafinil compound, the active drug substance in PROVIGIL, for the Company's
commercial use at a purchase price equal to a percentage of net product sales.
In addition, the agreement requires that the Company pay trademark and license
royalties, which also are based on a percentage of net product sales.
Azwell, Inc.
In June 1998, the Company entered into an agreement with Nippon Shoji
Kaisha Ltd. ("Nippon Shoji"), a Japanese pharmaceutical company, to develop and
market PROVIGIL in Japan. Subsequently, Nippon Shoji merged with Showa
Pharmaceutical Co., Ltd. to form Azwell Inc. ("Azwell"). Azwell is responsible
for funding product development activities, including conducting the clinical
trials for narcolepsy required by Japanese regulatory authorities to be included
in an application seeking authorization to market PROVIGIL in Japan. The Company
will supply PROVIGIL to Azwell for use in Japanese clinical trials. Upon product
approval by the Japanese Ministry of Health and Welfare, Azwell will market and
sell the product in Japan. The Company will receive a percentage of net product
sales as a license royalty and in exchange for supplying bulk compound. The
agreement also provides for payments to Cephalon upon the achievement of certain
milestones. The agreement with Azwell has an initial ten-year term and the
Company may terminate the agreement if (i) Azwell fails to file an
investigational new drug application ("IND") by June 2000, or (ii) fails to file
a marketing application by end of December 2002.
Dompe Biotech S.p.A.
In June 1998, Cephalon entered into an agreement with Dompe Biotech S.p.A.
("Dompe"), an Italian pharmaceutical company, in which Cephalon granted Dompe
the right to market, sell and distribute PROVIGIL in Italy. The parties will
jointly manage regulatory matters and an application for marketing approval of
PROVIGIL has been filed with the Italian Ministry of Health. Upon product
approval in Italy, Dompe will market and sell PROVIGIL and will be obligated to
fund a minimum of promotional activities during the first two years of sales.
The Company will supply finished product to Dompe for a purchase price equal to
a percentage of net product sales. The agreement with Dompe has an initial term
of ten years and automatically renews for successive two-year periods unless
terminated by either party upon 180 days notice prior to the expiration.
Merckle GmbH
In December 1998, Cephalon entered into an agreement with Merckle GmbH
("Merckle") under which Cephalon obtained the rights to promote and market
PROVIGIL in Austria and Switzerland for the treatment of narcolepsy. Under the
agreement, Cephalon is responsible for promoting and marketing the product while
Merckle retains responsibility for all other activities. The Company will
receive quarterly compensation from Merckle based
5
on sales levels achieved. A marketing application has been approved in Austria
and the Company expects to initiate sales activities in Austria in 1999. The
ten-year agreement with Merckle automatically renews for successive one-year
periods unless terminated by either party upon 180 days notice prior to
expiration.
OTHER COMMERCIAL COLLABORATIONS
Bristol-Myers Squibb Company
In July 1994, the Company entered into a co-promotion agreement with
Bristol-Myers Squibb Company to promote and market STADOL NS(R) (butorphanol
tartrate) to neurologists in the United States. STADOL NS is indicated for the
management of pain when the use of an opioid analgesic is appropriate. Cephalon
receives compensation from BMS equal to a percentage of total STADOL NS sales
attributed to prescriptions written by neurologists which exceeds a
predetermined base amount. This agreement expires at the end of 1999, unless
further extended by the parties.
Medtronic, Inc.
In April 1997, the Company entered into an agreement with Medtronic, Inc.
to promote and market Intrathecal Baclofen Therapy (ITB(TM)), for the treatment
of intractable spasticity, to neurologists and physiatrists in the United
States. Quarterly compensation from Medtronic is based primarily on a payment
per patient screen basis. This co-promotion agreement will terminate pursuant to
it terms as of April 29, 1999.
Laboratoire Aguettant S.A.
In December 1997, the Company entered into an agreement with Laboratoire
Aguettant S.A. to promote and market APOKINON(R) (apomorphine hydrocloride) 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. In return for marketing
rights, the Company makes annual payments to Aguettant during the first five
years of the agreement. The Company receives quarterly compensation from
Aguettant primarily based on a rate per unit of APOKINON sold. The ten-year
agreement automatically renews for successive one-year periods unless terminated
by either party upon 90 days notice prior to expiration.
RESEARCH AND DEVELOPMENT
------------------------
The Company's research and development efforts focus primarily in two
areas: neurodegenerative disorders and oncological disorders. Neurodegenerative
disorders are characterized by the death of neurons, the specialized conducting
cells of the nervous system. Oncological disorders are characterized by the
uncontrolled proliferation of cells that form tumors. The Company utilizes its
technical expertise in molecular biology, molecular pharmacology, biochemistry,
cell biology, tumor biology and chemistry to develop products in both of these
areas. The Company's research strategy has focused on understanding the cellular
mechanisms of cell survival and cell death. This understanding may allow
medicinal chemical approaches toward creating novel, small, orally active,
synthetic molecules which would facilitate the death of tumor cells leading to
new therapies in oncology or would cross the blood-brain barrier (which prevents
the free passage of many molecules between the bloodstream and the central
nervous system, "CNS") and enhance the survival of neurons, thereby intervening
in the progression of neurodegenerative disorders. Cephalon believes that its
multidisciplinary technology approach facilitates the development of a portfolio
of potential products for the treatment of neurological disorders which involve
neuronal death such as Parkinson's disease, Alzheimer's disease and stroke, and
oncological disorders such as prostate cancer, pancreatic cancer and a variety
of other cancers. The Company's research programs currently consist of four core
technology areas: neurotrophic factors, gene transcription regulators, signal
transduction modulators and protease inhibitors.
6
RESEARCH AND DEVELOPMENT PROGRAMS
The following table outlines the Company's research and development
programs.
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COMPOUND INDICATION STATUS (1) COMMERCIAL RIGHTS (3)
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Neurotrophic Factors (MYOTROPHIN).. ALS NDA(2) Cephalon/Chiron/Kyowa Hakko
Gene Transcription Regulators...... Alzheimer's Disease Development Cephalon/Leo
Signal Transduction Modulators..... Alzheimer's Disease Development Cephalon/Kyowa Hakko
Parkinson's Disease Development Cephalon/Kyowa Hakko
Prostate and Phase I Cephalon/TAP/Kyowa Hakko
pancreatic cancer
Solid Tumors Research Cephalon
Protease Inhibitors................ Alzheimer's Disease Research Cephalon
Stroke Research Cephalon
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(1) "Research" includes the development of assay systems, discovery and
evaluation of prototype compounds in vitro and in animals. "Development"
includes product formulation, toxicology and additional animal testing of
a lead compound. "Phase I" clinical trials involve administration of a
product to a limited number of patients to assess safety and determine
appropriate dosage. "Phase II" clinical trials generally involve
administration of a product to a limited number of patients with a
particular disorder to determine dosage, efficacy and safety. "Phase III"
clinical trials generally examine the clinical efficacy and safety of a
product in an expanded patient population at multiple clinical sites.
"NDA" indicates that a new drug application has been filed with the FDA
in the United States for the treatment of the indication listed. See
"Government Regulation."
(2) The FDA stated the NDA was "potentially approvable" under certain
conditions. The prospects for regulatory approval in the United States
are very uncertain. Cephalon and Chiron have withdrawn the marketing
application for MYOTROPHIN in Europe. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Risks
Related to Cephalon's Business."
(3) Cephalon has entered into several collaborations under which the parties
license technology to/from each other for research and development and
marketing of the compounds. For further elaboration of commercial rights,
see "Research and Development Collaborations."
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7
NEUROTROPHIC FACTORS (MYOTROPHIN)
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 which affect the survival of different types of neurons. However,
neurotrophic factors cannot cross the blood-brain barrier. The Company's
development efforts in this area focus on using the neurotrophic factor,
MYOTROPHIN, in disorders such as amyotrophic lateral sclerosis 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.
Amyotrophic Lateral Sclerosis
Amyotrophic lateral sclerosis ("ALS") is a fatal disorder of the nervous
system characterized by the chronic, progressive degeneration of motor neurons.
The term "amyotrophic" refers to the loss of lower motor neurons that project
from the spinal cord to the muscle, and "lateral sclerosis" refers to the loss
of upper motor neurons that project from the brain to motor neurons in the
spinal cord. Although both groups of motor neurons are affected in this disease,
it is the loss of the spinal (lower) motor neurons that leads to muscle
weakness, muscle atrophy and, eventually, to the patient's death. ALS affects
approximately 15,000-20,000 people in the United States. The Company believes
that there is a proportionate incidence of ALS in the populations of Europe and
Japan. The first symptom of ALS is muscle weakness, which progresses to muscle
atrophy and loss of muscle function. The disease 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.
The Company conducted clinical trials in North America and Europe. In
February 1997, the Company and Chiron Corporation submitted a new drug
application to the FDA for approval to market MYOTROPHIN in the United States
for the treatment of amyotrophic lateral sclerosis. In May 1998, the FDA issued
a letter stating that the new drug application was "potentially approvable,"
under certain conditions. The Company cannot predict whether these conditions
can be met to the satisfaction of the FDA and the prospects for regulatory
approval of MYOTROPHIN continue to be very uncertain in the United States.
Cephalon and Chiron also filed jointly for regulatory approval of MYOTROPHIN in
Europe. Because they believed the application would not be approved, in
September 1998, Cephalon and Chiron withdrew their joint marketing authorization
application for MYOTROPHIN in Europe for the treatment of ALS. A study of
MYOTROPHIN in ALS patients is being conducted by Kyowa Hakko in Japan. For a
complete discussion, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Risks Related to Cephalon's
Business."
Other indications
The Company has conducted pilot studies to explore the utility of
MYOTROPHIN in indications other than ALS, such as multiple sclerosis and
peripheral neuropathies. Any further studies to be conducted by the Company are
contingent upon the regulatory outcome of the MYOTROPHIN NDA.
GENE TRANSCRIPTION REGULATORS
The inability of systemically administered trophic factors to cross the
blood brain barrier must be overcome in order to address disorders of the
central nervous system where the neurons as well as their axonal projections lie
within the blood brain barrier. The Company is developing proprietary molecules
believed to influence gene transcription by binding to a specific receptor found
in neurons in the central nervous system. In preclinical studies, these orally
active small molecules cross the blood-brain barrier and initiate
transcriptional events at the genes responsible for the production of certain
neurotrophic factors within the CNS.
8
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 which is believed to result in
the observed death of several types of neurons. Patients affected 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
individuals in the United States, 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.
The focus of the Company's gene transcription regulator program is to
develop molecules that would enhance the endogenous expression of neurotrophic
factors in the CNS and promote neuronal survival in regions of the brain known
to be affected by Alzheimer's disease. This program is being conducted in
collaboration with Leo Pharmaceutical Products, Ltd.
SIGNAL TRANSDUCTION MODULATORS
Survival of cells, including neurons, is regulated and influenced by
factors that promote cell survival or induce cell death. These factors exert
differential effects on the cell (promotion of survival versus induction of
death) through activation of intracellular signaling pathways. Once activated,
these pathways result in the discrete biochemical events targeted at distinct
intracellular kinases (proteins) that regulate molecular pathways of survival or
death. The Company's signal transduction modulator program focuses on
identifying small molecules that modulate these signal transduction events.
Neurology
In neurodegenerative disease, activation of death-promoting processes leads
to neuronal death. Thus, inhibition of the signaling events in death-promoting
pathways provides novel therapeutic targets for small molecules. The Company has
developed an extensive proprietary library of small molecule modulators of the
signal transduction processes which block the death process in isolated neurons
in vitro and in vivo, where damage has been induced by a variety of harmful
stimuli. The Company is pursuing the development of these small molecules for
the treatment of Alzheimer's disease, Parkinson's disease and other
neurodegenerative disorders.
Alzheimer's Disease
As previously mentioned, Alzheimer's disease is characterized by the death
of neurons in the CNS. In addition to its work focused on gene transcription
regulators, Cephalon has synthesized and identified a class of novel small
molecules which are orally active and cell- and blood-brain barrier permeable
and are inhibitors of the stress activated protein kinase pathway, which is
believed to be the signaling pathway which may be linked to the death of neurons
in this disease. One of these molecules, CEP-1347, has been shown to prevent
neuronal death in vitro and in several models of neuronal death in vivo. CEP-
1347 is currently in preclinical development for use as a potential treatment
for Alzheimer's disease. This program is being conducted under the terms of a
license agreement with Kyowa Hakko Kogyo Co., Ltd.
Parkinson's Disease
Parkinson's disease is a progressive disorder of the central nervous system
affecting over one million people in the United States. Clinically, the disease
is characterized by a decrease in spontaneous movements, gait difficulty,
postural instability, rigidity and tremor. Parkinson's disease is caused by the
degeneration of the pigmented neurons in the Substantia Nigra of the brain,
resulting in decreased dopamine availability. In preclinical models of
Parkinson's disease, CEP-1347 and other proprietary compounds have indicated
their potential utility in the treatment of this disease by demonstrating the
ability to protect the dopamine neurons in the Substantia Nigra.
9
Oncology
Cancer is a disease of uncontrolled proliferation of cells. As the cells
proliferate, they aggregate into masses, demand neovascularization (the
formation of new blood vessels), invade organs, and can eventually lead to
death. In many instances, it is the growth factors that are normally involved
in maintenance of cells which become the culprits in driving their abnormal
proliferation. Many of these growth factors bind to specific receptors (or
receptor kinases) and initiate intracellular signals that direct the cell to
proliferate. Thus, inhibition of these kinases provides a unique therapeutic
strategy for treating a variety of oncological disorders. The Company has
developed small molecule inhibitors of specific kinases that have been
demonstrated in preclinical models to inhibit tumor growth. This research
provides the opportunity for selective inhibition of tumor growth without the
undesirable effects on other organ systems produced by traditional
chemotherapeutics.
Other factors become involved as the tumor cells aggregate and promote the
formation of new blood vessels which provide nutrients to the growing tumor.
This latter process is called angiogenesis. The Company has a core of
proprietary, orally active molecules targeted at preventing the development of
new blood vessels required by a cancerous tissue to grow or spread. Selective
inhibition of this new vessel formation would result in slowing tumor growth by
basically starving the tumor of necessary nutrients.
Prostate Cancer
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. Current therapy includes surgery to remove the
cancer and treatment with anti-androgen agents such as leuprolide. If these
treatments fail and the tumor becomes androgen-refractory, there are no
effective treatments and death usually results.
The Company has identified certain molecules which modulate signal
transduction by blocking (antagonizing) the action of certain growth factors
through the trk kinase. The Company believes these inhibitors may be useful in
treating certain diseases such as prostate cancer, where tumor growth and
development may be mediated by an uncontrolled activation of the endogenous
growth factor. This approach has been demonstrated by the Company to be active
against androgen-refractory prostate cancer tumors in preclinical models.
Cephalon and TAP Holdings Inc. are parties to a licensing and research and
development collaboration to develop trk kinase inhibitors for the treatment of
human cancers and prostate disorders in the United States. In 1996, TAP
initiated a Phase I clinical study of an intravenously administered compound
which was completed in 1998. In March 1998, TAP initiated an ongoing multiple-
dose study of an orally administered compound. The objective of these multi-
center studies is to examine the drugs' pharmacokinetic and safety profiles in
patients with advanced cancer. The molecules used by TAP in these studies were
developed under the Company's agreement with Kyowa Hakko.
Solid Tumors
Angiogenesis, the natural process used by the human body to produce blood
vessels, occurs as a pathological process in the development of solid tumors
such as breast and lung cancers. The blood vessels created by this process
provide the nutrients and oxygen the tumor needs to grow and spread. The
process of angiogenesis is mediated by a number of factors including the
polypeptide vascular endothelial growth factor ("VEGF"). As a result, the
Company believes that inhibitors of the receptor kinase for VEGF has potential
utility in the treatment of solid tumors.
The Company has synthesized a number of proprietary orally active small
molecules which, in in vitro studies, are potent and selective inhibitors of the
receptor kinase for VEGF. The Company is currently evaluating these molecules
in preclinical models for their potential utility in a variety of solid tumors.
10
PROTEASE INHIBITORS
A protease is a naturally-occurring enzyme that is responsible for the
processing or cleavage of a protein. Certain proteases have been implicated in
the pathogenesis of neurodegenerative disorders, either directly by causing
neuronal death or indirectly by cleaving proteins into smaller peptide
fragments. These peptide fragments may threaten the survival of neurons. The
Company has developed expertise in identifying, isolating and assaying specific
types of proteases believed to be involved in certain neurodegenerative
disorders. In addition, the Company's expertise in chemistry has enabled the
synthesis of molecules that, in preclinical studies, specifically inhibit the
action of these proteases. In the past, the Company has focused on developing
small molecule therapeutics that inhibit the actions of the protease calpain,
which is thought to play a role in causing the neuronal damage associated with
stroke and on other compounds that inhibit the protease sigma-secretase, which
plays a pivotal role in the production of the toxic beta-Amyloid protein
associated with the degeneration in Alzheimer's disease. The Company believes
that this core technology can be applied to any number of proteases and
disorders.
RESEARCH AND DEVELOPMENT COLLABORATIONS
NEUROTROPHIC FACTORS (MYOTROPHIN)
Cephalon Clinical Partners, L.P.
In August 1992, Cephalon exclusively licensed to Cephalon Clinical Partners,
L.P. (the "Partnership"), rights to MYOTROPHIN for human therapeutic use within
the United States, Canada and Europe (the "Territory"). The Company is
performing the development and clinical testing of MYOTROPHIN on behalf of the
Partnership under a research and development agreement with the Partnership.
Under the agreement, the Partnership reimbursed the Company an aggregate
$38,714,000 through 1995 for development costs incurred. Since that time, the
Company has been funding the continued development of MYOTROPHIN from its own
cash resources.
The Partnership has granted an exclusive license to the Company to manufacture
and market MYOTROPHIN for human therapeutic use within the Territory in return
for royalty payments equal to 10.1% of sales and a payment of approximately
$16,000,000 (the "Milestone Payment") that will be made if MYOTROPHIN receives
regulatory approval in the United States or certain other countries within the
Territory.
The Company has a contractual option to purchase all of the limited
partnership interests in the Partnership (the "Purchase Option"). To exercise
the Purchase Option, Cephalon is required to make an advance payment of
$40,275,000 in cash or, at Cephalon's election, $42,369,000 in shares of common
stock, valued at the market price at the time the Purchase Option is exercised.
The Purchase Option will become exercisable for a 45-day period commencing on
the date which is the earlier of (a) the date which is the later of (i) the last
day of the first month in which the Partnership shall have received Interim
License payments equal to fifteen percent (15%) of the limited partners' capital
contributions (excluding the Milestone Payment), and (ii) the last day of the
24th full month after the date of the Company's first commercial sale, if any,
of MYOTROPHIN within the Territory that generates a payment to the Partnership,
and (b) the last day of the 48th full month after the date of such first
commercial sale, if any, in the Territory. If the Company does not exercise the
Purchase Option, its license will terminate and all rights to manufacture or
market MYOTROPHIN in the Territory will revert to the Partnership, which may
then commercialize MYOTROPHIN itself or license or assign its rights to a third
party. The Company would not receive any benefits from such commercialization,
license or assignment of rights.
Kyowa Hakko Kogyo Co., Ltd.
In July 1993, the Company entered into an agreement with Kyowa Hakko providing
for the development of MYOTROPHIN in Japan. Kyowa Hakko is responsible for
funding product development activities, conducting clinical trials in ALS and
seeking authorization to market MYOTROPHIN in Japan. In April 1995, Kyowa Hakko
initiated a Phase III study in Japan, results of which may be available in late
1999. The Company is supplying MYOTROPHIN at its cost to Kyowa Hakko for use
in Japanese clinical trials, and will supply MYOTROPHIN for
11
a percentage of any net product sales for commercial use. In addition, the
Company is to receive certain licensing, milestone and royalty payments. Under
certain circumstances, the Company has an option to co-promote MYOTROPHIN in
Japan.
The Company may terminate the agreement if (i) Kyowa Hakko fails to file for
marketing approval of MYOTROPHIN in Japan within eight years from the date of
the agreement, except where such failure is not within Kyowa Hakko's control, or
(ii) if Kyowa Hakko discontinues the development of MYOTROPHIN because of a lack
of safety or efficacy.
Chiron Corporation
Since January 1994, the Company and Chiron have collaborated in the
development of MYOTROPHIN for the treatment of ALS and certain other
neurological disorders, for commercialization in all countries of the world
other than Japan. Through June 1998, the costs of the program had generally been
shared equally by the two companies. Currently, the companies are funding their
own program expenses.
Profits, if any, and losses from the marketing of MYOTROPHIN for the treatment
of ALS and other neurological disorders in North America, the countries of the
European Community and certain other European countries ("Western Europe")
generally will be shared equally by the Company and Chiron. In addition, the
Company will receive a royalty on sales of MYOTROPHIN, if any, in Western Europe
to treat ALS. Chiron will market the products in the collaboration's territories
outside of North America and Western Europe, in return for royalties to the
collaboration, which also will be shared equally by the Company and Chiron.
Either party may terminate the collaboration if there is no reasonable basis
for developing any of the collaboration's compounds. If the Company is the non-
terminating party, it may continue to license the technology or require Chiron
to supply product on a "cost plus" basis for a certain period of time. The
agreement also is subject to termination if Cephalon does not exercise the
Purchase Option. See "Cephalon Clinical Partners, L.P."
Under the collaboration, Chiron has an option to obtain the Company's IGF-I
technology outside the neurology field for compensation to be determined if such
option is exercised.
The Company's collaboration with Chiron is subject to the rights of Cephalon
Clinical Partners, L.P., which has licensed the Company the right to develop
MYOTROPHIN in North America and Europe in return for receiving certain payments.
The Company is solely responsible for making any royalty and milestone payments
owed to the Partnership and is responsible for funding the Purchase Option if it
exercises the option. See "Cephalon Clinical Partners, L.P."
GENE TRANSCRIPTION REGULATORS
Leo Pharmaceutical Products, Ltd.
In November 1996, the Company and Leo Pharmaceutical Products, Ltd. ("Leo")
entered into an agreement to collaborate in the development of gene
transcription regulators for use in the treatment of neurological disorders.
Under this agreement, Cephalon will use its proprietary technology to evaluate
molecules synthesized by Leo. The companies intend to jointly develop selected
products and will share the cost of development. Leo is responsible for the cost
of Phase I studies, Cephalon is responsible for the cost of Phase II, and the
two companies will share equally in the cost of Phase III. Cephalon will have
the exclusive rights to market and sell these jointly developed products in the
United States and Mexico in the neurological field, and will pay Leo a
percentage of net product sales as a royalty and for the supply of product.
Cephalon will receive a royalty from Leo's net product sales of jointly
developed products in other territories.
12
SIGNAL TRANSDUCTION MODULATORS
TAP Holdings Inc.
The Company and TAP Holdings Inc. are parties to a licensing and research and
development collaboration to develop and commercialize certain compounds for the
treatment of human cancers and prostate disorders in the United States. The
compounds belong to a family of inhibitors from the Company's signal
transduction modulator program.
Under the terms of the agreement, the Company performs research and
preclinical development of these compounds for which it is compensated quarterly
by TAP, based on a contract rate per individual assigned to the program for that
quarter and reimbursement of certain external costs, all subject to annual
budgetary maximums. The research under the agreement may be extended for one-
year periods. TAP may terminate the research under the agreement upon 90 days
prior to the expiration.
TAP is responsible for conducting and funding all U.S. clinical trials and
additional activities for regulatory submissions for U.S. marketing approval.
The agreement provides for TAP to make milestone payments to Cephalon upon the
submission and approval of new drug applications, if any, that may emanate from
the collaboration and to purchase commercial supplies of product from Cephalon
at a price equal to a fixed percentage of sales plus royalties on product sales.
Kyowa Hakko Kogyo Co., Ltd.
In May 1992, the Company licensed from Kyowa Hakko Kogyo Co., Ltd. patent and
other intellectual property rights to a class of small molecules which the
Company has identified as signal transduction modulators; certain of these
molecules are being developed for use in the treatment of neurological disorders
and others are being developed for the treatment of cancer.
The Company has exclusive marketing rights in North America and Europe with
respect to certain of those compounds, which the Company is seeking to develop
for the treatment of prostate and pancreatic cancer; Kyowa Hakko retains
exclusive marketing rights to these compounds in Asia. The Company has
exclusive marketing rights in the United States with respect to all other of
these compounds, which the Company is seeking to develop for the treatment of
neurological disorders; the Company and Kyowa Hakko each hold semi-exclusive
marketing rights to these compounds throughout the rest of the world, including
Europe and Japan. The Company will pay to Kyowa Hakko a royalty on all sales of
pharmaceutical products containing the compounds. Under the terms of a related
supply agreement, Kyowa Hakko is responsible for supplying the compounds under
development. However, if Kyowa Hakko determines that it cannot or will not
manufacture and supply the compounds, it must then arrange for a third party to
manufacture and supply the compounds or allow the Company to assume
responsibility for manufacturing and supply. The license and supply agreements
will automatically terminate if the Company discontinues the development of
pharmaceutical products containing the compounds due to lack of safety or
efficacy.
PATENTS AND PROPRIETARY TECHNOLOGIES
An important part of Cephalon's product development strategy is to seek
protection for its products and technologies through the use of U.S. and foreign
patents and trademarks. As described below, Cephalon holds rights to and has
filed applications for various U.S. and foreign patents, though Cephalon cannot
be certain that any of these patent applications will issue, or if issued, that
they will not be challenged by third parties or that Cephalon will not be found
to have infringed upon the rights of others in any case.
13
PROVIGIL
The particle size of the composition of modafinil as the active drug substance
in PROVIGIL is included in claims of a U.S. patent of the Company which issued
in 1997. Foreign patents claiming the particle size composition of modafinil
are pending in Cephalon's other territories. The composition-of-matter patent
claiming modafinil as the active drug substance in PROVIGIL expired in 1998 in
the Republic of Ireland, Japan, Italy and Mexico. This patent was to have
expired in 1998 in the United Kingdom and the United States; however, the
Company has applied for an extension of the patent in the those countries. In
the United States, if the Company were to secure the maximum extension permitted
under the terms of the U.S. Drug Price Competition and Patent Term Restoration
Act of 1984, as amended (the "DPC Act"), the composition of matter patent would
expire on November 18, 2001. The Company cannot be certain that it will receive
this patent extension or that it will be able to take advantage of any other
patent benefits of the DPC Act. The Company does not believe that an extension
of the modafinil composition patent is possible in any other of its licensed
territories. Also included in the license from Lafon are rights to a U.S.
patent that issued in January 1993 for the use of PROVIGIL in treating
Parkinson's disease and a U.S. patent issued in 1990 which claims the
composition of isomers of PROVIGIL. The FDA has granted orphan drug status to
PROVIGIL for use in the treatment of excessive daytime sleepiness associated
with narcolepsy, that provides for a seven-year period of marketing exclusivity
for PROVIGIL in that indication. See "Government Regulation."
MYOTROPHIN
MYOTROPHIN(R) (mecasermin) Injection is the Company's trademark for
recombinant human insulin-like growth factor-I ("rhIGF-I" or "IGF-I"). The
Company believes that the composition of rhIGF-I is in the public domain and
therefore cannot be patented under a composition-of-matter patent. However,
Cephalon owns issued U.S., European and Japanese patents which include claims
covering the use of IGF-I for the treatment of diseases caused by the death of
non-mitotic, cholinergic neurons, including motor neurons compromised in ALS.
The Company also owns U.S. patents claiming the use of IGF-I in treating certain
types of peripheral neuropathies, and the Company has filed similar applications
in Canada, Europe and Japan. Cephalon also has filed patent applications in the
United States, Canada, Europe and Japan covering the use of IGF-I in enhancing
the survival of neuronal cells. The issued patents and all patent applications
relating to IGF-I in the United States, Canada and Europe have been licensed to
Cephalon Clinical Partners, L.P.
The FDA has designated MYOTROPHIN as an orphan drug for use in the treatment
of ALS. See "Government Regulation."
Under an agreement with SIBIA Neurosciences, Inc. ("SIBIA"), the Company has
obtained a license to use certain patent rights and other technology related to
the manufacture of rhIGF-I in certain strains of yeast host cells. The issued
patent and all patent applications relating to IGF-I in the United States,
Canada and Europe have been licensed to the Partnership.
Subject to the rights of the Partnership, the Company and Chiron cross-
licensed all of their respective patents and patent applications related to IGF-
I and certain other compounds (excluding the Company's rights under the SIBIA
license, as to which Chiron has the option to sublicense) in the field of
neurological diseases and disorders, including Chiron's rights under U.S. and
foreign patents.
The Company cannot be sure that any of its patent applications for IGF-I uses
will issue, that any issued patents will be as broad in scope as such patent
applications or that the claims of any issued patent will withstand challenge.
Even in those jurisdictions where rhIGF-I (or the processes used in IGF-I
manufacturing) may be covered by the claims of a use patent, "off-label" sales
by a third party might occur, especially if another company markets rhIGF-I for
other uses at a price that is less than the price of MYOTROPHIN, thereby
potentially reducing sales of MYOTROPHIN. It is not always possible to detect
"off-label" sales and therefore enforcement of use patents can be difficult.
Furthermore, some jurisdictions outside of the United States restrict the manner
in which patents claiming uses of a product may be enforced.
14
Under its collaboration with Chiron, Chiron has the primary responsibility for
manufacturing commercial supplies of MYOTROPHIN. One of Chiron's issued patents
related to certain methods for the manufacture of recombinant proteins,
including rhIGF-I, is currently the subject of an interference proceeding before
the U.S. Patent and Trademark Office ("USPTO") involving patent applications
owned by Genentech, Inc. ("Genentech"). It is not known when or how the USPTO
will ultimately conclude the interference proceeding. Another related patent
application of Chiron, which may cover the current process for manufacturing
rhIGF-I, was the subject of another interference proceeding with a Genentech
patent. Chiron prevailed in the second interference proceeding and thereafter
prevailed in a district court appeal brought by Genentech. That decision was
appealed to the U.S. Court of Appeals for the Federal Circuit ("CAFC") by
Genentech. In April, 1997, the CAFC reversed the District Court's judgment and
remanded the case back to the District Court, which issued a judgment affirming
the USPTO decision for Chiron. Genentech has the right to appeal to the CAFC.
It is not possible to predict which party will obtain an issued patent or
whether the issued claims will cover any portion of the current manufacturing
process. The Company is aware of other patents and patent applications owned by
third parties, which if issued with the claims as filed, may cover certain
aspects of the current method of manufacturing rhIGF-I. The Company and Chiron
intend to either seek licenses under any valid patents related to the
manufacturing of rhIGF-I as required or, alternatively, modify the manufacturing
process. There can be no assurance that, if required, such licenses can be
obtained at all or on acceptable terms or that a modified manufacturing process
can be implemented at all or without substantial cost or delay. If neither
approach is feasible, the Company could be subject to a claim of patent
infringement which, if successful, could prevent the Company from manufacturing
or selling MYOTROPHIN in the United States.
Even if patents issue on the pending applications owned or licensed by the
Company, there can be no assurance that applications filed by others will not
result in patents that would be infringed by the manufacture, use or sale of
MYOTROPHIN. The Company is aware of a U.S. patent recently issued to Genentech
and a granted European patent that claim the use of IGF-I in treating neuronal
damage suffered after a central nervous system insult affecting glia and/or
other non-cholinergic cells, by increasing the active concentration(s) of IGF-I
or its analogues in the CNS. The Company has filed an opposition against the
granted European patent. The Company cannot predict the outcome of this
opposition at this time. If the claims of the issued U.S. patent and the
granted European patent are not otherwise invalid or unenforceable, or if the
grant is not revoked by the European Patent Office, the Company could be
prevented from selling MYOTROPHIN in the United States and Europe for uses of
IGF-I claimed in the patents, unless it obtained a license to the patents. There
can be no assurance that a license is available at all or on acceptable terms to
the Company. The Company believes, based on a preliminary review, that the
claims of the issued United States patent and the granted European patent would
not be infringed by the use or sale of MYOTROPHIN for the treatment of ALS or
peripheral neuropathies, and that the claims directed to the treatment of
multiple sclerosis are invalid over the prior art. The Company is aware of a
published application filed under the Paris Convention Treaty, designating the
United States, that relates to the use of IGF-I in effecting a change in the
CNS. The Company believes that even if the subject matter were deemed to
overlap the subject matter of issued patents and pending patent applications
filed by the Company in the United States, based on the filing date of the third
party's application, it would not take priority over the Company's patents or
applications.
Another third party has been granted a U.S. patent claiming the use of IGF-I
to treat diabetic neuropathy. This patent could prevent the Company from
selling MYOTROPHIN in the United States for use in treating diabetic neuropathy
unless it obtained a license to the patent. That third party may also be
prosecuting a U.S. patent application that may contain a broader claim which, if
issued, could generally cover the use of rhIGF-I to treat many neurological
conditions, including ALS and peripheral neuropathies. The owner of such third-
party patent application has asserted for several years that the subject matter
claimed in its application interferes with claims of the Company's patent with
respect to the use of rhIGF- I in treating ALS. If a broad claim were to issue,
or an interference declared and the third party patent prevailed, the Company
could be prevented from selling MYOTROPHIN in the United States for use in
treating ALS and peripheral neuropathies unless it obtained a license to the
patent. There can be no assurance that any such licenses could be obtained at
all or on acceptable terms from any third parties holding a patent which covers
any of the Company's commercial activities. Furthermore, one or more claims of
the Company's existing patents could be declared invalid.
15
Other
Cephalon also owns issued U.S. patents claiming compositions of inhibitors of
certain proteases, compositions and uses of certain novel classes of small
molecules for inhibition of calpain, compositions and uses of a novel class of
small molecules for inhibition of the multicatalytic protease, and compositions
and uses of a novel class of small molecules referred to as "fused
pyrrolocarbazoles." Counterparts of these patents have been filed in other
countries, as appropriate.
Through collaborative agreements with researchers at several academic
institutions, Cephalon has 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. The Company also has licensed U.S. composition-of-matter and use
patents and various European patent applications for novel compositions under
its collaborative agreement with Kyowa Hakko, including compositions and uses of
certain indolocarbazoles in the treatment of pathological conditions of the
prostate (including prostate cancer) and for the treatment of neurological
disorders.
No assurance can be given that any additional patents will be issued on any of
the patent applications owned by the Company or licensed from third parties.
Furthermore, even if such patents are issued, there can be no assurance that the
validity of any issued patents will be upheld if challenged, that any issued
patents will provide protection against competitive products or otherwise be
commercially valuable, or that applications filed by others will not result in
patents that would be infringed by the manufacture, use or sale of the Company's
products. In addition, patent law relating to the scope of claims in the
biotechnology field is still evolving and the biotechnology patent rights of the
Company are subject to this additional uncertainty. There can be no assurance
that others will not independently develop similar products, duplicate any of
the Company's products, or, if patents are issued to the Company, design around
any products developed by the Company.
The products of the Company could infringe the patent rights of others. If
licenses required under any such patents or proprietary rights of third parties
are not obtained, the Company 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 the
Company. In the event that the Company is a defendant in such litigation, an
adverse outcome would subject the Company to significant liabilities to third
parties, require the Company to license disputed rights from third parties, or
require the Company to cease selling its products.
The Company also relies upon trade secrets and other unpatented proprietary
information in its product development activities. The Company's employees enter
into agreements providing for confidentiality and the assignment of rights to
inventions made by them while employed by the Company. The Company also has
entered into non-disclosure agreements to protect its confidential information
delivered to third parties in conjunction with possible corporate collaborations
and other purposes. There can be no assurance that these types of agreements
will effectively prevent disclosure of the Company's confidential information.
MANUFACTURING AND PRODUCT SUPPLY
The Company's ability to conduct clinical trials on a timely basis, to obtain
regulatory approvals and to commercialize its products will depend in part upon
its ability to manufacture its 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 ("cGMP")
regulations.
Cephalon has no manufacturing facilities of its own and relies on third
parties for all of its manufacturing requirements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Certain Risks
Related to Cephalon's Business."
16
The Company relies on Lafon for all of its requirements of bulk modafinil
compound and upon third party manufacturers to provide final formulation,
tabletting and packaging of PROVIGIL.
Cephalon relies on Chiron for all of its manufacturing requirements for
MYOTROPHIN (including clinical and commercial supplies of MYOTROPHIN used by
Kyowa Hakko in Japan). The Company is aware of patents and patent applications
owned by third parties that may cover certain aspects of the collaboration's
method of manufacturing MYOTROPHIN. See "Patents and Proprietary Technologies."
Cephalon relies on Kyowa Hakko to supply bulk compounds for its signal
transduction modulator research program, but if Kyowa Hakko determines that it
cannot or will not manufacture and supply the compounds, it must then arrange
for a third party to manufacture and supply the compounds or allow the Company
to assume responsibility for manufacturing and supply. See "Research and
Development Collaborations--Kyowa Hakko Kogyo Co., Ltd."
Under the Company's agreement with TAP, the Company is obligated to provide
finished product for use in clinical trials and ultimately for commercial
purposes. See "Research and Development Collaborations--TAP Holdings Inc."
COMPETITION
Competition in the Company's fields of interest, from both large and small
companies, is intense and is expected to increase. Furthermore, academic
institutions, governmental agencies, and other public and private research
organizations will continue to conduct research, seek patent protection, and
establish collaborative arrangements for product development. Products developed
by any of these entities may compete directly with those developed or sold by
the Company. Many of these companies and institutions have substantially greater
capital resources, research and development staffs and facilities than the
Company, and substantially greater experience in conducting clinical trials,
obtaining regulatory approvals and manufacturing and marketing pharmaceutical
products. These entities represent significant competition for the Company. 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 being developed or sold by the
Company or that would render its technology and products obsolete or
noncompetitive. Competition and innovation from these or other sources
potentially could materially adversely affect any sales of products which might
be developed or are currently being sold by the Company or make them obsolete.
Advances in current treatment methods may also adversely affect the market for
such products. The approval and introduction of therapeutic products that
compete with compounds being developed by the Company could also adversely
affect the Company's ability to attract and maintain patients in clinical
studies for the same indication or otherwise successfully complete its clinical
studies.
With respect to PROVIGIL, there are presently several products used in the
United States and the Company's other licensed territories to treat narcolepsy.
There can be no assurance that the Company will be able to demonstrate the
potential advantages of PROVIGIL to prescribing physicians and their patients on
an absolute basis and/or in comparison to other presently marketed products. In
the United States and elsewhere, PROVIGIL faces significant competition in the
marketplace since narcolepsy is currently treated with several drugs, all of
which have been available for a number of years and many of which are available
in inexpensive generic forms.
With respect to MYOTROPHIN, Rilutek(R) (riluzole) has been approved and is
being marketed by Rhone-Poulenc Rorer in the United States and certain countries
in Europe for the treatment of ALS. In addition, the Company believes that other
companies are developing other therapeutic agents for the treatment of ALS.
Because the potential patient population for ALS is limited, competition from
other products may adversely affect potential sales of MYOTROPHIN. Other
companies are developing rhIGF-I as a therapeutic product for diseases other
than ALS or peripheral neuropathy, including Chiron. If another company markets
rhIGF-I for other uses at a price lower than the price of MYOTROPHIN, potential
sales of MYOTROPHIN, if any, may be reduced. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Certain Risks Related
to Cephalon's Business."
17
Cephalon is marketing proprietary products of other pharmaceutical companies,
including STADOL NS in the United States and APOKINON in France. All of these
therapies compete directly or indirectly with other products on the market. In
addition, in all cases, new products are under development by third parties
which could compete, if approved for marketing, with the products currently
being marketed by the Company.
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 by the FDA in the United States under the U.S. Food, Drug
and Cosmetic Act and by comparable agencies in most foreign countries.
As an initial step in the FDA regulatory approval process, preclinical studies
are typically conducted in animals to identify potential safety problems. The
results of the preclinical studies are submitted to regulatory authorities as a
part of an investigational new drug application ("IND"), which is filed with
regulatory agencies prior to beginning studies in humans. For several of the
Company's drug candidates, no animal model exists which is potentially
predictive of results in humans. As a result, no in vivo indication of efficacy
would be available until these candidates progress to human clinical trials.
Clinical trials are typically conducted in three sequential phases, although
the phases may overlap. In Phase I, which frequently begins with the initial
introduction of the drug into healthy human subjects prior to introduction into
patients, the compound is tested for safety (adverse effects), dosage tolerance,
absorption, biodistribution, metabolism, excretion, clinical pharmacology and,
if possible, to gain early information on effectiveness. Phase II typically
involves studies in a small sample of the intended patient population to assess
the efficacy of the drug for a specific indication, to determine dose tolerance
and the optimal dose range as well as to gather additional information relating
to safety and potential adverse effects. Phase III trials are undertaken to
further evaluate clinical safety and efficacy in an expanded patient population,
often at multiple study sites, in order 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, each clinical study
must be evaluated by an independent Institutional Review Board ("IRB") at the
institution at which the study will be conducted. The IRB considers, among other
things, ethical factors, the safety of an 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.
Data from preclinical and clinical trials are submitted to the FDA in a new
drug application ("NDA") for marketing approval and to foreign health
authorities in Europe as a marketing authorization application ("MAA"). 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. Preparing an NDA
or MAA involves considerable data collection, verification, analyses and
expense, and there can be no assurance that the FDA or any foreign health
authority will grant an approval on a timely basis, or at all. The approval
process is affected by a number of factors, primarily the risks and benefits
demonstrated in clinical trials as well as the severity of the disease and the
availability of alternative treatments. The FDA or foreign health authorities
may deny an NDA or MAA, in their sole discretion, if that authority determines
that its regulatory criteria have not been satisfied or may require additional
testing or information. Among the conditions for marketing approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to the cGMP regulations of the health
authority. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of
production, quality control and quality assurance to ensure full technical
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.
Even after initial FDA or foreign health authority approval has been obtained,
further studies, including Phase IV post-marketing studies, may be required to
provide additional data on safety and will be required to gain
18
approval for the use of a product as a treatment for clinical indications other
than those for which the product was initially tested. Also, the FDA or foreign
regulatory authority will require post-marketing reporting to monitor the side
effects of the drug. 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, an application seeking approval of such changes may be
required to be submitted to the FDA or foreign regulatory authority.
In the United States, the Orphan Drug Act provides incentives to drug
manufacturers to develop and manufacture drugs for the treatment of either (i)
rare diseases, currently defined as diseases that affect fewer than 200,000
individuals in the United States or, (ii) 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 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 compound
for the same indication, it would not prevent approval of the compound for other
indications. In addition, other types of drugs may be approved for the same use.
Orphan drug designation 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 of the
market exclusivity of an orphan drug and, thus, there can be no assurance that
the benefits of the existing statute will remain in effect.
Under the terms of the U.S. Drug Price Competition and Patent Term Restoration
Act of 1984 (the "DPC Act"), a sponsor may be granted a maximum five year
extension of the term of a patent for a period of time following the initial FDA
approval of a new drug application (NDA) for a new chemical entity ("NCE"). The
statute specifically allows a patent owner to extend the term of the patent for
a period equal to one-half the period of time elapsed between the filing of an
IND and the filing of the corresponding NDA plus the complete 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 14 years following FDA approval. Additionally,
under this statute, five years of marketing exclusivity is granted for the first
approval of a NCE. During this period of exclusivity, a third party would be
prevented from filing an Abbreviated New Drug Application ("ANDA") or a
505(b)(2) application for a modafinil drug product equivalent or identical to
PROVIGIL. An ANDA is the application form typically used by manufacturers
seeking approval of a generic version of an approved drug. Subsequent approved
indications for the NCE are eligible, under this statute, 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 for any non-exclusive indication(s) if any five-year
exclusivity granted to the NCE has expired, but would be prohibited from
marketing a generic version of the new chemical entity for the subsequent
approved indication until the expiration of three years from marketing
authorization for such subsequent approved indication. The Company intends to
seek the benefits of this statute as applicable, but there can be no assurance
that the Company will be able to obtain any such benefits.
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 at
this time 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 U.S. and, in some circumstances, may prohibit the
export even if such products are approved for sale in other countries.
The Controlled Substances Act (the "CSA") 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
19
particular CSA requirements, if any, applicable to a product is its actual or
potential abuse profile. A pharmaceutical product may be "scheduled" 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 CSA as a Schedule IV substance. Schedule IV substances, such as
modafinil, 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. Additionally, PROVIGIL
may be subject to various state statutes regulating controlled substances which,
in some cases, may be more restrictive than the CSA. In 1997, STADOL NS was
classified as a Schedule IV controlled substance at the request of Bristol-Myers
Squibb. In addition, a number of state regulatory agencies in the United States
have independently controlled the distribution of STADOL NS under their local
authority.
In addition to the statutes and regulations described above, the Company also
is 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 present and potential future federal,
state and local regulations.
SCIENTIFIC AND MEDICAL ADVISORY BOARDS
The Company maintains a Scientific Advisory Board consisting of individuals
with expertise in neuroscience and related fields. Members of the Scientific
Advisory Board advise the Company concerning long-term scientific planning,
research and development, and also periodically evaluate the Company's research
programs. The members are compensated by the Company for their services. The
current members of the Company's Scientific Advisory Board are as follows:
Stanley H. Appel, M.D.,
Baylor College of Medicine
Stanley Cohen, Ph.D.,
Vanderbilt University School of Medicine
Gordon Guroff, Ph.D.,
National Institute of Child Health and Human Development, NIH
Robert Y. Moore, M.D., Ph.D.,
University of Pittsburgh
Robert H. Roth, Ph.D.
Yale University School of Medicine
Shirley M. Tilghman, Ph.D.,
Princeton University
The Company also maintains a Medical Advisory Board consisting of individuals
with expertise in clinical development who periodically review and evaluate the
Company's clinical development plans and clinical trials. The members are
compensated by the Company for their services. The current members of the
Company's Medical Advisory Board are as follows:
Arthur K. Asbury, M.D.,
University of Pennsylvania Medical Center
Robert L. Barchi, M.D., Ph.D.,
University of Pennsylvania Medical Center
Dennis Choi, M.D., Ph.D.,
Washington University School of Medicine
Steven T. DeKosky, M.D.,
Western Psychiatric Institute and Clinic
Richard Johnson, M.D.,
Johns Hopkins Hospital
Robert Y. Moore, M.D., Ph.D.,
University of Pittsburgh
20
EMPLOYEES
As of December 31, 1998, the Company had a total of 295 full-time employees,
of which 227 were employed at the Company's main facility in West Chester,
Pennsylvania, 18 were located at the Company's facilities in Europe, and
approximately 50 were engaged in sales and marketing activities throughout the
United States. The Company believes that it has been successful in attracting
skilled and experienced personnel; however, competition for such personnel is
intense. None of the Company's employees are covered by collective bargaining
agreements. Management considers relations with its employees to be good.
ITEM 2. PROPERTIES
The Company owns its administrative offices and research facilities, which
currently occupy approximately 156,000 square feet of space in West Chester,
Pennsylvania. The Company also leases approximately 4,950 square feet of office
space in Surrey, England, which serves as the Company's European headquarters.
The annual cost of the lease is approximately $193,000. The Company also leases
offices in France and Germany at an aggregate annual cost of approximately
$45,000. The Company believes that its current facilities are adequate for its
present purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company, a current director and officer, and a former officer have been
named as defendants in a number of civil actions filed in the U.S. District
Court for the Eastern District of Pennsylvania, which have been consolidated
into a single class action. The plaintiff class is comprised of those persons
and entities who purchased Cephalon common stock, or traded in options to buy or
sell Cephalon common stock, during the period June 12, 1995 through and
including June 7, 1996. Plaintiffs seek to hold defendants liable for stock
trading losses that stem from alleged violations of the U.S. securities laws and
alleged common law negligent misrepresentation. More specifically, plaintiffs
have alleged that statements by the Company and the named defendants relating to
the results of certain clinical studies of MYOTROPHIN were misleading. A
judgment in this matter could materially exceed the coverage which may be
available under its directors' and officers' liability insurance. The Company is
vigorously defending this lawsuit and believes that there are valid defenses
against the claims, but the defense of the action is expensive, and the costs of
defense will reduce the available insurance coverage that might otherwise be
available to satisfy the claims. In an effort to resolve this dispute, in
January 1999, the Company engaged a mediator to initiate a non-binding mediation
process and commenced discussions with counsel for the lead plaintiffs. At this
time, the Company is not able to determine with any certainty the outcome of
this action or its potential liability.
Due to the Company's involvement in promoting STADOL NS(R) (butorphanol
tartrate) Nasal Spray, a product of Bristol-Myers Squibb, the Company is a co-
defendant in a product liability action brought against BMS. Although the
Company cannot predict with certainty the outcome of this litigation, it
believes that any expenses or damages that are incurred will be paid by BMS
under the indemnification provisions of the co-promotion agreement. As such, the
Company does not believe that these actions will have a negative effect on the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of security holders during the fourth
quarter of fiscal 1998.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of Cephalon, Inc. 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.
High LOW
---- ---
1997
First Quarter...................................... 28.50 17.38
Second Quarter..................................... 21.88 11.00
Third Quarter...................................... 12.63 9.50
Fourth Quarter..................................... 13.88 9.75
1998
First Quarter...................................... 15.00 9.50
Second Quarter..................................... 16.13 6.75
Third Quarter...................................... 8.31 3.86
Fourth Quarter..................................... 10.36 4.50
1999
First Quarter (through February 19, 1999).......... 10.69 8.00
As of February 19, 1999 there were 757 holders of record and approximately
18,000 beneficial holders of the Company's Common Stock. On February 19, 1999,
the last reported sale price of the Common Stock as reported on the NASDAQ
National Market was $8.06 per share.
Cephalon has never declared or paid cash dividends on its capital stock and
does not anticipate paying any cash dividends in the foreseeable future.
22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data have been derived from the
consolidated financial statements of Cephalon, Inc. as of and for each of the
five years in the period ended December 31, 1998 which have been audited by
Arthur Andersen LLP, independent public accountants. This data should be read in
conjunction with the Company's consolidated financial statements, including
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.
[Enlarge/Download Table]
Year Ended December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues............................................ $ 15,655,000 $ 23,140,000 $ 21,366,000 $ 46,999,000 $ 21,681,000
Operating Expenses:
Research and development........................... 43,649,000 51,587,000 62,096,000 73,994,000 51,613,000
Selling, general and administrative................ 30,947,000 36,744,000 28,605,000 15,762,000 9,180,000
------------- ------------- ------------- ------------- ------------
Total operating expenses............................ 74,596,000 88,331,000 90,701,000 89,756,000 60,793,000
Interest income, net................................ 3,534,000 4,772,000 6,205,000 9,754,000 3,047,000
Gain on sale of assets.............................. -- -- 9,845,000 -- --
------------- ------------- ------------- ------------- ------------
Loss................................................ $ (55,407,000) $ (60,419,000) $ (53,285,000) $ (33,003,000) $(36,065,000)
============= ============= ============= ============= ============
Basic and diluted loss per share.................... $ (1.95) $ (2.36) $ (2.19) $ (1.63) $ (2.13)
Weighted average number of shares outstanding....... 28,413,220 25,637,508 24,319,163 20,262,071 16,928,516
As of December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Balance Sheet Data:
Cash, cash equivalents and investments(1)........... $ 67,346,000 $ 119,471,000 $ 146,848,000 $ 178,067,000 $114,458,000
Total assets........................................ 94,673,000 151,208,000 177,891,000 221,330,000 140,173,000
Long-term debt...................................... 15,096,000 27,587,000 16,974,000 21,668,000 16,088,000
Accumulated deficit(2).............................. (273,793,000) (218,386,000) (157,967,000) (104,682,000) (71,679,000)
Stockholders' equity(2)............................. 57,602,000 100,338,000 137,326,000 180,205,000 112,767,000
(1) Maintenance of certain cash and investment balances is required by specific
agreements.
(2) No cash dividends have been declared on the capital stock since the
inception of the Company.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN RISKS RELATED TO CEPHALON'S 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 below. Given these risks and uncertainties, any or all of
these forward-looking statements may prove to be incorrect. Therefore, you are
cautioned not to place too much reliance on any such forward-looking statements.
Furthermore, we do not intend (and we are not obligated) to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. This discussion is permitted by the Private Securities
Litigation Reform Act of 1995.
Dependence on the Commercial Success of PROVIGIL(R) (modafinil) Tablets [C-IV]
During the next several years we will be very dependent on the commercial
success of PROVIGIL(R) (modafinil) Tablets [C-IV] ("PROVIGIL Tablets" or
"PROVIGIL"), especially in the United States. In December 1998, the FDA approved
PROVIGIL for use by those suffering from excessive daytime sleepiness associated
with narcolepsy. The market for use of PROVIGIL in narcolepsy patients is
relatively small; it is limited to approximately 125,000 persons in the United
States, of which we estimate between 30,000 and 45,000 currently are seeking
treatment from a physician. At our present level of operations, we will not be
able to attain profitability if physicians prescribe PROVIGIL only for those who
are diagnosed narcoleptics and, we may not promote PROVIGIL outside of this
approved use. We have initiated clinical studies to examine whether or not
PROVIGIL is effective and safe when used in connection with disorders other than
narcolepsy, but we do not know whether these studies will in fact demonstrate
safety and efficacy, or if they do, whether we will succeed in receiving
regulatory approval to market PROVIGIL for additional disorders. If the results
of these studies are negative, or if adverse experiences are reported in these
clinical studies or otherwise in connection with the use of PROVIGIL by
patients, this could undermine physician and patient comfort with the product
and limit the commercial success of the product. Even if the results of these
studies are positive, the impact on PROVIGIL may be negligible until we are able
to obtain FDA approval to expand the authorized use of PROVIGIL to include
treatment for conditions other than excessive daytime sleepiness associated with
narcolepsy. FDA regulations restrict our ability to communicate the results of
additional clinical studies to patients and physicians without first obtaining
from the FDA approval to expand the authorized uses for this product. As a
result, it may be several years, if ever, before we have sales revenue from
PROVIGIL beyond that attributable to prescriptions for diagnosed narcoleptics.
In addition, the following factors could limit the rate and level of market
acceptance of PROVIGIL:
. the effectiveness of our sales and marketing efforts relative to those
of our competitors;
. the availability and level of reimbursement for PROVIGIL by third-party
payors, including the Federal, state and foreign government agencies;
. the occurrence of any side effects or adverse reactions (or unfavorable
publicity relating thereto) stemming from the use of PROVIGIL;
24
We have described these and other factors in more detail below:
. Effectiveness of our Marketing and Selling Efforts
We must effectively market and sell PROVIGIL in the United States. In
the United States and elsewhere, PROVIGIL faces significant competition in
the marketplace since narcolepsy is currently treated with several drugs,
all of which have been available for a number of years and many of which
are available in inexpensive generic forms. Thus, we will need to
demonstrate to physicians and third party payors, that the cost of PROVIGIL
is reasonable and appropriate in light of the safety and efficacy of the
product, and the related health care benefits to the patient.
During the past few years, we have developed a specialty sales
organization focused on marketing, promoting and detailing the products of
other companies to neurologists. However, we have no experience in
marketing, selling or distributing our own products in the United States,
and we lack the more substantial experience held by major pharmaceutical
companies in developing, training and managing a sales organization over an
extended period of time. More recently, we have established a managed care
sales force to market our products to health maintenance organizations,
prescription benefit management firms, and other third party payors; we
also lack substantial experience in this area and we cannot be certain that
we will be successful in our efforts to market our products to these
groups.
. Uncertainty Associated with Third Party Payor Reimbursement Levels
The continuing efforts of government and third party payors to contain
or reduce the costs of health care through various means may affect our
sales. In certain foreign markets, pricing or profitability of
pharmaceutical products is subject to governmental control. In the United
States, there have been, and we expect there will continue to be, various
Federal and state proposals to implement similar government controls. The
adoption by Federal or state governments of any such proposals could limit
the commercial success of PROVIGIL. In addition, in both the United States
and elsewhere, sales of pharmaceutical products are dependent in part on
the availability of reimbursement to the consumer from third party payors,
such as government and private insurance plans. Third party payors are
increasingly challenging the prices charged for products, and are limiting
reimbursement levels offered to consumers for such products. To the extent
that third party payors direct such efforts toward PROVIGIL, the commercial
success of the product could be impaired.
. Uncertainty as to the Occurrence of Unexpected Adverse Events
The usage of PROVIGIL has been limited to date to clinical trial
patients under controlled conditions and under the care of expert
physicians. We cannot predict whether the commercial use of PROVIGIL will
produce undesirable or unintended side effects that have not been
demonstrated in our clinical trials.
. No Assurance of Market Exclusivity for PROVIGIL
We hold exclusive license rights to a composition-of-matter patent
covering modafinil as the active drug substance in PROVIGIL; this patent
was to have expired in 1998 in the United States but we have applied for a
patent extension that, if granted, would run through November 18, 2001. In
addition, we own a U.S. patent covering the particle size of modafinil
which issued in 1997. However, we may not succeed in obtaining any
extension for the composition-of-matter patent and we cannot guarantee that
any of our patents will be found to be valid if their validity is
challenged by a third party, or that these patents (or any other patent
owned or licensed by us) would prevent a potential competitor from
developing competing products or product formulations that avoid
infringement.
25
The FDA has granted orphan drug status to PROVIGIL for its use in the
treatment of excessive daytime sleepiness associated with narcolepsy, which
allows us a seven-year period of marketing exclusivity for the product in
that indication. While the marketing exclusivity provided by the orphan
drug law should prevent other sponsors from obtaining approval of the same
compound for the same indication (unless the other sponsor can demonstrate
clinical superiority), it would not prevent approval of the compound for
other indications that otherwise are non-exclusive, nor approval of other
kinds of compounds for the same indication.
. Manufacturing and Distribution Uncertainties Associated with PROVIGIL
We depend upon Laboratoire L. Lafon as our sole supplier of bulk
modafinil compound, the active drug substance contained in PROVIGIL.
Moreover, we depend upon a single manufacturer that is qualified to
manufacture finished PROVIGIL for commercial purposes, and a non-active
ingredient used in the manufacture of PROVIGIL is no longer available. We
maintain an inventory of modafinil compound to protect against supply
disruptions and, at anticipated levels of demand, we also have several
years supply of the ingredient that is no longer available. We are
preparing a new formulation of PROVIGIL that would not include the now
unavailable ingredient, and could enable us to qualify additional tablet
manufacturers with regulatory authorities. However, the introduction of
any such new formulation requires that we establish that the new
formulation is bioequivalent to the current one, and also requires
regulatory approval. If we are unable to develop and obtain approval for a
new formulation, or if demand for the product were to greatly exceed
expectations, 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 PROVIGIL.
We must comply with all applicable regulatory requirements of the FDA
and foreign authorities, including current Good Manufacturing Practice
regulations ("cGMP"). The facilities used to manufacture, store and
distribute our products are subject to inspection by the FDA and other
regulatory authorities at any time to determine compliance with cGMP and
other regulatory requirements. The cGMP regulations are complex, and
failure to be in compliance could lead to remedial action, civil and
criminal penalties and delays in production of material.
We rely on several third parties in the United States to formulate,
tablet, package, distribute, provide customer service activities and accept
and process returns. Although we employ a small number of persons to
coordinate and manage the activities undertaken by these third parties, we
have relatively limited experience in this regard. Any disruption in these
activities could impede our ability to sell PROVIGIL and reduce sales
revenue.
Risk Associated with Revenue-Sharing Notes
In February 1999, we completed the sale of $30,000,000 of revenue-sharing
notes due February 2002 (the "Notes"). The Notes are secured by our licenses,
patents and FDA rights relating to PROVIGIL (collectively, the "Pledged
Assets"). The Notes contain a number of covenants including a requirement to
maintain cash and cash equivalent balances of $40,000,000 through December 31,
1999 and $30,000,000 during the remainder of the term of the Notes. If we fail
to maintain such cash balances or violate the other covenants, the holders of
the Notes can declare a default and increase the royalty percentage to 25% of
U.S. PROVIGIL sales and, if the default is not cured within one year, can
accelerate the due date of the Notes and foreclose on the Pledged Assets. The
holders of the Notes can also foreclose on the Pledged Assets if we fail to pay
principal and interest when due.
Need for Additional Funds
Since our inception we have had negative cash flow from operations. As of
December 31, 1998, we had sufficient cash resources to fund our operations at
their current level for at least twelve months. However, beyond 1999, we will
need to raise substantial additional funds to continue our operations at their
current level, continue to meet our minimum cash balance requirements during the
period prior to the repayment of the Notes and pay the Notes at maturity. We
expect that it will be at least several years, if ever, before our level of
commercial sales and other revenue will
26
provide enough funds to generate positive cash flow from operations. Therefore,
if we cannot raise additional funds, we will have to reduce our present level of
spending which may involve curtailing or restructuring our operations, including
the sale of certain assets of the company. Even after taking these steps, we
would not be able to eliminate all of our existing fixed costs, such as
occupancy expenses and debt service.
Most of the funds we have raised to date have been through the sale of
equity in the company; our ability to raise money through the sale of additional
equity in the company, as well as the price at which such equity may be sold,
are difficult to predict. If we issue common stock or securities convertible
into common stock in order to raise such funds, the existing shareholders'
percentage ownership of Cephalon necessarily would be reduced.
Volatility of Stock Price
The market price and trading volume of shares of our common stock is
volatile, and we expect it to continue to be volatile for the foreseeable
future. Negative announcements (such as adverse regulatory decisions, 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, news concerning certain external events, such
as that concerning our competitors or changes in government regulations that may
impact the biotechnology or pharmaceutical industries, also could affect the
price of our common stock.
Potential for Product Liability
The administration of drugs to humans, whether in clinical trials or
commercially, can result in product liability claims even if our drugs or a
collaborator's drugs are not actually at fault for causing an injury.
Furthermore, our products may cause, or may appear to have caused, adverse side
effects or potentially dangerous drug interactions that we may not learn about
or understand fully until the drug is actually manufactured and sold for some
time. 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 at a
relatively limited level, and as such, claims could exceed our coverage.
Furthermore, we cannot be certain that we will always be able to purchase
sufficient insurance at an affordable price. 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.
Legal Proceedings
Cephalon, a current director and officer, and a former officer, have been
named as defendants in a number of civil actions filed in the U.S. District
Court for the Eastern District of Pennsylvania, all of which have been
consolidated into a single class action. The plaintiff class is comprised of
those persons and entities who purchased Cephalon common stock, or traded in
options to buy or sell Cephalon common stock, during the period June 12, 1995
through and including June 7, 1996. Plaintiffs seek to hold defendants liable
for stock trading losses that stem from alleged violations of the U.S.
securities laws and alleged common law negligent misrepresentation. More
specifically, plaintiffs have alleged that statements made by Cephalon and the
named defendants relating to the results of certain clinical studies of
MYOTROPHIN were misleading. A judgment in this matter could materially exceed
the coverage that may be available under our directors' and officers' liability
insurance. We are vigorously defending this lawsuit and believe that there are
valid defenses against the claims, but the defense of the action is expensive,
and the costs of defense will reduce the amount of insurance coverage that might
otherwise be available to satisfy the claims. In an effort to resolve this
dispute, in January 1999, we engaged a mediator to initiate a non-binding
mediation process and commenced discussions with counsels for the lead
plaintiffs. However, at this time we are not able to determine with any
certainty the results of these discussions, the outcome of this action or our
potential liability.
27
Due to our involvement in promoting STADOL NS(R) (butorphanol tartrate)
Nasal Spray, a product of Bristol-Myers Squibb, we are a co-defendant in a
product liability action brought against BMS. Although we cannot predict with
certainty the outcome of this litigation, we believe that any expenses or
damages that we may incur will be paid by BMS under the indemnification
provisions of our co-promotion agreement. As such, we do not believe that these
actions will have a negative effect on our financial condition or results of
operations.
Risks Inherent in Research and Development of Pharmaceutical Products
We are highly focused on the research and development of potential
pharmaceutical products. Research and development of potential pharmaceutical
products is a very risky and speculative activity that is extremely time
consuming and expensive. 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 major
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 unlikely since, in our industry, the
majority of compounds fail to enter clinical studies and the majority of
therapeutic candidates entering clinical studies fail to be commercialized.
Uncertain Ability to Protect Patents and Other Proprietary Technology and
Information
Our ability to compete effectively depends, in part, on our ability to
protect our proprietary technology, both in the United States and abroad. As
such, we place considerable importance on obtaining patent and trade secret
protection for new technologies, products and processes.
We intend to file applications for patents covering the composition of
matter or uses of our drug candidates or our proprietary processes. 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, we cannot be sure that such agreements will be honored or that we
will be able to effectively protect our rights to our unpatented trade secrets
and know-how. Moreover, we cannot be sure that others will not 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 similar claims.
In addition, we could incur substantial costs in defending any patent
infringement suits or in asserting any patent rights, including those licensed
to us by third parties, and in defending suits against us or our employees
relating to ownership of or rights to intellectual property. Such disputes
could substantially delay our drug development or commercialization. The U.S.
Patent and Trademark Office ("PTO") or a private party could institute an
interference proceeding involving us in connection with one or more of our
patents or patent applications. Such proceedings could result in an adverse
decision as to priority of invention, in which case we would not be entitled to
a patent on the invention at issue in the interference proceeding. The PTO or a
private party could also institute reexamination proceedings involving us in
connection with one or more of our patents, and such proceedings could result in
an adverse decision as to the validity or scope of the patents. See "Business--
Patents and Proprietary Technologies."
Dependence on Key Executives and Scientists
The nature of our business is such that 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 qualified personnel necessary for the
development and management of our business. Our research and development
programs and our business might be harmed by the loss of the services of
existing personnel, as well
28
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 maintain "key man" life insurance on any of our employees.
Uncertainties Related to MYOTROPHIN(R) (mecasermin) Injection
Cephalon and Chiron have withdrawn the joint marketing authorization
application for MYOTROPHIN(R) (mecasermin) Injection ("MYOTROPHIN Injection" or
"MYOTROPHIN") in Europe for the treatment of ALS. We made this decision because
of comments we received from the reviewer concerning the results of our two
pivotal ALS studies. These comments led us to believe that our application
would not be approved. The withdrawal of our marketing authorization
application for MYOTROPHIN in Europe may negatively affect the FDA approval
process for MYOTROPHIN in the United States.
In May 1998, the FDA issued a letter stating that the new drug application
submitted jointly by Cephalon and Chiron Corporation to market MYOTROPHIN in the
United States for the treatment of amyotrophic lateral sclerosis (ALS) was
"potentially approvable," contingent, however, upon the submission of additional
information from ongoing clinical studies that demonstrates to the satisfaction
of the FDA that MYOTROPHIN is effective in the treatment of ALS. Cephalon and
Chiron have had discussions with the FDA regarding safety and efficacy data and
have submitted information from the ongoing treatment investigational new drug
program ("T-IND"). The T-IND is a compassionate use program that is neither
placebo-controlled nor blinded, and therefore is not designed to produce
evidence of efficacy. No additional data will be submitted to the FDA at this
time. The study of MYOTROPHIN in ALS patients being conducted by Kyowa Hakko in
Japan is not under our control. Results from that study may be available in
late 1999 but may not satisfy the FDA's request for additional information. The
prospects for regulatory approval of MYOTROPHIN continue to be very uncertain in
the United States. We will continue to evaluate the prospects of receiving
regulatory approval and, based on communications with the FDA, may determine to
withdraw the new drug application.
If the information that has been submitted to the FDA to date does not
prove to be sufficient for approval, a new study would be necessary, which would
be expensive and would take years to complete. We are not sure whether the
potential profits from sales of MYOTROPHIN would make an additional study cost-
effective to conduct. Even if an additional study were conducted, the results of
a new study may not be sufficient to obtain regulatory approval.
Dependence on Corporate Collaborators
Because we have limited resources, we have entered into a number of
agreements with other pharmaceutical companies to support our efforts to develop
and market potential products. These agreements may call for our partner to
control:
. the supply of bulk or formulated drugs for commercial use or for use in
clinical trials;
. the design and execution of clinical studies;
. the process of obtaining regulatory approval to market the product; and
. the marketing and selling of any approved product.
In each of these areas, our research and commercial interests may not be
supported fully since our program may well compete for time, attention and
resources with the internal programs of our corporate collaborators. As such,
we cannot be sure that our corporate collaborators will share our perspectives
on the relative importance of our program, that they will commit sufficient
resources to our program to move it forward effectively, or that the program
will advance as rapidly as it might if we had retained complete control of all
research, development, regulatory and commercialization decisions. For example,
we rely on several of these collaborators for the production of compounds and
the manufacture and supply of pharmaceutical products. If we learn from any of
them that they will not, or cannot, continue to produce and supply compounds or
products under the terms of our agreement(s), we would attempt to identify and
obtain a commitment from another manufacturer. We cannot be certain that we
would be able to locate an appropriate manufacturer or that a new manufacturer
will be able to
29
manufacture such compounds or products in sufficient quantities, at reasonable
prices, and in accordance with cGMP requirements established by the FDA and
other regulatory authorities.
Other Risks
We face other risks and uncertainties in our business that are characteristic
of a company operating in the biotechnology and pharmaceutical industries,
including intense competition and the failure to keep pace with rapid
technological developments; environmental risks associated with the materials
used in research and development activities; and the failure of third-party
vendors and suppliers to be Year 2000 compliant in a timely manner.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents, reverse repurchase agreements and investments at
December 31, 1998 were $67,346,000, representing 71% of total assets, and at
December 31, 1997 were $119,471,000, representing 79% of total assets. Cash
equivalents, reverse repurchase agreements and investments consisted primarily
of short to intermediate-term corporate obligations, overnight investments that
are backed by collateral in the form of government securities with a value equal
to at least 102% of such investments and short to intermediate-term obligations
of the United States government.
The following is a summary of selected cash flow information for each of the
years ended December 31:
[Enlarge/Download Table]
1998 1997 1996
---- ---- ----
Net cash used for operating activities................ $(50,198,000) $(54,677,000) $(53,215,000)
Net cash provided by investing activities............. 45,253,000 31,154,000 45,886,000
Net cash (used for) provided by financing activities.. (1,351,000) 28,123,000 6,435,000
Net Cash Used for Operating Activities
--Operating Cash Inflows
A summary of the major sources of cash receipts reflected in net cash used
for operating activities for each of the years ended December 31 is as follows:
[Download Table]
1998 1997 1996
---- ---- ----
TAP Holdings................... $8,059,000 $6,957,000 $5,889,000
Bristol-Myers Squibb........... 2,005,000 4,682,000 4,879,000
Chiron......................... 1,962,000 5,242,000 4,100,000
Medtronic...................... 1,922,000 553,000 --
Kyowa Hakko.................... 902,000 2,210,000 1,700,000
SmithKline Beecham............. -- 3,083,000 2,856,000
Schering-Plough................ -- 88,000 3,000,000
Interest....................... 4,734,000 8,260,000 8,489,000
We have a licensing and research and development collaboration with TAP
Holdings Inc. to develop and commercialize certain compounds for the treatment
of human cancers and prostate disorders in the United States. Under the terms of
the agreement, we perform research and preclinical development of these
compounds for which we are compensated quarterly by TAP, based on a contract
rate per individual assigned to the program for that quarter and reimbursement
of certain external costs, all subject to annual budgetary maximums. At December
31, 1998, $2,178,000 was receivable from TAP.
We market STADOL NS(R) (butorphanol tartrate) Nasal Spray, a Bristol-Myers
Squibb proprietary product, to neurologists in the United States. Pursuant to
the agreement, we receive quarterly payments equal to a percentage of total
STADOL NS sales attributed to prescriptions written by neurologists which
exceeds a predetermined base
30
amount. The decrease in amounts received from BMS in the twelve months ended
December 31, 1998 is due to a reduction in the total amount of STADOL NS sales
from the comparable 1997 period. Additionally, the 1997 period reflects four
quarterly BMS payments while the corresponding 1998 period includes only three
payments. At December 31, 1998, $630,000 was receivable from BMS.
Cephalon has been developing MYOTROPHIN in collaboration with Chiron
Corporation for the treatment of ALS and other neurological disorders. Under
the collaboration, the costs of the program through June 30, 1998 had generally
been shared equally by the two companies. The amounts we received generally
represent reimbursement from Chiron for MYOTROPHIN program costs incurred in
excess of our fifty percent share of program costs. Receipt of cash from Chiron
in the twelve months ended December 31, 1998 has decreased from prior year's
levels due to an overall reduction in our expenditures associated with the
MYOTROPHIN program and because as of June 30, 1998, each party has agreed to
fund their own MYOTROPHIN expenditures.
Under an April 1997 agreement with Medtronic, Inc., we are co-promoting
Intrathecal Baclofen Therapy (ITB(TM)) to neurologists and physiatrists in the
United States for the treatment of intractable spasticity. Compensation is
earned primarily on a payment per patient screen basis with the amount per
patient screen increasing if annual volume targets are achieved. The increase in
cash receipts from 1997 to 1998 is due to an increase in the number of patient
screens performed. At December 31, 1998, $470,000 was receivable from Medtronic.
The agreement with Medtronic will terminate pursuant to its terms as of April
29, 1999.
In May 1992, we entered into an agreement with Kyowa Hakko Kogyo Co., Ltd.
under which Kyowa Hakko is to provide us with bulk supplies of the substance
K252a and certain of its derivatives for manufacture into certain of our
neurology and oncology compounds. In July 1993, we entered into an agreement
with Kyowa Hakko to develop and market MYOTROPHIN in Japan. The payments
received from Kyowa Hakko primarily represent reimbursement of MYOTROPHIN
supplies for clinical trials conducted by Kyowa Hakko in Japan and reimbursement
of certain expenditures related to the K252a program. Also included in the
payments received from Kyowa Hakko in 1997 is a non-recurring $900,000 milestone
payment that was paid upon our filing of the MYOTROPHIN NDA in the United
States. At December 31, 1998, $266,000 was receivable from Kyowa Hakko.
Our research agreements with SmithKline Beecham and Schering-Plough concluded
in 1997.
The decrease in interest received in 1998 compared to 1997 and 1996 was
primarily due to lower investment balances.
--Operating Cash Outflows
A summary of the cash outflows reflected in net cash used for operating
activities for the year ended December 31 is as follows:
[Download Table]
1998 1997 1996
---- ---- ----
$(71,261,000) $(85,790,000) $(83,098,000)
Cash used in the selling, general and administrative area decreased in 1998
as compared to the corresponding 1997 period because of reductions in
expenditures associated with the MYOTROPHIN program and decreases in external
administrative expenses. Research and development funding decreased in 1998 as
compared to 1997 primarily because of a decrease in staffing levels, license
fees, expenditures associated with the MYOTROPHIN program and other research
activities. These reductions offset increased expenditures associated with the
PROVIGIL program.
Cash used for selling, general and administrative activities increased in
1997 as compared to 1996 due to increased funding of sales and marketing
activities, including increases in pre-marketing efforts to support products in
development. The funding of research and development decreased in 1997 as
compared to 1996
31
primarily due to the reduction in clinical trial expenses, including cost
reductions due to the November 1996 sale of our Beltsville, Maryland pilot-scale
manufacturing facility and the completion of certain clinical studies. The
decrease was partially offset by the cost in 1997 of purchasing bulk modafinil
compound.
--Cash and Funding Requirements Outlook
We believe that our cash and investment balance as of December 31, 1998 was
adequate to fund the then-current level of operations for at least twelve
months. We expect cash flow from operating activities to continue to be negative
for the next several years. The major source of our cash inflows in 1998 was
derived from our collaborative research and development agreement with TAP and
from co-promotion agreements. The continuation of funding under the agreement
with TAP is subject to the achievement of certain development milestones and
periodic review by TAP and may be terminated without cause with prior notice. As
of June 30, 1998, Cephalon and Chiron have agreed to fund their own ongoing
MYOTROPHIN expenditures. We will not receive any future payments from Chiron
for reimbursement of the Company's MYOTROPHIN program costs. Future receipts
from Kyowa Hakko are dependent upon shipment of MYOTROPHIN to supply Kyowa
Hakko's clinical trials in Japan. Additional receipts from Kyowa Hakko may be
received for reimbursement of certain expenditures associated with the K252a
program. The levels of potential payments to be received under our co-promotion
agreements with BMS and Medtronic are subject to a number of uncertainties
related to product sales, including competition from new and existing products.
The agreement with BMS has been extended through December 31, 1999. The
agreement with Medtronic will terminate pursuant to its terms as of April 29,
1999.
Although we initiated sales of PROVIGIL in the United States in February
1999, we expect it will be at least several years, if ever, before sales from
PROVIGIL will provide enough funds to generate cash inflows in excess of the
present level of cash outflows from operations. In addition to the uncertainty
surrounding the degree of market acceptance for a recently introduced product,
factors such as competition, the effectiveness of our sales and marketing
efforts and the ability to demonstrate the utility of PROVIGIL in disorders
other than narcolepsy will all have an impact on PROVIGIL sales that are not
predictable at this point in time.
The Company expects its cash requirements for PROVIGIL to increase
significantly for the next several years due to efforts associated with the
commercial launch of PROVIGIL in the United States, including building PROVIGIL
inventory and conducting clinical studies of PROVIGIL in disorders other than
narcolepsy. Additionally, we expect to continue to expend substantial funds on
research and development activities for our other products in development. We
intend to seek sources of funding for these research programs through
collaborative arrangements with third parties. If additional funds are
unavailable, we may have to reduce our present level of spend which may involve
curtailing or restructuring some of our programs.
We will require substantial additional funds to continue our operations at
their current level. We will need to obtain additional funding through debt
and/or equity financings, collaborative arrangements or through other financing
vehicles. The amount of capital needed to fund operations will depend upon many
factors, including the scope of our research and development programs and the
extent of any funding under collaborative research arrangements, the cost of
conducting clinical studies, the cost of defending and enforcing patent claims
and other legal proceedings, and the level of sales of PROVIGIL in the United
States. We can not be sure that additional funds can be obtained on acceptable
terms, if at all. If additional funds cannot be obtained, we will have to reduce
our present level of spending which may involve curtailing or restructuring
operations, including the sale of certain assets of the company. Even with such
curtailment, we would not be able to eliminate fixed costs, such as occupancy
expenses and debt service.
32
Net Cash Provided by Investing Activities
A summary of net cash provided by investing activities for each of the years
ended December 31 is as follows:
[Enlarge/Download Table]
1998 1997 1996
---- ---- ----
Purchases of property and equipment............. $ (576,000) $ (823,000) $(2,058,000)
Sale leaseback of property and equipment........ -- -- 427,000
Proceeds from sale of assets.................... -- -- 17,192,000
Sales and maturities of investments, net........ 45,829,000 31,977,000 30,325,000
----------- ----------- -----------
Net cash provided by investing activities.... $45,253,000 $31,154,000 $45,886,000
=========== =========== ===========
In November 1996, we sold the assets of our Beltsville, Maryland pilot-scale
manufacturing facility for a total purchase price of $24,864,000. In the
transaction, we received $17,192,000 in cash, and transferred $7,712,000 of
equipment lease obligations to the purchaser.
Sales and maturities of investments, net, represent the liquidation of
investments.
Net Cash (Used for) Provided by Financing Activities
A summary of net cash (used for) provided by financing activities for each of
the years ended December 31 is as follows:
[Enlarge/Download Table]
1998 1997 1996
---- ---- ----
Proceeds from exercises of common stock options and warrants.... $ 410,000 $ 3,458,000 $ 8,516,000
Proceeds from issuance of long-term debt........................ -- 30,000,000 1,838,000
Principal payments on long-term debt ........................... (1,761,000) (5,335,000) (3,919,000)
----------- ----------- -----------
Net cash (used for) provided by financing activities.......... $(1,351,000) $28,123,000 $ 6,435,000
=========== =========== ===========
The extent and timing of future warrant and option exercises, if any, are
primarily dependent upon the market price of Cephalon's common stock and general
financial market conditions, as well as the exercise prices and expiration dates
of the warrants and options.
Proceeds from the issuance of long-term debt in the year ended December 31,
1997 consists of a $30,000,000 private placement of senior convertible notes. As
of December 31, 1998, the principal on the notes had been fully converted into
3,148,000 shares of Cephalon's common stock. Proceeds from the issuance of long-
term debt in 1996 represent additional borrowings provided by the Commonwealth
of Pennsylvania in connection with the 1995 West Chester building purchase.
For all periods presented, principal payments on long-term debt include
payments on mortgage loans and payments on capital lease obligations.
Additionally, we paid $2,500,000 in 1996 on an unsecured bank loan and, in March
1997, repaid in full the $3,750,000 balance due on that same unsecured bank
loan.
Commitments and Contingencies
--Related Party
Cephalon Clinical Partners, L.P. (the "Partnership") granted Cephalon an
exclusive license (the "Interim License") to manufacture and market MYOTROPHIN
within the United States, Canada and Europe (the "Territory") in return for
royalty payments equal to 10.1% of MYOTROPHIN sales and a payment of
approximately $16,000,000 (the "Milestone Payment") that is to be made if
MYOTROPHIN receives regulatory approval in the United States or certain other
countries within the Territory. We have the option to pay the Milestone Payment
in cash, common stock, or a combination thereof.
33
We have a contractual option to purchase all of the limited partnership
interests in the Partnership (the "Purchase Option") in specified circumstances
following the initiation of commercial sales, if any, of MYOTROPHIN. To exercise
the Purchase Option, we are required to make an advance payment of $40,275,000
in cash or, at our election, $42,369,000 in shares of Cephalon's common stock,
valued at the market price at the time the Purchase Option is exercised. In
addition to the advance payment, the exercise of the Purchase Option requires us
to make royalty payments to the former limited partners for a period of eleven
years after exercise at a royalty rate of 10.1% (subject to reduction under
certain circumstances) of MYOTROPHIN sales in the Territory. If we do not
exercise the Purchase Option prior to its expiration date the Interim License
will terminate and all development and marketing rights to MYOTROPHIN in the
Territory would revert to the Partnership, which may commercialize MYOTROPHIN
itself or license or assign its rights to a third party. We would not receive
any benefits from any such commercialization, license or assignment of rights.
Late in 1995, the Partnership depleted all of its available funding and has
not provided further funding of MYOTROPHIN development costs. The amount of
additional funding required for further development is determined by the
Partnership's general partner in advance of each quarter, and each quarter, we
have the right, but not the obligation, to contribute such funds. If we decide
to discontinue funding of the MYOTROPHIN program, the Purchase Option and
Interim License will terminate and commercialization rights to MYOTROPHIN will
revert back to the Partnership, as described in the preceding paragraph.
The January 1994 collaboration between Cephalon and Chiron is subject to the
rights of the Partnership. We are solely responsible for making any royalty and
milestone payments owed to the Partnership and for funding any exercises of the
Purchase Option.
The general partner of the Partnership is a wholly-owned subsidiary of
Cephalon, which owns 1% of the Partnership.
--Shareholder Litigation
Cephalon, a current director and officer, and a former officer have been
named as defendants in a number of civil actions, which have been consolidated
into a single class action, alleging that statements made about the results of
certain clinical studies of MYOTROPHIN were misleading. Due to our involvement
in promoting STADOL NS, a product of Bristol-Myers Squibb, we are a co-defendant
in a recent product liability action brought against BMS. See "Certain Risks
Related to Cephalon's Business."
RESULTS OF OPERATIONS
This section should be read in conjunction with the more detailed discussion
under "Liquidity and Capital Resources."
A summary of revenues and expenses for each of the years ended December 31 is
as follows:
[Enlarge/Download Table]
% CHANGE % CHANGE
1998 VS. 1997 VS.
1998 1997 1996 1997 1996
---- ---- ---- ---- ---------
Revenues....................................... $15,655,000 $23,140,000 $21,366,000 (32)% 8%
Research and development expenses.............. 43,649,000 51,587,000 62,096,000 (15) (17)
Selling, general and administrative expenses... 30,947,000 36,744,000 28,605,000 (16) 28
Interest income, net........................... 3,534,000 4,772,000 6,205,000 (26) (23)
Gain on sale of assets......................... -- -- 9,845,000 -- (100)
34
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenues decreased in 1998 as compared to 1997 due primarily to the cessation
of both the Schering-Plough and Smith-Kline Beecham research and development
collaborations and because of a decrease in revenues recognized from Chiron and
Kyowa Hakko as a result of the decreased expenditures associated with the
MYOTROPHIN program. These decreases were partially offset by revenue from
initial sales of PROVIGIL in the United Kingdom although such sales were not
material.
Research and development expenses decreased in 1998 as compared to 1997
primarily because of a decrease in staffing levels, license fees, expenditures
associated with the MYOTROPHIN program and other research activities. These
reductions were partially offset by increased clinical research expenditures
associated with the PROVIGIL program.
The decrease in the selling, general and administrative area for 1998 as
compared to the corresponding 1997 period was due primarily to reductions in
expenses associated with the MYOTROPHIN program and expenses related to a
certain co-promotion agreement.
Net interest income decreased in 1998 due primarily to lower investment
balances throughout the year as compared to the corresponding 1997 period.
Year ended December 31, 1997 compared to year ended December 31, 1996
The increase in revenues for 1997 as compared to 1996 resulted primarily from
increases in revenue recognized under the Chiron collaboration, the Kyowa Hakko
MYOTROPHIN agreement and the TAP agreement, and revenue recognized from the
initiation of a co-promotion agreement with Medtronic. The increases in revenues
were partially offset by a decrease in revenue in 1997 from Schering-Plough due
to the conclusion of its funding of a research program.
Research and development expenses decreased in 1997 as compared to 1996
primarily due to the reduction in clinical trial expenses, including cost
reductions due to the November 1996 sale of our Beltsville, Maryland pilot-scale
manufacturing facility and the completion of certain clinical studies. The
decrease was partially offset by an increase in expenditures due to the purchase
of bulk modafinil compound, the active drug substance in PROVIGIL Tablets, an
increase in expenditures in our research programs and certain license fees
payable in accordance with third-party agreements.
The increase in selling, general and administrative expenses in 1997 as
compared to 1996 was primarily due to increases in expenses incurred in our U.S.
and European sales and marketing organizations including increases in pre-
marketing efforts in support of the products in development and expenses
associated with a co-promotion agreement.
The decrease in net interest income in 1997 as compared to 1996 was primarily
due to an increase in interest expense associated with senior convertible notes.
In 1996, we realized a $9,845,000 gain in connection with the sale of assets
at our Beltsville, Maryland pilot-scale manufacturing facility.
Results of Operations Outlook
We initiated sales of PROVIGIL for narcolepsy in the U.S. in February 1999.
We expect that sales of PROVIGIL may be limited since we can only market the
product to treat excessive daytime sleepiness associated with narcolepsy. As a
result, we expect to continue to incur operating losses for at least several
years. We may never be able to achieve profitability solely through sales of
PROVIGIL even if we obtain approval to market the product to treat other
disorders. We do not expect sales of PROVIGIL in the United Kingdom to provide a
significant source of revenue for at least several years.
35
The major source of our current revenue is derived 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. Additionally, all
agreements have termination clauses allowing either party to end the funding
under those agreements. Without these sources of revenue, operating losses would
increase.
In the next several years, we expect our expenditures associated with
PROVIGIL to increase including expenses related to marketing and selling a
commercial product and expenses incurred in conducting clinical studies of
PROVIGIL in disorders other than narcolepsy. Additionally, we expect to continue
to incur substantial expenses on research and development activities for our
other products in development. We intend to seek sources of funding for these
programs through collaborative arrangements with third parties.
We do not believe that inflation has had a material impact on the results of
its operations since inception.
SUBSEQUENT EVENT
On February 25, 1999, we completed a debt offering totaling $30,000,000,
raised through the private sale of revenue-sharing notes (the "Notes"). The
Notes are repayable in cash in February 2002. The Notes are secured by our U.S.
rights to PROVIGIL (the "Pledged Assets") and bear an annual interest rate of
11%. Investors in the Notes also will receive a royalty of 6% on U.S. sales of
PROVIGIL for up to five years. We have the right to redeem the Notes at a
premium prior to maturity, which would reduce the royalty period to four years
and may extend the maturity and the royalty by one year under certain
circumstances. The Notes contain a number of covenants including a requirement
to maintain a minimum level of cash and investments equal to $40,000,000 during
1999 and $30,000,000 thereafter as long as the principal remains outstanding. If
we fail to maintain such cash balances or violate the other covenants, the
holders of the Notes can declare a default and increase the royalty percentage
to 25% of U.S. PROVIGIL sales and, if the default is not cured within one year,
can accelerate the due date of the Notes and foreclose on the Pledged Assets.
The holders of the Notes can also foreclose on the Pledged Assets if we fail to
pay principal and interest when due. The Notes are not convertible into common
stock.
The offering also includes the issuance of five-year warrants to purchase
1,920,000 shares of Cephalon common stock with an exercise price of $10.08. The
investors will forfeit 480,000 warrants if specified PROVIGIL sales levels are
achieved. In addition, we may redeem up to 720,000 of the remaining warrants
after three years if the market value of Cephalon common stock exceeds certain
thresholds.
IMPACT OF YEAR 2000
The "Year 2000 Issue" is typically the result of software and firmware being
written using two digits rather than four to define the applicable year. If our
software and firmware with date-sensitive functions are not Year 2000 compliant,
these systems may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, interruptions in
research and development operations or the inability to engage in normal
business activities.
We have developed a multi-step Year 2000 readiness plan for its internal
systems. The plan includes development of corporate awareness, assessment of
internal systems, project planning, project implementation (including
remediation, upgrading and replacement where necessary), validation testing and
contingency planning.
We are currently conducting a review of our information technology systems to
identify the systems that could be adversely affected by the Year 2000 problem.
We believe that, with minor modifications and testing of our systems, the Year
2000 issue will not pose a significant operational problem. We are using our
internal resources to reprogram or replace and test our software for Year 2000
modifications. If we are unable to make the required modifications to existing
software or convert to new software in a timely manner, the Year 2000 Issue
could have an impact on operations, although we do not believe this impact will
be material.
36
We have initiated formal communication with significant suppliers and third
party vendors to determine the extent to which operations are vulnerable to
those third parties' failure to remediate their own Year 2000 hardware and
software issues. Our primary focus to date has been on research and development
activities that do not rely heavily on third-party systems. However, third
parties perform certain activities related to commercialization of our products,
including product manufacturing and distribution, order entry, shipping and
billing, and sales tracking. We have asked our suppliers and vendors to inform
us of the status of the Year 2000 compliance of their products and we are aware
that certain of our suppliers and vendors are not currently Year 2000 compliant.
These parties have communicated to us that they are taking appropriate
remediation steps, and we intend to monitor their progress. We will continue to
seek information from non-responsive suppliers and vendors and we plan to
contact additional suppliers. In addition, in all new contract negotiations, we
are asking suppliers to warrant that products sold or licensed to us are Year
2000 compliant. In the event that any of our significant suppliers are unable
to become Year 2000 compliant, our business or operations could be adversely
affected. We cannot be sure that the systems of other companies on which we rely
will be compliant on or before January 1, 2000 and will not have an adverse
effect on our operations.
We do not expect the total cost associated with required modifications to
become Year 2000 compliant to be material. We are funding the minimal
expenditures of the Year 2000 project through existing cash on hand. We
anticipate completing the critical Year 2000 issues by the first half of 1999,
which is prior to any anticipated impact on our operating systems, and expect
the Year 2000 project to continue beyond January 1, 2000 with respect to
resolution of non-critical issues.
We have not yet fully developed a comprehensive contingency plan addressing
situations that may result if we are unable to achieve Year 2000 readiness of
our critical operations. We can not be sure that we will be able to develop a
contingency plan that will adequately address issues that may arise in the year
2000. Finally, the Company we are also vulnerable to external forces that might
generally affect industry and commerce, such as utility or transportation
company Year 2000 compliance failures and related service interruptions.
The costs of the project and the completion date of the Year 2000
modifications are based on our best estimates. These estimates were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third-party modification plans and other
factors. We can not be sure that these estimates will be achieved and actual
results could differ materially from those anticipated.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not hold any investments in market risk sensitive instruments.
Accordingly, we believe that we are not subject to any material risks arising
from changes in interest rates, foreign currency exchange rates, commodity
prices, equity prices or other market changes that affect market risk sensitive
instruments.
37
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, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cephalon, Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Philadelphia, Pennsylvania
February 25, 1999
38
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[Enlarge/Download Table]
December 31, December 31,
1998 1997
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2) $3,975,000 $10,271,000
Reverse repurchase agreements (Note 2) 3,509,000 27,414,000
Short-term investments (Note 2) 59,862,000 81,786,000
Accounts receivable - contract 3,887,000 5,039,000
Other 1,361,000 2,641,000
-------------- --------------
Total current assets 72,594,000 127,151,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $13,439,000 and $11,099,000 (Note 3) 20,505,000 21,853,000
OTHER 1,574,000 2,204,000
-------------- --------------
$94,673,000 $151,208,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,558,000 $2,724,000
Accrued expenses (Note 4) 13,298,000 16,075,000
Current portion of long-term debt (Note 5) 1,624,000 1,734,000
-------------- --------------
Total current liabilities 18,480,000 20,533,000
LONG-TERM DEBT (Note 5) 15,096,000 27,587,000
OTHER (Note 6) 3,495,000 2,750,000
-------------- --------------
Total liabilities 37,071,000 50,870,000
-------------- --------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY: (Note 8)
Preferred stock, $.01 par value,
5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 100,000,000 shares authorized,
28,802,323 and 27,395,254 shares issued and outstanding 288,000 274,000
Additional paid-in capital 331,673,000 318,753,000
Treasury stock (487,000) (259,000)
Accumulated deficit (273,793,000) (218,386,000)
Cumulative translation adjustment (79,000) (44,000)
-------------- --------------
Total stockholders' equity 57,602,000 100,338,000
-------------- --------------
$94,673,000 $151,208,000
============== ==============
The accompanying notes are an integral part of these financial statements.
39
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
REVENUES: (Note 9) $15,655,000 $23,140,000 $21,366,000
OPERATING EXPENSES:
Research and development 43,649,000 51,587,000 62,096,000
Selling, general and administrative 30,947,000 36,744,000 28,605,000
-------------- -------------- --------------
74,596,000 88,331,000 90,701,000
-------------- -------------- --------------
LOSS FROM OPERATIONS (58,941,000) (65,191,000) (69,335,000)
INTEREST:
Income 5,408,000 7,973,000 8,491,000
Expense (Note 5) (1,874,000) (3,201,000) (2,286,000)
-------------- -------------- --------------
3,534,000 4,772,000 6,205,000
-------------- -------------- --------------
GAIN ON SALE OF ASSETS -- -- 9,845,000
-------------- -------------- --------------
LOSS (Note 10) $(55,407,000) $(60,419,000) $(53,285,000)
============= ============= =============
BASIC AND DILUTED LOSS PER SHARE (Note 1) $(1.95) $(2.36) $(2.19)
============= ============= =============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 28,413,220 25,637,508 24,319,163
============= ============= =============
The accompanying notes are an integral part of these financial statements.
40
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
Accumulated
Total Other
Comprehensive Accumulated Comprehensive Common
Loss Total Deficit Income/(Loss) Stock
--------------- -------------- ----------------- --------------- -------------
BALANCE, JANUARY 1, 1996 $ 180,205,000 $ (104,682,000) $ 14,000 $ 238,000
Loss $(53,285,000) (53,285,000) (53,285,000)
Foreign currency (57,000)
translation --------------
Other comprehensive loss (57,000) (57,000) (57,000)
--------------
Comprehensive loss $(53,342,000)
==============
Stock options and warrants exercised 8,152,000 -- 8,000
Restricted stock award plan 2,073,000 -- --
Employee benefit plan 529,000 -- --
Treasury stock acquired (291,000) -- --
--------------- ---------------- ----------- -------------
BALANCE, DECEMBER 31, 1996 $ 137,326,000 $ (157,967,000) $ (43,000) $ 246,000
Loss $(60,419,000) (60,419,000) (60,419,000)
Foreign currency (1,000)
translation --------------
Other comprehensive loss (1,000) (1,000) (1,000)
--------------
Comprehensive loss $(60,420,000)
==============
Stock options and warrants exercised 4,023,000 -- 3,000
Restricted stock award plan 1,164,000 -- 1,000
Employee benefit plan 605,000 -- --
Conversion of convertible debentures 17,695,000 -- 20,000
Issuance of warrants in connection 400,000 -- --
with convertible debentures transactions
Expired call option (1,973,000) -- 5,000
Treasury stock acquired (455,000) -- --
Treasury stock retirement 1,973,000 -- (1,000)
--------------- ----------------- ----------- -------------
BALANCE, DECEMBER 31, 1997 $ 100,338,000 $ (218,386,000) $ (44,000) $ 274,000
Loss $(55,407,000) (55,407,000) (55,407,000)
Foreign currency (35,000)
translation ---------------
Other comprehensive loss (35,000) (35,000) (35,000)
---------------
Comprehensive loss $(55,442,000)
===============
Stock options and warrants exercised 216,000 -- --
Restricted stock award plan 1,500,000 -- 1,000
Employee benefit plan 583,000 -- 1,000
Conversion of convertible debentures 10,635,000 -- 12,000
Treasury stock acquired (228,000) -- --
---------------- --------------- ----------- -------------
BALANCE, DECEMBER 31, 1998 $57,602,000 $(273,793,000) ($79,000) $288,000
================ =============== =========== =============
Additional
Paid-in Treasury
Capital Stock
------------ ------------
BALANCE, JANUARY 1, 1996 $286,122,000 $ (1,487,000)
Loss
Foreign currency
translation
Other comprehensive loss
Comprehensive loss
Stock options and warrants exercised 8,144,000 --
Restricted stock award plan 2,073,000 --
Employee benefit plan 529,000 --
Treasury stock acquired -- (291,000)
------------ ------------
BALANCE, DECEMBER 31, 1996 $296,868,000 $ (1,778,000)
Loss
Foreign currency
translation
Other comprehensive loss
Comprehensive loss
Stock options and warrants exercised 4,020,000 --
Restricted stock award plan 1,163,000 --
Employee benefit plan 605,000 --
Conversion of convertible debentures 17,675,000 --
Issuance of warrants in connection 400,000
with convertible debentures transactions
Expired call option (1,978,000) --
Treasury stock acquired -- 455,000
Treasury stock retirement -- 1,974,000
------------ ------------
BALANCE, DECEMBER 31, 1997 $318,753,000 $ (259,000)
Loss
Foreign currency
translation
Other comprehensive loss
Comprehensive loss
Stock options and warrants exercised 216,000 --
Restricted stock award plan 1,499,000 --
Employee benefit plan 582,000 --
Conversion of convertible debentures 10,623,000 --
Treasury stock acquired -- (228,000)
------------ ------------
BALANCE, DECEMBER 31, 1998 $331,673,000 $ (487,000)
============ ============
The accompanying notes are an integral part of these financial statements.
41
CEPHALON, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
Year Ended December 31,
--------------------------------------------------------------------
1998 1997 1996
------------------------ -------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss $(55,407,000) $(60,419,000) $(53,285,000)
Adjustments to reconcile loss to net cash
used for operating activities:
Depreciation and amortization 2,340,000 2,247,000 4,198,000
Gain on sale of assets -- -- (9,845,000)
Non-cash compensation expense 1,854,000 1,811,000 2,602,000
Other 47,000 157,000 --
(Increase) decrease in operating assets:
Accounts receivable - contract 1,152,000 247,000 (2,262,000)
Other current assets 1,157,000 (186,000) 4,102,000
Other long-term assets (109,000) (1,656,000) 121,000
Increase (decrease) in operating liabilities:
Accounts payable 874,000 1,086,000 (2,741,000)
Accrued liabilities (2,851,000) 1,289,000 2,947,000
Other long-term liabilities 745,000 747,000 948,000
------------------- -------------------- --------------------
Net cash used for operating activities (50,198,000) (54,677,000) (53,215,000)
------------------- -------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (576,000) (823,000) (2,058,000)
Sale leaseback of property and equipment -- -- 427,000
Proceeds from sale of assets -- -- 17,192,000
Sales and maturities of investments, net 45,829,000 31,977,000 30,325,000
------------------- -------------------- --------------------
Net cash provided by investing activities 45,253,000 31,154,000 45,886,000
------------------- -------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercises of common stock
options and warrants 410,000 3,458,000 8,516,000
Proceeds from issuance of long-term debt -- 30,000,000 1,838,000
Principal payments on long-term debt (1,761,000) (5,335,000) (3,919,000)
------------------- -------------------- --------------------
Net cash (used for) provided by
financing activities (1,351,000) 28,123,000 6,435,000
------------------- -------------------- --------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,296,000) 4,600,000 (894,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,271,000 5,671,000 6,565,000
------------------- -------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $3,975,000 $10,271,000 $5,671,000
=================== ==================== ====================
The accompanying notes are an integral part of these financial statements.
42
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Cephalon, Inc., headquartered in West Chester, PA, is an international
biopharmaceutical company dedicated to the discovery, development and marketing
of products to treat neurological disorders and cancer. The Company has had
negative cash flow from operations since inception and has funded its operations
primarily from the proceeds of public and private placements of its equity
securities. The Company has only recently initiated sales of its first approved
product, PROVIGIL(R) (modafinil) Tablets [C-IV] ("PROVIGIL Tablets" or
"PROVIGIL"), in the United States for use by those suffering from excessive
daytime sleepiness associated with narcolepsy.
The Company's business is subject to a number of significant risks,
including the risks inherent in pharmaceutical research and development
activities. The Company is highly dependent upon the successful
commercialization of PROVIGIL and there is no assurance that the Company will
achieve profitability solely on sales of PROVIGIL in the United States.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the results of operations of
the Company and its wholly owned subsidiaries. Intercompany transactions have
been eliminated.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FIXED ASSETS AND DEPRECIATION
Buildings, property and equipment are stated at cost and depreciated using
the straight-line method over the estimated 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. The Company's assets are reviewed and adjusted for
impairment whenever events or circumstances have occured that indicate that the
remaining useful lives of the assets should be revised or that the remaining
balance of such assets may not be recoverable based upon expectations of future
undiscounted cash flows. No such adjustments were required as of December 31,
1998. Expenditures for maintenance and repairs are charged to expense as
incurred, while major renewals and betterments are capitalized.
REVENUE RECOGNITION
On contracts in which the Company receives payments based upon the level of
its related research and development expenses, revenues are recognized as the
related expenses are incurred. On contracts which provide for the receipt of
milestone payments, revenues are recognized when the payor confirms that the
milestone has been achieved. On contracts which provide for payments based upon
pre-determined rates for personnel working on the contract and reimbursement of
third-party expenses, revenues are recognized as the work is performed and the
third-party expenses are incurred. Payments received that relate to future
performance are deferred and recognized as revenue over the specified future
performance periods. Under the Company's co-promotion agreements, revenue is
recognized upon the achievement of the stipulated sales activity and performance
43
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
targets. Under agreements to supply product for clinical trials, the Company
recognizes revenue upon shipment. (See Note 9).
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book values of cash, cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued expenses are considered to approximate
their respective fair values. None of the Company's debt instruments that are
outstanding as of December 31, 1998 have readily ascertainable market values;
however, the carrying values are considered to approximate their respective fair
values.
LOSS PER SHARE
Statement of Financial Standards No. 128 "Earning per Share" requires dual
presentation of basic and diluted earnings per share ("EPS") for complex capital
structures on the face of the income statement. Basic EPS is computed by
dividing net income by the weighted-average number of common shares outstanding
during the period. Diluted EPS is similar to basic EPS except that the effect
of converting or exercising all potential dilutive securities also is included
in the denominator. For the years ended December 31, 1998, 1997 and 1996, the
Company's calculation of diluted EPS excludes stock options, restricted stock
awards, warrants and the conversion of convertible notes since their inclusion
would be antidilutive.
2. CASH, CASH EQUIVALENTS AND INVESTMENTS
At December 31, cash, cash equivalents and investments consisted of the
following:
[Download Table]
1998 1997
---- ----
Cash and cash equivalents.......................... $ 3,975,000 $ 10,271,000
Reverse repurchase agreements collateralized by
U.S. Treasury securities......................... 3,509,000 27,414,000
Short-term investments
U.S. government obligations...................... 49,830,000 76,789,000
Commercial paper................................. 10,032,000 --
Other corporate obligations...................... -- 4,997,000
----------- ------------
59,862,000 81,786,000
$67,346,000 $119,471,000
=========== ============
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents. The Company's
short-term investments consisted primarily of short to intermediate-term
corporate obligations, overnight investments that are backed by collateral in
the form of government securities with a value equal to at least 102% of such
investments and short to intermediate-term obligations of the United States
government. These securities are held in a trust account with a commercial bank
on behalf of the Company. The Company believes that the quantity and quality of
the collateral are sufficient to secure its investment in these instruments. All
of the Company's investments in debt securities at December 31, 1998 mature in
1999.
44
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company considers its investments as being
"available for sale." The Company classifies these investments as short-term and
records them at fair market value. The unrealized gains and losses in each of
the three years ended December 31, 1998 were immaterial.
Certain of the Company's lease agreements contain covenants that obligate
the Company to maintain certain minimum cash and investment balances (see Note
5).
3. PROPERTY AND EQUIPMENT:
At December 31, property and equipment consisted of the following:
[Enlarge/Download Table]
1998 1997
---- ----
Land and buildings...................................... $ 20,046,000 $ 19,629,000
Laboratory and office equipment......................... 13,898,000 13,323,000
------------ ------------
33,944,000 32,952,000
Less allowances for depreciation and amortization....... (13,439,000) (11,099,000)
------------ ------------
Property and equipment, net............................. $ 20,505,000 $ 21,853,000
============ ============
4. ACCRUED EXPENSES
At December 31, accrued expenses consisted of the following:
[Download Table]
1998 1997
---- ----
Accrued compensation and benefits.................... $ 876,000 $ 964,000
Accrued professional and consulting fees............. 2,556,000 1,258,000
Accrued clinical trial fees and related expenses..... 2,177,000 2,320,000
Accrued license fees and royalties................... 2,096,000 2,627,000
Accrued co-promotion expenses........................ 118,000 2,491,000
Accrued litigation-related costs..................... 4,838,000 4,896,000
Other accrued expenses............................... 637,000 1,519,000
----------- -----------
$13,298,000 $16,075,000
=========== ===========
5. LONG-TERM DEBT
At December 31, long-term debt consisted of the following:
[Download Table]
1998 1997
---- ----
Capital lease obligations...... $ 1,335,000 $ 1,682,000
Mortgage loans................. 15,385,000 16,313,000
Senior convertible notes....... -- 11,326,000
----------- -----------
16,720,000 29,321,000
Less current portion........... (1,624,000) (1,734,000)
----------- -----------
Long-term debt................. $15,096,000 $27,587,000
=========== ===========
Aggregate maturities of long-term debt for the next five years are as
follows: 1999--$1,624,000; 2000--$1,642,000; 2001--$1,374,000; 2002--$1,212,000;
2003--$1,258,000; 2004 and thereafter--$9,610,000. The current portion of long-
term debt consists of payments due on the capital lease obligations and mortgage
loans. The Company paid interest related to debt instruments of $1,170,000,
$2,242,000, and $1,388,000 in 1998, 1997 and 1996, respectively.
45
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SENIOR CONVERTIBLE NOTES
In April 1997, the Company completed a $30,000,000 private placement of
senior convertible notes. As of December 31, 1997, $18,674,000 in principal of
the notes had been converted into 1,938,000 shares of common stock. As of
December 31, 1998, the remaining balance of $11,326,000 in principal of the
notes was converted into 1,210,000 shares of common stock.
CAPITAL LEASE OBLIGATIONS
The Company currently leases laboratory, production and computer equipment
with a cost of $3,352,000 under lease agreements. Under the terms of the
agreements, the Company must maintain a minimum balance in unrestricted cash and
investments of $30,000,000 or deliver 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, 1998, the balance due under the lease
agreements was $1,335,000. Both agreements provide the Company with an option to
purchase the leased equipment.
MORTGAGE LOANS
In March 1995, the Company purchased the buildings housing its
administrative offices and research facilities in West Chester, Pennsylvania for
$11,000,000. The Company financed the purchase through the assumption of an
existing $6,900,000 first mortgage and from $11,600,000 in mortgage loans
provided by the Commonwealth of Pennsylvania (the "State Funding"), a portion of
which was used to finance building improvements and $2,700,000 was held in
escrow to fund future improvements. At December 31, 1998, the remaining escrow
balance, including earned interest, was $1,404,000. The first mortgage has a 15-
year term with an annual interest rate of 95/8%. The State Funding has a 15-year
term with an annual interest rate of 2%. The 2% interest rate is subject to
increase to prime plus 2% if the Company fails to hire a specified number of new
employees in Chester County, Pennsylvania by the end of 1999. The Company is
presently paying interest at the 2% rate and is accruing interest at the higher
rate. The mortgage loans require annual aggregate principal and interest
payments of $1,800,000. The mortgage loans are secured by the buildings and
fixtures therein and a portion of the State Funding is also secured by all
Company equipment located in Pennsylvania that is otherwise unsecured.
6. OTHER LIABILITIES
At December 31, other liabilities consisted of the following:
[Download Table]
1998 1997
---- ----
Accrued long-term interest..... $3,210,000 $2,372,000
Deferred compensation.......... 285,000 378,000
---------- ----------
$3,495,000 $2,750,000
========== ==========
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain of its offices and automobiles under operating
leases. The Company does not consider its future annual minimum payments under
these leases to be material. In November 1996, the remaining operating lease
obligations of the Company's former manufacturing facility were transferred to
the purchaser of the
46
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
facility. Lease expense under all operating leases totaled $866,000, $725,000,
and $3,423,000 in 1998, 1997, and 1996, respectively.
RELATED PARTY
In August 1992, Cephalon exclusively licensed to Cephalon Clinical
Partners, L.P. (the "Partnership") rights to manufacture and market
MYOTROPHIN(R) (mecasermin) Injection ("MYOTROPHIN Injection" or "MYOTROPHIN")
for human therapeutic use within the United States, Canada and Europe (the
"Territory") Through a concurrent offering of 900 limited partnership interests,
the Partnership raised approximately $38,714,000 in net proceeds. In August
1995, the Company purchased 67 limited partnership interests and recorded the
acquisition cost as in-process research and development expense in accordance
with SFAS No. 2 "Accounting for Research and Development Costs." A total of 27
1/2 limited partnership interests were canceled following default on payments
due to the Partnership. There are currently 805 1/2 limited partnership
interests held by third parties.
The Company is performing the development and clinical testing of
MYOTROPHIN on behalf of the Partnership and the Company's costs incurred to
develop MYOTROPHIN in the Territory were reimbursed by the Partnership to the
extent of its available funds and subject each year to the Partnership
Development Agreement budget for that year. Late in 1995, the Partnership
depleted all of its available funding and will not provide further funding of
MYOTROPHIN development costs to the Company. The amount of additional funding
required for further development will be determined by the Partnership's general
partner in advance of each quarter, and each quarter, the Company will have the
right, but not the obligation, to contribute such funds.
In exchange for the exclusive license to MYOTROPHIN, Cephalon is obligated
to make royalty payments equal to 10.1% of MYOTROPHIN sales and a payment of
approximately $16,000,000 (the "Milestone Payment") that is to be made if
MYOTROPHIN receives regulatory approval in the United States or certain other
countries within the Territory. The Company has the option to pay the Milestone
Payment in cash, common stock, or a combination thereof.
The Company has a contractual option to purchase all of the limited
partnership interests in the Partnership (the "Purchase Option"). To exercise
the Purchase Option, Cephalon is required to make an advance payment of
$40,275,000 in cash or, at Cephalon's election, $42,369,000 in shares of the
Company's Common Stock, valued at the market price at the time the Purchase
Option is exercised. The Purchase Option will become exercisable for a 45-day
period commencing on the date which is the earlier of (a) the date which is the
later of (i) the last day of the first month in which the Partnership shall have
received Interim License payments equal to fifteen percent (15%) of the limited
partners' capital contributions (excluding the Milestone Payment), and (ii) the
last day of the 24th full month after the date of the Company's first commercial
sale, if any, of MYOTROPHIN within the Territory that generates a payment to the
Partnership, and (b) the last day of the 48th full month after the date of such
first commercial sale, if any, in the Territory. In addition to the advance
payment, the exercise of the Purchase Option requires the Company to make future
payments to the former limited partners for a period of eleven years after
exercise at a royalty rate of 10.1% (reducing to 5.0% after a specified return
is earned by the former limited partners) of MYOTROPHIN sales in the Territory,
provided that royalties on MYOTROPHIN sales in Europe will only be paid to the
extent necessary to meet specified sales targets. If the Company does not
exercise the Purchase Option prior to its expiration date the Interim License
will terminate and all development and marketing rights to MYOTROPHIN in the
Territory would revert to the Partnership, which may commercialize MYOTROPHIN
itself or license or assign its rights to a third party. The Company would not
receive any benefits from any such commercialization, license or assignment of
rights.
The current general partner of the Partnership is a wholly-owned subsidiary
of the Company, which owns 1% of the Partnership. The board of directors of the
Partnership is 50% controlled by a third-party investor. The
47
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
general partner cannot adversely modify the economic terms of the Partnership
without a vote of the limited partners. The general partner may be removed at
any time by a vote of the limited partners. The obligations of the general
partner include enforcing agreements entered into by the Partnership,
prosecuting and defending the intellectual property owned by the Partnership and
entering into loan agreements and other transactions on behalf of the
Partnership. No such borrowings, commitments, or obligations are outstanding.
The January 1994 collaboration between the Company and Chiron Corporation
("Chiron") is subject to the rights of the Partnership. The Company is solely
responsible for making any royalty and milestone payments owed to the
Partnership and is responsible for funding the Purchase Option if it exercises
the option.
LEGAL PROCEEDINGS
The Company, a current director and officer, and a former officer have been
named as defendants in a number of civil actions filed in the U.S. District
Court for the Eastern District of Pennsylvania, which have been consolidated
into a single class action. The plaintiff class is comprised of those persons
and entities who purchased Cephalon common stock, or traded in options to buy or
sell Cephalon common stock, during the period June 12, 1995 through and
including June 7, 1996. Plaintiffs seek to hold defendants liable for stock
trading losses that stem from alleged violations of the U.S. securities laws and
alleged common law negligent misrepresentation. More specifically, plaintiffs
have alleged that statements by the Company and the named defendants relating to
the results of certain clinical studies of MYOTROPHIN were misleading. A
judgment in this matter could materially exceed the coverage which may be
available under its directors' and officers' liability insurance. The Company is
vigorously defending this lawsuit and believes that there are valid defenses
against the claims, but the defense of the action is expensive, and the costs of
defense will reduce the available insurance coverage that might otherwise be
available to satisfy the claims. In an effort to resolve this dispute, in
January 1999 the Company engaged a mediator to initiate a non-binding mediation
process and commenced discussions with counsel for the lead plaintiffs. At this
time, the Company is not able to determine with any certainty the outcome of
this action or its potential liability.
Due to the Company's involvement in promoting STADOL NS(R) (butorphanol
tartrate) Nasal Spray, a product of Bristol-Myers Squibb, the Company is a co-
defendant in a product liability action brought against BMS. Although the
Company cannot predict with certainty the outcome of this litigation, it
believes that any expenses or damages that are incurred will be paid by BMS
under the indemnification provisions of the co-promotion agreement. As such, the
Company does not believe that these actions will have a negative effect on the
Company's financial condition or results of operations.
8. STOCKHOLDERS' EQUITY
EQUITY COMPENSATION PLANS
The Company has established the Stock Option Plan and the Equity
Compensation Plan for its employees, directors and certain other individuals.
All grants and terms are authorized by the Compensation Committee of the
Company's Board of Directors. The Company may grant either non-qualified or
incentive stock options under both plans, and may also grant restricted stock
awards under the Equity Compensation Plan. The options and restricted stock
awards generally become exercisable or vested ratably over four years from the
grant date and the options must be exercised within ten years of the grant date.
48
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following tables summarize the aggregate option activity under both plans:
[Enlarge/Download Table]
1998 1997 1996
------------------- -------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Outstanding, January 1, 3,518,258 $13.96 3,181,020 $14.07 2,942,697 $17.72
Granted 1,009,000 8.18 873,520 12.94 583,835 19.27
Exercised (57,379) 10.21 (223,493) 8.27 (140,574) 7.83
Canceled (435,580) 16.20 (312,789) 19.16 (204,938) 19.83
--------- ------ --------- ------ --------- ------
Outstanding, December 31, 4,034,299 $12.42 3,518,258 $13.96 3,181,020 $14.07
========= ====== ========= ====== ========= ======
Exercisable at end of year 2,279,718 $13.31 1,961,945 $12.93 1,722,378 $11.88
Weighted average fair value of $ 4.75 $ 7.67 $11.48
options granted during the year
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICE OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
----------------------- ------- ---------------- -------------- ------- --------------
$ .30 - $ 9.00 1,651,060 7.9 years $ 7.49 722,825 $ 7.12
$ 9.01 - $14.00 1,167,761 6.8 $11.24 645,904 $11.31
$14.01 - $31.00 1,215,478 6.0 $20.26 910,989 $19.64
--------- ---------
4,034,299 7.0 $12.42 2,279,718 $13.31
========= =========
At December 31, 1998, 569,012 shares were available for future grants under
the plans.
During 1998, 1997 and 1996, the Company received proceeds of $410,000,
$2,205,000 and $1,127,000, respectively, from the exercise of stock options.
The following table summarizes restricted stock award activity for the
years ended December 31:
[Download Table]
RESTRICTED STOCK AWARDS
---------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Outstanding, January 1, 237,825 190,700 140,000
Granted 142,450 113,450 85,700
Vested (77,100) (54,325) (35,000)
Canceled (9,400) (12,000) --
---------- ---------- ----------
Outstanding, December 31, 283,775 237,825 190,700
Compensation expense recognized $1,494,000 $1,679,000 $2,073,000
49
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Effective in 1996, Cephalon adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation." As permitted under SFAS 123, the Company applies
APB No. 25 and related interpretations. All options granted under the plans to
date have been with exercise prices equal to the fair market value of the stock
on the date of grant. Accordingly, under APB No. 25, no compensation expense for
employees has been recognized for its stock-based compensation plans other than
for its restricted stock awards.
If the Company had elected to recognize compensation cost based on the fair
value of the options as prescribed by SFAS 123, pro forma loss and loss per
share amounts would have been reflected as set forth below:
[Download Table]
1998 1997 1996
---- ---- ----
As reported
Loss $(55,407,000) $(60,419,000) $(53,285,000)
Basic and diluted loss per share $ (1.95) $ (2.36) $ (2.19)
Pro forma
Loss $(60,659,000) $(62,315,000) $(58,885,000)
Basic and diluted loss per share $ (2.13) $ (2.43) $ (2.42)
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts since SFAS 123 does not apply to awards prior to
1995, and additional awards in future years are anticipated.
The fair value of the options granted during 1998, 1997 and 1996 were
estimated on the date of grant using the Black-Scholes option-pricing model
based on the following assumptions:
[Download Table]
1998 1997 1996
---- ---- ----
Risk free interest rate 5.23% 6.35% 6.11%
Expected life 6 years 6 years 6 years
Expected volatility 56% 56% 56%
Expected dividend yield 0% 0% 0%
QUALIFIED SAVINGS AND INVESTMENT PLAN
The Company has 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 the Company in cash or a
combination of cash and shares of the Company's common stock. For the years
1998, 1997 and 1996, the Company contribution was 100% of the first 6% of
employee salaries contributed in the ratio of 50% cash and 50% Company stock.
The Company contributed $1,155,000, $1,090,000, and $1,106,000 in cash and
common stock to the plan for the years 1998, 1997, and 1996, respectively.
WARRANTS AND OTHER OPTIONS
In April 1997, the Company issued warrants to purchase 84,000 shares of the
Company's common stock at an exercise price of $24.77 per share to the placement
agent in connection with the private placement of the Company's senior
convertible notes (see Note 5).
In February 1994, the Company issued to Chiron a warrant to purchase
750,000 shares of common stock with an exercise price of $18.50 per share.
50
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In August 1992, the Company and Cephalon Clinical Partners, L.P. completed
a private placement of 900 units. Each unit consists of a limited partnership
interest in the Partnership and warrants to purchase 4,500 shares of the
Company's common stock, resulting in the aggregate issuance of warrants to
purchase 4,050,000 shares of common stock. In connection with the offering,
including the sale of a Class B limited partnership interest, the Company issued
warrants to purchase an additional 144,000 shares of common stock.
At December 31, 1998, warrants to purchase shares of the Company's common
stock were outstanding as follows:
[Download Table]
NUMBER OF SHARES
ISSUABLE UPON EXERCISE EXERCISE PRICE
OF WARRANTS EXPIRATION DATE PER SHARE
----------- --------------- ---------
1,661,277 August 31, 1999 $ 13.82
352,900 August 31, 1999 $ 13.70
17,963 August 31, 1999 $ 11.77
750,000 February 8, 2002 $ 18.50
84,000 April 7, 2000 $ 24.77
---------
2,886,140
=========
During 1998, no warrants were exercised. In 1997, 102,004 warrants were
exercised for an aggregate exercise price of $1,183,000.
In exchange for 490,000 shares of common stock, in May 1997, the Company
acquired options from Swiss Bank Corporation ("SBC") to purchase 2,500,000
shares of the Company's common stock. The options expired unexercised. The
transaction related to the options was recorded in stockholders' equity.
PREFERRED SHARE PURCHASE RIGHTS
In November 1993, the Board of Directors of the Company declared a dividend
distribution of one right ("Right") for each outstanding share of common stock.
In addition, a Right attaches to and trades with each new issue of the Company's
common stock. Each Right entitles each registered holder, upon the occurrence of
certain events, to purchase from the Company a unit consisting of one one-
hundredth of a share (a "Unit") of the Series A Junior Participating Preferred
Stock of the Company (the "Preferred Shares"), or a combination of securities
and assets of equivalent value, at a purchase price of $90.00 per Unit, subject
to adjustment.
9. REVENUES
At December 31, revenues consisted of the following:
[Download Table]
1998 1997 1996
---- ---- ----
Commercial collaborations.................... $5,598,000 $ 5,228,000 $ 4,305,000
Research and development collaborations....... 9,085,000 17,912,000 17,061,000
Other......................................... 972,000 -- --
COMMERCIAL COLLABORATIONS
Cephalon has entered into several agreements under which its sales
organization markets the proprietary products of third parties. The Company
focuses their sales efforts on neurologists and other neurological specialists.
Under these agreements, the Company receives payments generally for achievement
of the stipulated sales activity and performance targets, and may also be
responsible for payment of fees to the third party
51
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
collaborator and funding promotional activities. In the United States, Cephalon
is promoting and marketing STADOL NS(R) (butorphanol tartrate) for Bristol-Myers
Squibb Company. In France, Cephalon is promoting and marketing APOKINON(R)
(apomorphine hydrochloride) for Laboratoire Aguettant S.A. The agreement with
Medtronic Inc. to co-promote Intrathecal Baclofen Thererapy (ITB(TM)) will
terminate pursuant to its terms as of April 29, 1999.
RESEARCH AND DEVELOPMENT COLLABORATIONS
The Company has entered into several collaborative research and development
agreements under which the Company is reimbursed generally for its research
efforts, product supply, development milestones and license fees. Under these
agreements, the Company may also be responsible for the payment of milestone and
license fee payments to its collaborators.
Under a collaborative agreement with TAP, the Company performs research and
development for which it is compensated quarterly by TAP for both internal and
external expenses. Under collaborative agreements with Kyowa Hakko, the Company
is reimbursed for its cost to supply MYOTROPHIN in Japanese clinical trials, the
achievement of certain milestones and certain expenditures related to the
Company's K252a research and development program.
10. INCOME TAXES
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $174,000,000, that will begin to
expire in 2003. The net operating loss carryforwards differ from the accumulated
deficit principally due to differences in the recognition of certain research
and development expenses for financial and federal income tax reporting.
The amount of net operating loss carryforwards which can be utilized in any
one period will be limited by federal income tax regulations since a cumulative
change in ownership of more than 50% occurred within a three year period. The
Company does not believe that such limitation will have a material adverse
impact on the utilization of its carryforwards.
Significant components of the Company's deferred tax assets for federal and
state income taxes as of December 31, are as follows:
[Enlarge/Download Table]
1998 1997
---- ----
Net operating loss carryforwards ..................... $ 59,240,000 $ 54,051,000
Capitalized research and development expenditures .... 32,357,000 16,478,000
Other--net ........................................... 9,300,000 6,657,000
------------- ------------
Total deferred tax assets ............................ 100,897,000 77,186,000
Valuation allowance for deferred tax assets .......... (100,897,000) (77,186,000)
------------- ------------
Net deferred tax assets .............................. $ -- $ --
============= ============
A valuation allowance was established for 100% of the deferred tax assets
as realization of the tax benefits is not assured.
11. SUBSEQUENT EVENT
On February 25, 1999, the Company completed a debt offering totaling
$30,000,000, raised through the private sale of revenue-sharing notes (the
"Notes"). The notes are repayable by the Company in cash in February 2002. The
Notes are secured by the Company's U.S. rights to PROVIGIL (the "Pledged
Assets") and bear an annual interest rate of 11%. Investors in the
52
CEPHALON, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Notes also will receive a royalty of 6% on U.S. sales of PROVIGIL for up to five
years. The Company has the right to redeem the Notes at a premium prior to
maturity, which would reduce the royalty period to four years and may extend the
maturity and the royalty by one year under certain circumstances. The Notes
contain a number of covenants including a requirement to maintain a minimum
level of cash and investments equal to $40,000,000 during 1999 and $30,000,000
thereafter as long as the principal remains outstanding. If the Company fails to
maintain such cash balances or violates the other covenants, the holders of the
Notes can declare a default and increase the royalty percentage to 25% of U.S.
PROVIGIL sales and, if the default is not cured within one year, can accelerate
the due date of the Notes and foreclose on the Pledged Assets. The holders of
the Notes can also foreclose on the Pledged Assets if the Company fails to pay
principal and interest when due. The Notes are not convertible into common
stock.
The offering also includes the issuance of five-year warrants to purchase
1,920,000 shares of the Company's common stock with an exercise price of $10.08.
The investors will forfeit 480,000 warrants if specified PROVIGIL sales levels
are achieved. In addition, the Company may redeem up to 720,000 of the remaining
warrants after three years if the market value of the Company's common stock
exceeds certain thresholds.
53
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions held by the directors and executive officers
of the Company are as follows:
[Enlarge/Download Table]
NAME Age POSITION
---- --- --------
Frank Baldino, Jr., Ph.D...... 45 Director, President and Chief Executive Officer and
founder of the Company
Bruce A. Peacock.............. 47 Director, Executive Vice President, Chief Operating
Officer and Treasurer
William P. Egan(1)............ 54 Director
Robert J. Feeney, Ph.D.(2).... 73 Director
Martyn D. Greenacre(1)........ 57 Director
Kevin E. Moley(1)............. 52 Director
Horst Witzel, Dr.-Ing.(2)..... 71 Director
Jeffry L. Vaught, Ph.D........ 48 President, Research and Development
J. Kevin Buchi................ 43 Senior Vice President, Finance and Chief Financial Officer
Peter E. Grebow, Ph.D......... 52 Senior Vice President, Worldwide Business Development
Earl W. Henry, M.D............ 51 Senior Vice President, Worldwide Clinical Research and
Regulatory Affairs
John E. Osborn................ 41 Senior Vice President, General Counsel and Secretary
(1) Members of the Audit Committee of the Board of Directors.
(2) Members of the Stock Option and Compensation Committee of the Board of
Directors.
All directors hold office until the next annual meeting of the stockholders
of the Company and until their successors are elected and qualified or until
their earlier resignation or removal.
All executive officers are elected annually 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, the founder of the Company, has served as President, Chief
Executive Officer and a director since its inception. Dr. Baldino received his
Ph.D. degree from Temple University and holds several adjunct academic
appointments. Dr. Baldino currently serves as a director of ViroPharma, Inc., a
biopharmaceutical company, First Consulting Group, Inc., which provides
consulting services for information processing, and Pharmacopeia, Inc., a
developer of proprietary technology platforms for pharmaceutical companies.
54
Mr. Peacock has served as a director, Executive Vice President and Chief
Operating Officer since February 1994. For the previous two years, Mr. Peacock
served as Executive Vice President and Chief Financial Officer and Treasurer of
the Company. From 1982 to January 1992, Mr. Peacock was employed by Centocor,
Inc., a biopharmaceutical company, most recently as Senior Vice President, Chief
Financial Officer and Treasurer. Mr. Peacock holds a B.A. degree from Villanova
University and is a Certified Public Accountant.
Mr. Egan was elected to the Board of Directors in 1988. Since 1979, Mr.
Egan has served as President of Burr, Egan, Deleage & Co., a venture capital
company. He also is a general partner of ALTA Communications VI, L.P., and ALTA
Communications VII, L.P., both venture capital firms.
Dr. Feeney was elected to the Board of Directors in 1988. Since October
1987, Dr. Feeney has served as a general partner of Hambrecht & Quist Life
Science Technology Fund, a life sciences venture capital fund affiliated with
Hambrecht & Quist Incorporated. For 37 years prior thereto, Dr. Feeney was
employed at Pfizer Inc., a pharmaceutical company, and last served as its Vice
President of Licensing and Development. Dr. Feeney currently serves as a
director of QLT PhotoTherapeutics Inc., a Canadian biotechnology company.
Mr. Greenacre was appointed to the Board of Directors in October 1992. Mr.
Greenacre has been President, Chief Executive Officer and Director of Delsys
Pharmaceutical Corp. since June 1997. From 1993 to 1996, Mr. Greenacre served
with Zynaxis Inc., a biopharmaceutical company, as President, Chief Executive
Officer and a director. From 1989 to 1992, Mr. Greenacre served as Chairman
Europe, SmithKline Beecham Pharmaceuticals. He joined SmithKline & French, the
predecessor to SmithKline Beecham, in 1973 where he held positions of increasing
responsibility in commercial operations and management. Mr. Greenacre currently
serves as a director of Creative Biomolecules, Inc., a biotechnology company,
and Genset s.a., a human genome sciences company.
Mr. Moley was appointed to the Board of Directors in 1994. Mr. Moley has
been Chairman of the Board of Patient Care Dynamics since November 1998. From
January 1996 to February 1998, Mr. Moley was President and CEO of Integrated
Medical Systems, where he had served as a director since 1994. From February
1993 to December 1995, Mr. Moley was Senior Vice President of PCS Health
Systems, a provider of prescription management services. From 1989 to 1992 Mr.
Moley served in the Bush administration as an Assistant Secretary of the U.S.
Department of Health and Human Services ("HHS"), and in 1992 and 1993 as the
Deputy Secretary of HHS. Mr. Moley also serves as a director of Merge
Technologies, Inc., a medical imaging software company, and Pfymatrix, Inc., a
physician practice management company.
Dr. Witzel was appointed to the Board of Directors in January 1991. From
1986 until his retirement in 1989, Dr. Witzel served as the Chairman of the
Board of Executive Directors of Schering AG, a German pharmaceutical company
and, prior to 1986, was a member of the Board of Executive Directors in charge
of Production and Technology. Dr. Witzel currently serves as a director of The
Liposome Company, Inc., a biotechnology company.
Dr. Vaught has headed the Company'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 the Company, Dr. Vaught
served as CNS Research Assistant Director for the R.W.J. Pharmaceutical Research
Institute, a subsidiary of the pharmaceutical and consumer products company
Johnson & Johnson, and CNS Therapeutic Team Leader for Johnson & Johnson sector
management from 1990 to 1991. Dr. Vaught received his Ph.D. degree from the
University of Minnesota.
Mr. Buchi joined the Company as Controller in March 1991 and held several
financial positions with the Company prior to being appointed Senior Vice
President, Finance 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 M.M. degree from the J.L. Kellogg
Graduate School of Management, Northwestern University in 1982 and is a
Certified Public Accountant.
Dr. Grebow joined the Company in January 1991 and was Senior Vice
President, Drug Development prior to his current position as Senior Vice
President, Worldwide Business Development. From 1988 to 1990, Dr. Grebow
55
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.
Dr. Henry joined the Company in August 1997 as Vice President, Clinical
Operations, and was appointed Senior Vice President, Worldwide Clinical Research
and Regulatory Affairs in October 1998. Prior to Cephalon, Dr. Henry served as
Vice President, Clinical Research for Guilford Pharmaceuticals. From 1992 to
1995, he was Executive Director, Clinical Research at Sandoz, Inc. and spent
five years at Pfizer Central Research. Dr. Henry received his doctor of medicine
degree from the University of Chicago and completed his clinical training in
neurology and neuropathology at Harvard Medical School, where he held a faculty
appointment.
Mr. Osborn joined the Company in March 1997 and has served as Senior Vice
President, General Counsel and Secretary of the Company since January 1999. He
was appointed Senior Vice President of the Company in September 1998, and prior
to that served as Vice President, Legal Affairs. From 1992 to March 1997, Mr.
Osborn was employed by The DuPont Merck Pharmaceutical Company, most recently as
Vice President, Associate General Counsel and Assistant Secretary. From 1989 to
1992, he served as special assistant to the legal adviser at the U.S. Department
of State. Prior to that, he was associated with the law firms of Hale and Dorr,
Boston and Dechert Price & Rhoads, Philadelphia. 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.
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 the Company's definitive proxy statement for the 1999 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 the Company's definitive proxy statement for the 1999 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 the Company's definitive proxy statement for the 1999 annual meeting of
stockholders.
56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following is a list of the consolidated financial statements of the
Company and its subsidiaries and supplementary data included in this report
under Item 8:
Report of Independent Public Accountants.
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
SCHEDULES
All schedules 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, 1998, the Company filed a
Current Report on Form 8-K on December 28, 1998 announcing approval from the
U.S. Food and Drug Administration to market PROVIGIL(R) (modafinil) Tablets for
the treatment of excessive daytime sleepiness associated with narcolepsy.
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 which 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.
[Enlarge/Download Table]
EXHIBIT
NO.
--
3.1 Restated Certificate of Incorporation, as amended. (Exhibit 3.1)(19)
3.2 Bylaws of the Registrant, as amended. (Exhibit 3.1)(19)
4.1 Specimen copy of stock certificate for shares of Common Stock of the Registrant (Exhibit
4.1)(10).
4.2 Amended and Restated Rights Agreement, dated as of January 1, 1999, between Cephalon, Inc. and
StockTrans, Inc. as Rights Agent (Exhibit 1) (22).
*4.3(a) Form of Notc Purchase Agreement dated as of February 24, 1999 by and
between Cephalon and Investor.
*4.3(b) Form of Revenue Sharing Senior Secured Note due 2002 dated March
1, 1999. (21)
*4.3(c) Form of Class A Warrant.
*4.3(d) Form of Class B Warrant.
57
[Enlarge/Download Table]
EXHIBIT
NO.
--
*4.3(e) Security Agreement dated March 1, 1999 between Cephalon, Inc. and Delta Opportunity Fund,
Ltd., as collateral agent.
*4.3(f) Patent and Trademark Agreement dated March 1,1999 between Cephalon, Inc. and Delta
Opportunity Fund, Ltd., as collateral agent.
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)(20).
10.4(b) Letter agreement dated March 6, 1995 amending License Agreement between Cephalon, Inc. and
Kyowa Hakko Kogyo Co., Ltd. (Exhibit 10.4(6))(14)(20).
10.5(a) Supply Agreement, dated January 20, 1993, between Cephalon, Inc. and Laboratoire L. Lafon
(Exhibit 10.1)(7)(20).
10.5(b) License Agreement, dated January 20, 1993, between Cephalon, Inc. and Laboratoire L. Lafon
(Exhibit 10.2)(7)(20).
10.5(c) Trademark Agreement, dated January 20, 1993, between Cephalon, Inc. and Genelco S.A.
(Exhibit 10.3)(7)(20).
10.5(d) Amendment to License Agreement and Supply Agreement, dated July 21, 1993, between
Cephalon, Inc. and Laboratoire L. Lafon (Exhibit 10.1)(10)(11).
10.5(e) Amendment to Trademark Agreement, dated July 21, 1993, between Cephalon, Inc. and
Genelco S.A. (Exhibit 10.2)(11)(20).
10.5(f) Amendment No. 3 to License Agreement dated June 8, 1995, between Cephalon, Inc. and
Laboratoire L. Lafon (Exhibit 99.2)(15).
10.5(g) Amendment No. 4 to License Agreement and Supply Agreement dated August 23, 1995,
between Cephalon, Inc. and Laboratoire L. Lafon (Exhibit 10.5(g))(17)(20).
*10.5(h) Amendment No. 5 to License Agreement and Supply Agreement dated January 21, 1998 between
Cephalon, Inc. and Laboratoire L. Lafon. (21)
*10.5(i) Amendment No. 6 to License Agreement and Supply Agreement dated February 2, 1998 between
Cephalon, Inc. and Laboratoire L. Lafon. (21)
*10.5(j) Amendment No. 3 to Trademark Agreement dated January 21, 1998 between Cephalon, Inc. and Genelco
S.A. (21)
*10.5(k) Amendment No. 4 to Trademark Agreement dated February 9, 1998 between Cephalon, Inc. and Genelco
S.A. (21)
58
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EXHIBIT
No.
--
+10.6(a) Cephalon, Inc. Amended and Restated 1987 Stock Option Plan (Exhibit 10.7)(4).
+10.6(b) Cephalon, Inc. Equity Compensation Plan (Exhibit 10.6(b))(17).
+10.6(c) Cephalon, Inc. Non-Qualified Deferred Compensation Plan (Exhibit 10.6(c))(10).
10.7 Form of Note Purchase Agreement, dated as of January 15, 1997, between Cephalon, Inc. and
the several purchasers of Cephalon's Senior Convertible Notes, without exhibits (10.1)(18).
10.8(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).
10.8(b) Amended and Restated Product Development Agreement, dated as of August 11, 1992, by and
between the Registrant and Cephalon Clinical Partners, L.P. (Exhibit 10.2)(6)(20).
10.8(c) Purchase Agreement, dated as of August 11, 1992, by and between the Registrant and each of
the limited partners of Cephalon Clinical Partners, L.P. (Exhibit 10.3)(6)(20).
10.8(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).
10.8(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).
10.8(f) Incentive Warrant to purchase 115,050 shares of Common Stock of the Registrant issued to
PaineWebber Incorporated (Exhibit 10.6)(6).
10.8(g) Fund Warrant to purchase 19,950 shares of Common Stock of the Registrant issued to
PaineWebber R&D Partners III, L.P. (Exhibit 10.7)(6).
10.8(h) Pledge Agreement, dated as of August 11, 1992, by and between Cephalon Clinical Partners, L.P.
and the Registrant (Exhibit 10.8)(6).
10.8(i) Promissory Note, dated as of August 11, 1992, issued by Cephalon Clinical Partners, L.P. to the
Registrant (Exhibit 10.9)(6).
10.8(j) 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).
10.9 Supply, Distribution and License Agreement, dated as of July 27, 1993, by and between Kyowa
Hakko Kogyo Co., Ltd. and Cephalon, Inc. (Exhibit 10.3)(11)(20).
10.10(a) Agreement between Cephalon, Inc. and Chiron Corporation dated as of January 7, 1994
(Exhibit 10.1)(12)(20).
10.10(b) Letter agreement dated January 13, 1995 amending Agreement between Cephalon, Inc. and
Chiron Corporation (Exhibit 10.12(b))(14).
10.10(c) Letter agreement dated May 23, 1995 amending Agreement between Cephalon, Inc. and Chiron
Corporation (17)(20).
59
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Exhibit
No.
--
10.11(a) Agreement between Cephalon, Inc. and TAP Holdings Inc. (formerly TAP Pharmaceuticals
Inc.) dated as of May 17, 1994 (Exhibit 99.2)(13)(20).
10.11(b) Amendment dated June 28, 1996 amending Agreement between Cephalon, Inc. and TAP
Holdings Inc. (Exhibit 10.13(b))(19)(21)
*10.12 Toll Manufacturing and Packaging Agreement dated February 24, 1998 between Cephalon, Inc. and
Circa Pharmaceuticals, Inc. (21)
*21 Subsidiaries of Cephalon, Inc.
*23.1 Consent of Arthur Andersen LLP.
*24 Power of Attorney (included on the signature page to this Form 10-K Report).
*27 Financial Data Schedule
* 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 from 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 Registration Statement on Form S-3 (Registration
No. 333-20321) filed on January 24, 1997.
(19) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
(20) 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.
(21) 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.
(22) Filed as an Exhibit to the Company's Form 8-A/A (12G) filed on January 20,
1999.
60
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: March 4, 1999 Cephalon, Inc.
By: /s/ Frank Baldino, Jr., Ph.D.
---------------------------------------
Frank Baldino, Jr., Ph.D.
President 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. or Bruce A. Peacock, and each of them acting alone, 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.
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SIGNATURE TITLE DATE
--------- ----- ----
By: /s/ Frank Baldino, Jr., Ph.D. President, Chief Executive Officer March 4, 1999
------------------------------ and Director
Frank Baldino, Jr., Ph.D. (Principal executive officer)
By: /s/ Bruce A. Peacock Executive Vice President, March 4, 1999
------------------------------
Bruce A. Peacock Chief Operating Officer and Director
By: /s/ J. Kevin Buchi Sr. Vice President, Finance March 4, 1999
------------------------------
J. Kevin Buchi and Chief Financial Officer
(Principal financial and accounting officer)
By: /s/ William P. Egan Director March 4, 1999
------------------------------
William P. Egan
By: /s/ Robert J. Feeney, Ph.D. Director March 4, 1999
------------------------------
Robert J. Feeney, Ph.D.
By: /s/ Martyn D. Greenacre Director March 4, 1999
------------------------------
Martyn D. Greenacre
By: /s/ Kevin E. Moley Director March 4, 1999
-------------------------------
Kevin E. Moley
By: /s/ Horst Witzel, Dr.-Ing. Director March 4, 1999
------------------------------
Horst Witzel, Dr.-Ing
61
Dates Referenced Herein and Documents Incorporated by Reference
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