-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B/IFR2PxDHWftpVzZqbJF+zvl16swZdfnIpvw4LITa9HwZhRGrA7aNHuidYNS+x2 RPp/q64wlMMKbqzqdDPZXQ== 0001005150-03-000719.txt : 20030331 0001005150-03-000719.hdr.sgml : 20030331 20030331170150 ACCESSION NUMBER: 0001005150-03-000719 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CELGENE CORP /DE/ CENTRAL INDEX KEY: 0000816284 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 222711928 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-16132 FILM NUMBER: 03631740 BUSINESS ADDRESS: STREET 1: 7 POWDER HORN DR CITY: WARREN STATE: NJ ZIP: 07059 BUSINESS PHONE: 7322711001 MAIL ADDRESS: STREET 1: 7 POWDER HORN DRIVE STREET 2: P O BOX 4914 CITY: WARREN STATE: NJ ZIP: 07059 10-K 1 form10k.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 2002 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the transition period from ___________ to ___________ Commission File No. 0-16132 CELGENE CORPORATION ------------------- (Exact name of registrant as specified in its charter) Delaware 22-2711928 ------------------------------------ -------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification) incorporation or organization) 7 Powder Horn Drive 07059 Warren, New Jersey ---------- ------------------------------------- (Zip Code) (Address of principal executive offices)
(732) 271-1001 ----------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- Indicate by check mark whether the registrant is an accelerated filer (as defined in 12b-2 of the Act). Yes X No --- The aggregate market value of voting stock held by non-affiliates of the registrant on June 28, 2002, the last business day of the registrant's most recently completed second quarter, was $1,135,431,360, based on the last reported sale price of the registrant's Common Stock on the NASDAQ National Market on that date. There were 80,448,475 shares of Common Stock outstanding as of March 1, 2003. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- The registrant intends to file a definitive proxy statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended December 31, 2002. The proxy statement is incorporated herein by reference into the following parts of the Form 10K: Part III, Item 10, Directors and Executive Officers of the Registrant; Part III, Item 11, Executive Compensation; Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management (except for that portion of Item 12 relating to Equity Compensation Plan Information); Part III, Item 13, Certain Relationships and Related Transactions; Part III, Item 15, Principal Accountant Fees and Services In addition, the portion of Item 5 in Part II relating to Equity Compensation Plan Information is cross-referenced to Part III, Item 12, of this Annual Report on Form 10-K. ================================================================================ CELGENE CORPORATION ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
ITEM NO. PAGE - ----------- ----- Part I 1. Business ......................................................... 1 2. Properties ....................................................... 32 3. Legal Proceedings ................................................ 33 4. Submission of Matters to a Vote of Security Holders .............. 33 Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters .............................................. 34 6. Selected Consolidated Financial Data ............................. 35 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .............................. 36 7a. Quantitative and Qualitative Disclosures About Market Risk ............................................................. 43 8. Financial Statements and Supplementary Data ...................... 44 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............................. 44 Part III 10. Directors and Executive Officers of the Registrant ............... 45 11. Executive Compensation ........................................... 45 12. Security Ownership of Certain Beneficial Owners and Management ....................................................... 45 13. Certain Relationships and Related Transactions ................... 46 14. Controls and Procedures .......................................... 46 15. Principal Accountant Fees and Services ........................... 46 Part IV 16. Exhibits, Financial Statements, and Reports on Form 8-K .......... 47 Signatures ....................................................... 50
i ITEM 1. BUSINESS We are a fully-integrated biopharmaceutical company, incorporated in 1986 as a Delaware corporation. We are primarily engaged in the discovery, development and commercialization of novel therapies designed to treat cancer and immunological diseases through regulation of cellular, genomic and proteomic targets. We had total revenues of $135.7 million in 2002 and a net loss of $100.0 million, which included a charge to operations of $32.2 million attributable to a litigation settlement and related agreements and $55.7 million related to an acquired in-process research and development charge in connection with the acquisition of Anthrogenesis Corp. We had an accumulated deficit of $322.4 million at December 31, 2002 and have since our inception in 1986 financed our working capital requirements primarily through product sales, public and private sales of our equity securities and debt, income earned on the investment of the proceeds from the sale of such securities and revenues from research contracts and license payments. We have built a highly integrated discovery, development and commercialization platform for drug and cell-based therapies that enables the company to both create and retain significant value within its therapeutic franchise areas of cancer and immunological diseases. This target-to-therapeutic platform integrates both small molecule and cell-based therapies and spans the key functions required to generate a large and diverse pipeline of new drug and cell therapy candidates, including: (i) cell biology, genomics, proteomics and informatics technologies for identifying and validating clinically important therapeutic targets; (ii) high throughput screening systems combined with diverse and focused compound libraries for discovering new drug leads; (iii) computational and medicinal chemistry for optimizing drug candidates; (iv) in vitro and in vivo models of disease for preclinical evaluation of drug efficacy and safety; (v) a clinical and regulatory organization highly experienced in the development of pharmaceutical agents; and (vi) an approximately 160-person sales and marketing organization. The parallel development of chemotherapeutic and biotherapeutic agents may allow us to provide physicians/clinicians with a more comprehensive and integrated set of therapeutic solutions for managing complex human diseases such as cancer and immuno-related diseases. We have three major commercial-stage programs: o THALOMID(Reg. TM) (THALIDOMIDE), is approved in the United States for the treatment of acute cutaneous manifestations of moderate to severe erythema nodosum leprosum, or ENL, and as maintenance therapy to prevent and suppress cutaneous manifestation recurrences. ENL, a complication of leprosy, is a chronic bacterial disease. We distribute THALOMID(Reg. TM) in the United States through our commercial organization. Working with the FDA, we developed a novel comprehensive education and distribution program, the "System for Thalidomide Education and Prescribing Safety," or S.T.E.P.S.(Reg. TM), that is designed to support the safe and appropriate use of THALOMID(Reg. TM). We also intend to seek marketing approval for THALOMID(Reg. TM) for the treatment of early-stage multiple myeloma and metastatic renal cell carcinoma. o We have a major collaboration with Novartis Pharma AG concerning the entire Ritalin(Reg. TM) family of drugs. We developed Focalin(TM) (d-MPH), the chirally pure version of Ritalin(Reg. TM), that is approved for the treatment of attention deficit disorder and attention deficit hyperactivity disorder, or ADD/ADHD, in school-age children. The use of chirally pure compounds, such as Focalin(TM), can result in significant clinical benefits. Many non-chirally pure pharmaceuticals contain two configurations, known as isomers, which are mirror images of each other. Generally these isomers interact differently with their biological targets causing one isomer to have a beneficial effect and the other isomer to have either no effect or potentially undesirable side effects. In April 2000, we granted Novartis an exclusive license (except Canada) for the development and marketing of Focalin(TM) in return for substantial milestone payments and royalties on Focalin(TM) and the entire Ritalin(Reg. TM) family of drugs. In 2002, Novartis launched Focalin(TM) and Ritalin(Reg. TM) LA, the long-acting version of Ritalin(Reg. TM), in the United States. We have retained the exclusive commercial rights to Focalin(TM) for oncology-related disorders such as cognitive dysfunction associated with chemotherapy. o CELLULAR THERAPEUTICS. In 2002 we acquired Anthrogenesis Corp., a privately held biotherapeutics company pioneering the recovery of stem cells from human placental tissue that now operates as 1 Celgene Cellular Therapeutics, our wholly owned subsidiary. Celgene Cellular Therapeutics' proprietary technology allows for the procurement of large quantities of high-potential stem cells from human placental tissue. Celgene Cellular Therapeutics has developed proprietary methods for collecting, processing and storing placental stem cells and is developing three main business units: stem cell banking for transplantation, private stem cell banking and the development of biomaterials for organ and tissue repair. Our preclinical and clinical-stage pipeline of new drug candidates and cell therapies is highlighted by seven classes of small molecule, orally administered therapeutic agents designed to selectively regulate disease-associated genes and proteins: o IMMUNOMODULATORY DRUGS (IMIDS(TM)). IMiDs(TM) are novel small molecule, orally available compounds that modulate the immune system. We have advanced two IMiDs(TM), REVIMID(TM) (CC-5013) and ACTIMID(TM) (CC-4047), into clinical trials in cancer and inflammatory diseases. We recently initiated two pivotal programs for REVIMID(TM) in multiple myeloma and metastatic melanoma that consist of multi-center, controlled, double-blind trials conducted in the United States and internationally. In addition, REVIMID(TM) is also being evaluated in myelodysplastic syndromes, glioblastoma and serious inflammatory diseases. ACTIMID(TM), a second class of IMiDs(TM), is being tested in a Phase I/II clinical trial in refractory multiple myeloma. Interim data from this trial demonstrated that ACTIMID(TM) has anti-tumor activity in multiple myeloma and has a manageable toxicity profile. ACTIMID(TM) and REVIMID(TM) have different activity profiles that may be better suited for different disease types. A third IMiD(TM) is currently undergoing preclinical efficacy and safety evaluation. The IMiD(TM) class of drug candidates is covered by a comprehensive intellectual property estate of U.S. and foreign issued patents and pending patent applications including composition-of-matter and use patents. o SELECTIVE CYTOKINE INHIBITORY DRUGS (SELCIDS(TM)). SelCIDs(TM) are novel small molecule, orally available modulators of the phosphodiesterase type form 4 (PDE 4) target that inhibit tumor necrosis factor-alpha, or TNF-, and interleukin-1 , or IL-1, cytokines that have been linked to the onset and progression of inflammatory diseases and potentially cancer. Our lead SelCID(TM), CC-1088, completed a Phase I/II trial in patients with Crohn's disease and demonstrated anti-inflammatory activity. CC-1088 is also being studied as a potential treatment for myelodysplastic syndromes in a Phase II clinical trial. A second SelCID(TM), CC-7085, was well- tolerated in a Phase I trial and a third, more potent SelCID(TM), CC-1004, is expected to begin clinical trials in 2003. o BENZOPYRANS. Our first compound from our San Diego Research Division to enter the clinic, CC-8490, completed a Phase I safety trial and was well-tolerated in healthy human volunteers. CC-8490 demonstrated anti-proliferative effects and the ability to induce apoptosis in preclinical models of cancer. We plan to initiate a Phase I/II study of CC-8490 in glioblastoma later in 2003. We have a Collaborative Research and Development Agreement with the National Cancer Institute for this group of compounds. o SELECTIVE ESTROGEN RECEPTOR MODULATORS (SERMS). SERMs are compounds that mimic the positive effects of estrogen while blocking the hormone's negative effects. Estrogen is a hormone that has a broad spectrum of effects on tissues in both women and men. Although the hormone's biological effects are often beneficial, estrogen is also a potent growth factor in breast and other reproductive tissues that can cause or contribute to cancer. For cancer indications, our SERMs are designed to block certain harmful stimulatory effects of estrogen and other factors targeted by these agents. In treating osteoporosis, our SERMs are designed to mimic the positive effects of estrogen by inhibiting bone loss and providing potential cardiovascular protection in pre- and post-menopausal women, while avoiding some of estrogen's adverse effects such as increased risk of breast and uterine cancer. We have a Collaborative Research and License Agreement with Novartis to discover and develop SERMs for the treatment and prevention of osteoporosis. o KINASE INHIBITORS. Our kinase inhibitors include c-Jun N-terminal kinase, or JNK, and nuclear factor kappa beta, or NF (Kappa Beta), inhibitors. Kinases are regulatory proteins that control cell growth, diffentiation and survival/death by transmitting biological signals from a cell's exterior 2 environment to its nucleus, where genes that maintain health and genes that cause disease are turned on and off in response to these signals. Kinase inhibitors bind to and block the activity of gene-regulating kinases, such as JNK and NF-(Kappa Beta), thereby inhibiting the ability of kinase proteins to turn on specific genes that cause or contribute to disease. We have a major JNK drug discovery and development program, as well as a comprehensive patent estate covering JNK and other important kinases. o TUBULIN INHIBITORS. The newest class of compounds that we have developed is the tubulin inhibitors. This novel class of anti-proliferative compounds contains multiple drug candidates that have numerous anti-cancer mechanisms. In preclinical models, our proprietary tubulin inhibitors have demonstrated activity against drug resistant cancer cells, inhibition of inflammatory cytokines and anti-angiogenic activity. o LIGASE MODULATORS. Ubiquitin ligases are important molecules that control key cellular functions by maintaining appropriate levels and types of proteins within cells. Ubiquitin-mediated protein modulation regulates a broad range of cellular processes including cell proliferation, differentiation and survival/death. When disease-preventing proteins, such as tumor suppressor proteins, are inappropriately removed or disease-causing proteins such as tumorgenic proteins are not properly eliminated from cells, abnormalities in cellular functions may occur and cause diseases such as cancer and inflammation. Our novel ubiquitin ligases modulate key cell signaling proteins and are accessible targets for developing selective small molecule drugs to treat cancer and inflammatory diseases. Based on this data, we are developing a growing portfolio of small molecule modulators of potential proprietary E3 ligases. We are establishing a leading intellectual property estate in the emerging field of ubiquitin ligase-biogenetic activities and mediated protein turnover that includes thirty-eight potentially proprietary ligase targets. 3 CELGENE PRODUCT OVERVIEW The target disease indications and the development and commercial status of THALOMID(Reg. TM), Focalin(TM) and our drug candidates currently under development are outlined in the following table:
PRODUCT DISEASE INDICATION COLLABORATOR STATUS - --------------------- ----------------------- -------------------- -------------------------------- THALOMID(Reg. TM) ENL Marketed. Multiple Myeloma Phase III trials ongoing. Additional trials ongoing and planned. Renal Cancer Phase II/III trials ongoing and planned. MDS Phase III trial ongoing. Colorectal Cancer Pharmacia Phase II trials ongoing. Inflammatory Diseases Phase II trials ongoing and planned. IMiDs(TM) REVIMID(TM) Multiple Myeloma Phase II/III trials ongoing. Additional trials planned. Malignant Metastatic Phase II/III trials ongoing. Melanoma Additional trials planned. MDS Phase II trials ongoing. Additional registration studies planned. Solid Tumor Cancers Phase I/II trials ongoing and expanded. Additional trials planned. Inflammatory Diseases Phase I/II trials ongoing and planned. ACTIMID(TM) Multiple Myeloma Phase I/II trial ongoing. Prostate Cancer Phase I/II trials planned. SelCIDs(TM) CC-1088 Crohn's Disease Phase II trial completed. MDS Phase II trial ongoing. CC-7085 Inflammatory Diseases Phase I trial completed. CC-1004 Inflammatory Diseases Phase I/II trials planned. BENZOPYRANS CC-8490 Cancer Phase I trial completed. Additional trials planned. SERMs SERM(alpha) Osteoporosis Novartis Pharma AG Preclinical studies ongoing. KINASE INHIBITORS JNK CC-401 Cancer/Inflammatory Diseases Phase I trials completed. Additional trials planned. IKK-2 Cancer/Inflammatory Serono SA Diseases Preclinical studies ongoing. P38/MEK Cancer/Inflammatory Diseases Drug discovery ongoing. TUBULIN INHIBITORS CC-5079 Cancer Preclinical studies ongoing. CC-4089 Cancer Preclinical studies ongoing. LIGASES Cancer/Inflammatory Diseases Drug discovery ongoing. FOCALIN(TM) ADD/ADHD Novartis Pharma AG Marketed. Chemotherapy-induced fatigue and Cognitive Phase II trial ongoing. Dysfunction RITALIN(Reg. TM) LA ADD/ADHD Novartis Pharma AG Marketed. FOCALIN(TM) LA ADD/ADHD Novartis Pharma AG Trials planned.
4 Clinical trials are typically conducted in three sequential phases, although the phases may overlap. o PHASE I CLINICAL TRIALS If the FDA allows a request to initiate clinical investigations to become effective, Phase I human clinical trials can begin. These tests usually involve a small number of healthy volunteers or patients. The tests study a drug's safety profile, and may include the safe dosage range. The Phase I clinical studies also determine how a drug is absorbed, distributed, metabolized and excreted by the body, and the duration of its action. o PHASE II CLINICAL TRIALS In Phase II clinical trials, controlled studies are conducted on a limited number of patients with the targeted disease. An initial evaluation of the drug's effectiveness on patients is performed and additional information on the drug's safety is obtained. o PHASE III CLINICAL TRIALS This phase typically includes multi-center trials and involves a larger patient population. During the Phase III clinical trials, physicians monitor patients to determine efficacy and to gather further information on safety. OVERVIEW OF GENES AND DISEASE Genes control all cellular functions responsible for maintaining human health. Gene regulation is a highly controlled process in which specific sets of genes are activated and inactivated to maintain the body's essential functions, as well as to fight disease. Genes are controlled by networks of proteins inside cells that relay biologic information through pathways from a cell's surface to its nucleus where genes are activated or inactivated in response to these signaling events. These cell signaling pathways consist of several large and distinct classes of gene regulating proteins that include transcription factors, kinases and ligases. Transcription factors are molecular switches that bind to the regions of genes that control the level and duration of gene expression and protein production. Kinases are enzymes that transmit information within cells and selectively regulate gene expression. Ligases control the levels and types of gene regulating proteins in cells. Each of these three classes of gene regulatory proteins controls multiple genes that contribute to disease. Recent advances in cellular and molecular biology have demonstrated that malfunctions in gene regulation trigger cells to produce inappropriate amounts or types of proteins that give rise to many complex human diseases. For example, over-activation of certain genes and overproduction of their protein products can cause uncontrolled proliferation of cells characteristic of cancer and inflammatory diseases. Alternatively, under-activation of critical genes and their protein products, such as tumor suppressors, also may give rise to diseases including cancer. Genomics is the large-scale identification and characterization of the genes that comprise the human genome, which is advancing drug discovery and development. The entire human genome has been sequenced, and this information is being compiled in databases. These genomic databases only provide a starting point for understanding the role of genes in disease because gene sequence data, by itself, provides limited information about a gene's relationship to a specific disease. To fully capitalize on the therapeutic potential of genomics, it is necessary to map critical gene regulating pathways and identify key proteins in these pathways that can serve as drug targets for disease therapy. Many conventional drug discovery efforts have focused on identifying compounds that have been directed toward extracellular targets -- either cell surface receptors or proteins produced and secreted by cells -- that indirectly regulate gene expression. Many of these drugs provide only symptomatic relief of disease and do not treat the molecular causes of disease. For example, standard rheumatoid arthritis therapies such as non-steroidal anti-inflammatory drugs (e.g., Ibuprofen) only relieve the symptoms of pain and inflammation. These drugs do not address the destruction of arthritic joints caused by rheumatoid arthritis. Drugs directed toward targets outside the cell also have a number of potential 5 limitations because they often control only a few of the specific sets of genes and proteins that are responsible for the onset and progression of disease and may even cause detrimental side effects due to their non-specific action. An additional limitation is that many current drugs must be injected and are not orally available. OVERVIEW OF OUR GENE AND PROTEIN-REGULATING TECHNOLOGY We have developed and integrated a large set of proprietary drug targets and drug discovery technologies to accelerate the application of genomics and proteomics to the discovery of important new classes of gene and protein-regulating drugs. To identify specific drug targets, we map gene-regulating pathways to identify proteins that control disease-associated genes. This information is then used to discover novel gene and protein-regulating drugs by applying our drug discovery engine. We believe our discovery and development capabilities provide us with a highly advanced and competitive technology platform for target and drug discovery. This engine consists of: o ADVANCED CELLULAR, MOLECULAR AND GENOMIC TECHNOLOGIES. We use information produced from human genomics initiatives to map gene-regulating pathways and identify clinically important drug targets for specific diseases. We have generated proprietary human cell lines, from multiple tissues of the body, to create in vitro models of disease and to evaluate the activity and selectivity of drug candidates. We also use functional genomics and proteomics, which is the large-scale linking of genes and their protein products to their biological functions, for mapping gene-regulating pathways and identifying disease targets for use in drug discovery. o TARGET FOCUSED HIGH THROUGHPUT SCREENING SYSTEMS AND COMPOUND LIBRARIES. We have assembled a library of distinct small molecule compounds and natural products that we screen using our proprietary biochemical and cell-based assay technologies. Our drug discovery systems are capable of determining the activity and specificity of a compound across multiple genes and proteins. o A PROPRIETARY, KINASE-FOCUSED COMPOUND LIBRARY. We have identified the active sites, or molecular locks, on a number of gene-regulating kinase targets using our extensive knowledge of the three-dimensional structures of these targets. We believe gene-regulating targets identified in the future will contain similar locks. Our kinase inhibitor library is designed to contain compounds expected to fit, like molecular keys, into these locks, enhancing our ability to identify effective inhibitors of current as well as undiscovered gene-regulating kinase targets. In addition, we design these compounds with attractive pharmaceutical properties, such as solubility, chemical stability, non-reactivity and the ability to be taken orally, which may accelerate the development of viable drug candidates. o STRUCTURE-BASED DRUG DESIGN. We use our proprietary three-dimensional models of drug targets, combined with advanced chemistry technologies, to generate drug leads and advance drug candidates into preclinical and clinical development. Our drug discovery and development programs are focused principally on cancer and inflammatory diseases in which gene dysregulation plays a major role in the onset and progression of these complex multi-genic diseases. THALOMID(Reg. TM) In July 1998, we received approval from the U.S. Food and Drug Administration to market THALOMID(Reg. TM) for the treatment of acute cutaneous manifestations of moderate to severe ENL and as maintenance therapy for prevention and suppression of cutaneous manifestation recurrences. ENL is an inflammatory complication of leprosy associated with excess TNF- production. Although leprosy is relatively rare in the United States, the disease afflicts millions worldwide. ENL occurs in about 30% of leprosy patients and is characterized by skin lesions, acute inflammation, fever and anorexia. Thalidomide was developed initially as a sedative, and was widely prescribed by doctors in Europe in the late 1950s 6 and early 1960s to pregnant women for relief of morning sickness. After severe birth defects were associated with its use, thalidomide was virtually removed from the world market. Thalidomide was later discovered to have therapeutic effects in the treatment of ENL. Although the FDA had never approved the marketing of thalidomide until 1998, the U.S. Public Health Service has dispensed the drug for the treatment of ENL for the previous 25 years. We note that thalidomide's history may limit market acceptance of THALOMID(Reg. TM). THALOMID(Reg. TM) is the first drug approved under a special "Restricted Distribution for Safety" regulation, and we launched THALOMID(Reg. TM) in late September 1998 with our patented S.T.E.P.S.(Reg. TM) program. S.T.E.P.S.(Reg. TM) is designed to support the safe and appropriate use of THALOMID(Reg. TM) and is part of the approved labeling for THALOMID(Reg. TM). In 2002, THALOMID(Reg. TM) revenue totaled $119 million. We are currently developing THALOMID(Reg. TM) for the treatment of a variety of serious diseases for which we believe there are no adequate approved therapies. THALOMID(Reg. TM) has been, or is being evaluated in more than 200 clinical trials, some sponsored by the National Cancer Institute, or NCI, as a potential therapy for cancer and inflammatory diseases. Key indications include multiple myeloma, myelodysplastic syndromes, renal cell carcinoma and colorectal cancer. Our current intent is to seek FDA approval for THALOMID(Reg. TM) in early-stage multiple myeloma patients and renal cell carcinoma patients. Our work with thalidomide was originally based on a scientific collaboration with The Rockefeller University's Laboratory of Cellular Physiology and Immunology. In the early 1990s, researchers at The Rockefeller University discovered that thalidomide is a selective modulator of TNF- and, therefore, could be of potential benefit in many serious immunological diseases, including cachexia and other AIDS-related conditions. We believe that in serious and debilitating disease states, the risk of birth defects and other potential side effects related to thalidomide is outweighed by the drug's potential clinical benefits. The Rockefeller University has granted us certain exclusive rights and licenses to manufacture, use and sell thalidomide for treating the toxicity associated with high concentrations of TNF- in septic shock, cachexia and HIV-related disease states. Subsequently, researchers at the Children's Medical Center Corporation, or CMCC, which is affiliated with Harvard University, discovered that thalidomide is anti-angiogenic and filed patents on this utility. In December 1998, we were granted an exclusive license to these patents by CMCC, some of which have not yet issued in the United States. As a result of our own applications and designations acquired from the CMCC, we now have Orphan Drug designations from the FDA for THALOMID(Reg. TM) covering primary brain malignancies, HIV-associated wasting syndrome, severe Recurrent Aphthous Stomatitis, or RAS, clinical manifestations of mycobacterial infections caused by mycobacterium tuberculosis and non-tuberculous mycobacteria, ENL, multiple myeloma, Crohn's disease and Kaposi's sarcoma. If the FDA approves any of these indications for THALOMID(Reg. TM), we will be granted a seven-year period of exclusivity during which time the FDA is prohibited, except under certain conditions, from approving another version of thalidomide for the approved indication. In November 2001, we were also granted European Orphan Drug status for THALOMID(Reg. TM) in multiple myeloma and ENL. In addition, patents related to S.T.E.P.S.(Reg. TM) provide additional protection as the S.T.E.P.S.(Reg. TM) program is included in the THALOMID(Reg. TM) label. THALOMID(Reg. TM) AND ONCOLOGY Cancer tissue stimulates the growth of blood vessels essential for tumor growth, tissue invasion and metastasis. Specifically, primary tumors are believed to remain clinically insignificant unless they can obtain nourishment from their host. Biochemically, an invasive tumor induces the production of several growth factors that cause the formation of new blood vessels, termed angiogenesis. Almost three decades ago, it was proposed that this process of tumor angiogenesis could be a promising new target of cancer therapy. Anti-angiogenic compounds were believed to work by reducing or halting remaining tumor growth, and could also be used in conjunction with more traditional chemotherapeutic agents. Thalidomide was discovered to be anti-angiogenic at the CMCC in Boston. We are currently working with the NCI and a number of clinical investigators to assess the potential of THALOMID(Reg. TM) in the treatment of various cancers. Currently, we estimate that approximately 92% of THALOMID(Reg. TM) prescriptions are in oncological indications. 7 MULTIPLE MYELOMA. Multiple myeloma is the second most common hematologic malignancy diagnosed in the United States. It is a malignant disorder of plasma cells residing in the bone marrow and is characterized by the prominent appearance of a certain monoclonal antibody, or M-protein, in the blood or urine of patients. There is a high morbidity and mortality associated with multiple myeloma that includes bone fractures, bone marrow failure and kidney failure. According to the Multiple Myeloma Research Foundation and the American Cancer Society, there are approximately 45,000 people in the United States living with multiple myeloma with over 14,000 new cases and 11,000 deaths expected this year. While current treatment regimens provide some therapeutic benefits, multiple myeloma patients continue to relapse and suffer high mortality rates. Additionally, current treatments for multiple myeloma have detrimental side effects, and there is a great need for safer and more effective alternatives. THALOMID(Reg. TM) is currently being evaluated as a potential therapy for every disease stage of multiple myeloma, including monoclonal gammopathy of uncertain significance, or MGUS, smoldering, newly diagnosed, relapsed and refractory. Several investigators at leading cancer research centers have reported data on the response rate, the median effective dose and the average duration of response for multiple myeloma patients treated with THALOMID(Reg. TM) in clinical trials. o Newly Diagnosed Multiple Myeloma. Peer-reviewed studies from MD Anderson Cancer Center and the Mayo Clinic evaluating the use of the orally administered combination of THALOMID(Reg. TM) and dexamethasone for newly diagnosed multiple myeloma were published in the Journal of Clinical Oncology. Dr. S. Vincent Rajkumar of the Mayo Clinic reported that 32 of 50 patients (64 percent) achieved a greater than 50 percent reduction in M-protein, and an additional 14 patients (28 percent) achieved a reduction in M-protein of between 25 and 50 percent. The regimen was generally well-tolerated, and the most commonly reported grade one or two adverse events were constipation, sedation, neuropathy, edema, infection and bone pain. Based on this data, we have initiated a pivotal trial for THALOMID(Reg. TM) plus dexamethasone in early-stage multiple myeloma, and we intend to seek FDA approval for THALOMID(Reg. TM) in this indication. o Relapsed and Refractory Multiple Myeloma. THALOMID(Reg. TM)'s effect on long-term survival in multiple myeloma was published in Blood in an article entitled "Extended Survival in Advanced and Refractory Multiple Myeloma After Single-agent Thalidomide: Identification of Prognostic Factors in a Phase II Study of 169 Patients." The study is a follow-up of a phase II trial of 169 advanced and refractory multiple myeloma patients with progressive disease treated with THALOMID(Reg. TM), and it extends results of 84 patients previously reported in The New England Journal of Medicine. The phase II study was initiated to evaluate the use of THALOMID(Reg. TM) in multiple myeloma patients who relapsed after high dose chemotherapy. Of the study's 169 patients, 37 percent demonstrated a 25 percent or greater reduction in myeloma protein, 30 percent demonstrated a 50 percent or greater reduction and 14 percent of patients achieved a complete or near complete response. The trial's principal investigator, Bart Barlogie, M.D., Ph.D., and researchers at the Arkansas Cancer Research Center reported that high-risk patients who received greater than or equal to 42 grams of THALOMID(Reg. TM) in a three-month period experienced higher response rates (63 percent vs. 45 percent) and longer survival time (54 percent vs. 21 percent). In addition, for the entire patient cohort, event-free survival after two years of follow-up was 20 percent, and overall survival is 48 percent. The study's most commonly reported side effects included one or more grade three toxicities. 25 percent of patients experienced events affecting the central nervous system, such as sedation and somnolence, confusion, depression and tremor. Sixteen percent of patients experienced gastrointestinal toxicities, mainly constipation. Neuropathy was seen in nine percent of patients, and less than two percent of patients developed deep vein thrombosis. These toxicities were found to be dose related. MYELODYSPLASTIC SYNDROMES. Myelodysplastic Syndromes, or MDS, are a group of conditions caused by abnormalities of the blood-forming cells in the bone marrow resulting in a shortage of blood cells and, ultimately, low blood counts. The five types of MDS are refractory anemia, refractory anemia with ringed 8 sideroblasts, refractory anemia with excess blasts, refractory anemia with excess blasts in formation and chronic myelomonocytic leukemia. According to the American Cancer Society, 14,000 new cases of MDS are diagnosed each year in the United States, with survival rates ranging from six months to five years for the different types of MDS. The first peer-reviewed study evaluating the potential use of THALOMID(Reg. TM) to treat MDS was published in the August 15, 2001 issue of Blood. The study, entitled "Thalidomide Produces Transfusion Independence in Long-standing Refractory Anemias of Patients with Myelodysplastic Syndromes," reported on 83 MDS patients treated with THALOMID(Reg. TM). This pilot study was initiated to evaluate the activity of THALOMID(Reg. TM) in either low- or high-risk patients with MDS. Patients received an initial THALOMID(Reg. TM) dose of 100 mg/day and were escalated as tolerated. Sixteen patients showed hematologic improvement with 10 patients becoming transfusion independent. Hematologic improvement was measured by increased platelets, decreased dependence on transfusions and improved erythroid series. Less than five percent of patients had grade 4 toxicity with the most commonly reported side effects being fatigue, constipation, shortness of breath, fluid retention, dizziness, rash, tingling in fingers and/or toes, fever and headache, and nausea. We have initiated a Phase III, multi-center, controlled study to further evaluate THALOMID(Reg. TM) as a potential therapy of MDS. RENAL CELL CARCINOMA. Renal cell carcinoma, the most common form of kidney cancer, is caused when cells in the lining of the renal tubule, one of the canals that make up the kidneys, undergoes cancerous changes. The American Cancer Society estimates that about 30,800 new cases of kidney cancer are diagnosed in the United States annually. About 12,100 people die from this disease annually. Unlike most other cancers, kidney cancer does not respond to chemotherapy since one of the major functions of the kidneys is to clear the body of toxins. The only approved drug treatment for metastatic kidney cancer in the United States is Interleukin-2, or IL-2. We, in partnership with Baylor Cancer Center, initiated a Phase I/II study of THALOMID(Reg. TM) in combination with IL-2 in metastatic renal cell carcinoma patients. Fifteen patients received a daily THALOMID(Reg. TM) dose of 200 mg (3 patients), 400 mg (6 patients) or 600 mg (6 patients). IL-2 was given by subcutaneous injections (7mlU/m2; days 1-4, weeks 1-4). Of the 10 evaluable patients, five experienced partial response and two experienced stable disease. Adverse effects observed with THALOMID(Reg. TM) and IL-2 were sedation, constipation, skin rash, flu-like symptoms, fluid retention, hypotension and deep vein thrombosis. Based on these and similar data, we are planning pivotal trials and intend to seek FDA marketing approval for THALOMID(Reg. TM) in metastatic renal cell carcinoma. OTHER SOLID TUMORS. In addition to renal cell carcinoma, THALOMID(Reg. TM) is also used in colorectal cancer, prostate cancer, glioblastoma and metastatic melanoma. THALOMID(Reg. TM) AND INFLAMMATORY DISEASES THALOMID(Reg. TM) has been shown to modulate the immune system response both in vitro and in vivo. Examples of such biological activities include the inhibition of TNF-, stimulation of the anti-inflammatory cytokine IL-10 and activation of T-cell functions. These types of activities could prove to have therapeutic benefit in a variety of inflammatory, infectious and autoimmune diseases. The two key areas of investigation at present involve inflammatory bowel disease and sarcoidosis, an inflammation of body tissue, which often attacks the lungs and lymph nodes, and scleroderma, a chronic inflammatory tissue disorder. S.T.E.P.S.(Reg. TM) Working with the FDA and other governmental agencies, as well as certain advocacy groups, we designed and implemented S.T.E.P.S.(Reg. TM), for the safe and appropriate use of THALOMID(Reg. TM). This proprietary program includes comprehensive physician, pharmacist and patient education. All patients are required to use contraception, and female patients of child-bearing potential are given pregnancy tests regularly. All patients are subject to other requirements, including informed consent. Physicians are 9 also required to comply with the educational, contraception counseling, informed consent and pregnancy testing and other elements of the program. Automatic refills are not permitted under the program, and each prescription may not exceed four weeks dosing. A new prescription is required each month. S.T.E.P.S.(Reg. TM) is protected by a business patent covering controlled distribution systems that register pharmacists, patients and physicians who have agreed to follow the safety program. It includes systems that track compliance and authorize each prescription based on confirmation of compliance. S.T.E.P.S.(Reg. TM) is designed as a blueprint for pharmaceutical products that offer life-saving or other important therapeutic benefits but have potentially problematic side effects. IMIDS(TM) IMiDS(TM) are novel, small molecule, orally available compounds that modulate the immune system. Data published in The Journal of Immunology demonstrated that IMiDs(TM) potently inhibit the inflammatory cytokines and growth factors such as TNF-, basic fibroblastic growth factor, or bFGF, and vascular endothelial growth factor, or VEGF, that are involved in tumor development. IMiDs(TM) were also reported in Blood to enhance T-cell proliferation, IL-2 production and apoptosis, or cell death. We have advanced two IMiDs(TM), REVIMID(TM) and ACTIMID(TM), into clinical trials in cancer and inflammatory diseases. REVIMID(TM) REVIMID(TM), our lead IMiD(TM), is an orally available compound that affects multiple cellular pathways and biological targets. We are currently evaluating REVIMID(TM) in a wide range of hematological and solid tumor cancers, as well as inflammatory diseases. We are pursuing multiple regulatory pathways for REVIMID(TM). MULTIPLE MYELOMA. Preliminary data from a Phase II trial of REVIMID(TM) in relapsed or refractory multiple myeloma demonstrate that 39 of 46 evaluable patients (85 percent) with progressive disease experienced a reduction or stabilization in their paraprotein levels (a measure of tumor burden). Importantly, five of seven patients who experienced progressive disease on REVIMID(TM) monotherapy subsequently experienced a reduction or stabilization of paraprotein levels after REVIMID(TM) plus dexamethasone combination therapy. Therefore, 44 of 46 evaluable patients (96 percent) experienced a reduction or stabilization of paraprotein levels after either REVIMID(TM) monotherapy or REVIMID(TM) plus dexamethasone combination therapy. The preliminary data from the Phase II trial is very similar to final results from a Phase I/II trial of REVIMID(TM) monotherapy in relapsed or refractory multiple myeloma that we conducted in partnership with the Dana-Farber Cancer Institute. The trial demonstrated that 17 of 24 patients (71 percent) experienced at least a 25 percent reduction in paraprotein. MYELODYSPLASTIC SYNDROMES. Myelodysplastic syndromes, or MDS, are a group of hematologic conditions that affect approximately 50,000 people in the United States. The five types of MDS are refractory anemia, refractory anemia with ringed sideroblasts, refractory anemia with excess blasts, refractory anemia with excess blasts in formation, and chronic myelomonocytic leukemia. MDS occurs when blood cells remain in an immature, or "blast", stage within the bone marrow and never develop into mature cells capable of performing their necessary functions. Eventually, the bone marrow becomes filled with blast cells until there is no room for normal cells to develop. According to the American Cancer Society, 14,000 new cases of MDS are diagnosed each year in the United States, with average/expected survival rates ranging from six months to five years for the different types of MDS. Preliminary data from a Phase I/II trial of REVIMID(TM) monotherapy in MDS indicates that 12 of 18 evaluable patients (66 percent) with MDS responded to REVIMID(TM) therapy, including five patients with deletion of chromosome 5q31-33 who all achieved a complete cytogenetic response. REVIMID(TM) demonstrated significant erythropoietic and cytogenetic remitting activity in patients with MDS during the trial. Importantly, nearly all patients who responded to REVIMID(TM) achieved 10 transfusion independence, and many patients achieved a disappearance of cytogenetic abnormalities. Based on these findings, we plan to develop a clinical program designed to achieve regulatory approval in the timeliest manner. PIVOTAL PROGRAMS. The pivotal program for REVIMID(TM) in relapsed and refractory multiple myeloma has been reviewed by the FDA through the Special Protocol Assessment Program and will be conducted in accordance with comments received from the FDA. The pivotal program for REVIMID(TM) in relapsed and refractory multiple myeloma consists of two identical multi-center, controlled, double-blind trials that will each compare 25 mg/day of REVIMID(TM) plus dexamethasone versus dexamethasone alone in over 300 patients with previously treated multiple myeloma. One trial will be conducted in the United States and the second will be conducted internationally. The endpoints are time to disease progression and overall survival. We have also initiated a pivotal program for REVIMID(TM) in refractory metastatic melanoma that is comprised of two studies that will each evaluate REVIMID(TM) in 274 patients whose disease has progressed on treatment with DTIC, IL-2, IFN- or IFN-. The primary endpoint of this program will be overall survival. The median survival for this patient population is four to six months. The first trial will be conducted in the United States and will compare two different doses of REVIMID(TM). The second trial will be conducted internationally and will compare 25 mg/day of REVIMID(TM) versus placebo. ACTIMID(TM) ACTIMID(TM), our second IMiD(TM) to enter clinical trials, is being evaluated in a Phase I/II clinical trial in refractory multiple myeloma. MULTIPLE MYELOMA. Interim data from an ongoing Phase I/II trial of ACTIMID(TM) in 18 relapsed and refractory multiple myeloma patients indicates that ACTIMID(TM) has anti-tumor activity in multiple myeloma and has an acceptable toxicity profile. All patients at all dose levels reportedly experienced an improvement in their clinical health while on ACTIMID(TM) therapy. Based on these data, we will initiate Phase II trials of ACTIMID(TM). PROSTATE CANCER. We have identified prostate cancer as the first solid tumor target indication for ACTIMID(TM), and we expect to initiate a Phase II clinical trial of ACTIMID(TM) in metastatic hormone-refractory prostate cancer in 2003. The study will evaluate the safety and preliminary efficacy of ACTIMID(TM) in patients with metastatic hormone-refractory prostate cancer. SELCIDS(TM) SelCIDs(TM) are novel, small molecule drugs that modulate TNF-|jj and other disease-causing cytokines by selectively and potently inhibiting PDE 4, an enzyme whose selective inhibition has been shown to be effective in animal models of asthma and inflammation. We believe that control of TNF- at its source, versus simple removal of circulating levels of the cytokine, may facilitate more effective therapy without immune suppression. PDE 4 inhibitors, although shown to have potential therapeutic benefit in the treatment of inflammatory diseases, have also been found to have undesirable biological activities including nausea and vomiting. Phase I trials demonstrated that our first two SelCIDs(TM) are well-tolerated, with minimal side effects. Importantly, there were no signs of nausea or vomiting. Our SelCIDs(TM) were evaluated in ferret models of asthma and vomiting in which they were found to be potent anti-inflammatory agents with minimal side effects at therapeutic dosing levels. CC-1088 CC-1088, our lead SelCID(TM), is being studied as a potential treatment for MDS and Crohn's disease in Phase II clinical trials. CC-1088 completed a Phase I/II trial in patients with Crohn's disease. We conducted the double-blind, placebo controlled, Phase I/II trial to evaluate the safety and efficacy of CC-1088 in patients with moderate to severe Crohn's disease. We reported that 6 of 11 evaluable patients (54 percent) experienced a response to either 800 mg or 1200 mg of CC-1088 that was defined by a decrease of 70 or more points in the Crohn's Disease Activity Index, or CDAI, 11 at week 12 as compared to 3 of 7 evaluable patients (43 percent) who received placebo. This trend for activity was notable since the patients in the placebo arm had significantly less disease activity at entry. The most common adverse events patients experienced were a metallic taste (71 percent) and headache (29 percent). OTHER SELCIDS(TM) Based on the Phase I/II data from CC-1088 in Crohn's disease, we will advance the SelCID(TM) program and initiate clinical trials of the more potent, chirally pure compounds, including CC-1004, in a variety of chronic inflammatory diseases. BENZOPYRANS CC-8490 Our first compound from our San Diego research division to enter the clinic, CC-8490, completed a Phase I safety trial and was well-tolerated in healthy human volunteers. CC-8490 demonstrated anti-proliferative effects and the ability to induce apoptosis in preclinical models of cancer. In partnership with the National Cancer Institute, we will initiate a Phase I/II clinical trial of CC-8490 in glioblastoma. In preclinical glioblastoma models, CC-8490 demonstrated significant anti-tumor activity. Specifically, CC-8490 has caused marked inhibition of glioma growth in in vivo animal studies and has promoted cellular apoptosis in preclinical glioblastoma models. The Phase I/II clinical study, conducted jointly with the NCI, will identify the maximum tolerated dose of CC-8490 and evaluate the preliminary efficacy of CC-8490 in patients with recurrent high-grade gliomas. SERMS Estrogen is a hormone that has a broad spectrum of effects on tissues in both women and men. Many of these biological effects are beneficial, including maintenance of bone density and cardiovascular and neurological protection. In addition to estrogen's positive effects, however, the hormone is also a potent growth factor in the breast and uterus that significantly increases the risk of cancer in women. In addition, estrogen contributes to prostate cancer in men. Given the tissue-selective expression of estrogen receptors, estrogen receptor modulators potentially can be designed to mimic the positive effects and block the negative effects of estrogen in different tissues. Drugs that modulate these receptors are termed selective estrogen receptor modulators, or SERMs. APPLICATIONS OF SERMS IN OSTEOPOROSIS. Hormone replacement therapy, or HRT, has been the standard anti-resorptive therapy to prevent bone loss in post-menopausal women. However, HRT poses a number of health risks that make it a poor choice for many women, including an increased risk for breast and uterine cancer. SERMs have been developed to overcome many of the risks associated with HRT. However, first and second generation SERMs lack the efficacy of estrogen in preventing bone loss, and are also associated with several important risks and side effects that include increased risk of endometrial cancer, hot flashes, deep vein thrombosis, vaginal bleeding and liver toxicity. We have developed non-steroidal small molecules with a novel core chemical structure compared to FDA-approved SERMs and other known SERMs in clinical development. We have an agreement with Novartis for joint development of SERMs to treat and prevent osteoporosis, which is believed to affect over 75 million people worldwide. Under the terms of this agreement, we will receive milestone payments for specific preclinical, clinical and regulatory endpoints, as well as royalties. Novartis is currently evaluating our SERMs in preclinical models for efficacy on bone tissue and safety on reproductive tissues. In 2002, Novartis selected the first preclinical candidate after testing our SERMs for the most appropriate pharmacological properties. This selection triggered a milestone payment to us. 12 KINASE INHIBITORS JNK INHIBITORS The JNK cell-signaling pathway plays a pivotal role in the onset and progression of several important human diseases. Over-activation of the JNK pathway increases expression of a broad set of disease-causing genes, including VEGF, TNF-, IL-2, gamma interferon and matrix metalloproteinases. Drugs designed to inhibit JNK have a number of potential advantages in treating complex diseases such as inflammation and cancer because of their ability to suppress a broad set of disease-causing cytokines, growth factors and tissue-destructive enzymes. Importantly, JNK is an intracellular enzyme that can be targeted with small molecule, orally administered drugs. We have an extensive intellectual property estate covering JNK genes, JNK polypeptides and proteins, expression systems for protein production, JNK screening technology, JNK targets and therapeutic uses of molecules modulating JNK activity. This patent estate includes issued U.S. patents and foreign patents through licenses with the University of California, the University of Massachusetts and our own patents. Our comprehensive patent portfolio is expected to expand further as we have various pending U.S. and foreign patent applications. We have not licensed any rights to our JNK program to date and retain exclusive worldwide rights for all disease indications. We have a major drug discovery program focused on developing small molecules to control the JNK signaling pathway, and have identified multiple series of novel JNK inhibitors. We have completed high throughput screening for JNK1, JNK2 and JNK3 inhibitors using proprietary biochemical and cell-based screens. We also have developed additional high throughput drug screens for several other drug targets in the JNK pathway, including JNKKl (MKK4) and JNKK2 (MKK7). Using our kinase-focused inhibitor library, we have identified several potent compounds that inhibit JNK1, JNK2 and JNK3 activity. In addition to significantly reducing inflammation in acute disease models, these drug leads prevent the destruction of joints in an animal model of arthritis and also demonstrate potent disease-modifying activity in an animal model of asthma. Our scientists have presented data demonstrating significant therapeutic potential of our novel JNK inhibitors in a wide range of in vivo models, including stroke, asthma, ischemia/reperfusion injury, seizure, diabetes and cancer. We are currently optimizing drug leads to improve their potency, selectivity and other pharmaceutical properties. Our first JNK inhibitor drug is expected to enter the clinic later this year, and is currently completing preclinical development studies. This drug is being developed initially for intravenous administration for the treatment of acute organ failure caused by cell death and acute inflammatory responses. We are also developing orally administered JNK inhibitors that may be beneficial for long-term treatment of chronic rheumatologic, cardiovascular, respiratory and neurodegenerative diseases, in addition to a variety of cancers. At a recent scientific meeting, we described the promising anti-cancer activity of a JNK inhibitor when administered as a combination treatment with standard chemotherapeutic drugs in an animal model of cancer. The JNK pathway controls the expression of specific sets of genes involved in cancer, including cytokines and growth factors, cell cycle regulatory proteins and apoptosis-inducing genes, genes involved in oncogenic transformation, cell-to-cell adhesion molecules, tissue destructive enzymes involved in metastasis, multi-drug resistance proteins and angiogenic factors. In summary, pharmacologic intervention of JNK represents a novel approach to treating a variety of human diseases including those caused by excessive cell proliferation and death and inflammation. We have identified different chemical classes that act as potent JNK inhibitors and are actively optimizing these compounds for clinical development. CC-401 Our first JNK inhibitor, CC-401, successfully completed a Phase I, double-blind, placebo controlled, ascending single intravenous dose study in healthy human volunteers. Based on these results, we will advance the development of our JNK program and plan to initiate Phase II trials. 13 IKK-2 The NF-(Kappa Beta) cell-signaling pathway plays a pivotal role in inflammatory disease processes by regulating cytokine genes, such as TNF-, IL-l and IL-2, along with pro-inflammatory genes that code for cyclooxygenase-2, or COX-2, and cell adhesion molecules such as ICAM-1. The NF-(Kappa Beta) cell-signaling pathway also controls the expression of specific sets of genes involved in different stages of cancer development and progression, such as cell adhesion molecules and proteinases that facilitate tumor metastasis. In addition, NF-(Kappa Beta) regulates specific cell survival genes that make cancer cells resistant to radiation and chemotherapy. Our researchers and collaborators have identified six drug targets that regulate NF-(Kappa Beta) activation, and we have been issued four U.S. patents and, along with our collaborators, have filed related patent applications for drug targets in this pathway. Using our kinase-focused screening library, we have identified several small molecule drug leads that selectively inhibit the IKK-2 kinase target in the NF-(Kappa Beta) gene regulation pathway and have optimized certain pharmaceutical properties of these drug leads. Our scientists presented preclinical data on CC-839, our small molecule NF-(Kappa Beta) inhibitor. The data demonstrated that CC-839 potently regulates the expression of multiple pro-inflammatory and cell survival genes, and therefore may have broad disease-modifying effects in treating a variety of serious inflammatory diseases and cancer. Based on these results, our partner, Serono, is investigating specific therapeutic applications for CC-839 in preclinical disease models. TUBULIN INHIBITORS The newest class of compounds that we have developed is the tubulin inhibitors. This novel class of anti-proliferative compounds contains multiple drug candidates that have numerous anti-cancer mechanisms. In preclinical models, our proprietary tubulin inhibitors have demonstrated activity against drug resistant cancer cells, inhibition of inflammatory cytokines and anti-angiogenic activity. The compounds have demonstrated the ability to stop cancer cells from proliferating by impeding cell division. Preclinical models also demonstrated that the lead compound, CC-5079, and its analogs inhibit proliferation of various cancer cell lines. Multiple drug resistant, or MDR, cancer cells showed sensitivity to CC-5079 and its analogs with inhibition of TNF- production in vivo by both CC-4089 and CC-5079. In addition, CC-5079 was shown to inhibit angiogenesis in an in vitro assay and also to inhibit TNF- over-production in vitro and in vivo. We plan to aggressively develop these compounds and to fully understand their clinical potential. LIGASE MODULATORS Ubiquitin ligases are important molecules that maintain normal cellular functions by selectively marking unwanted or damaged proteins for degradation within cells. Ubiquitin-mediated protein modulation regulates a broad range of cellular processes including cell cycle progression, immune responses and cell differentiation. When unwanted proteins are not properly removed within cells, abnormalities in cellular functions may occur and cause diseases such as cancer and inflammation. There are three classes of ubiquitin ligases (E1, E2 and E3), of which the E3 ubiquitin ligases have the most substrate specificity. Our scientists have demonstrated that E3 ubiquitin ligases are attractive drug targets because they are amenable to high throughput screening and structural determination. We are establishing a significant intellectual property estate in the emerging field of ubiquitin ligase-dependent protein degradation that includes 38 proprietary E3 ligases. Our scientists have demonstrated that the Company's novel ubiquitin ligases modulate key cell signaling proteins and are accessible targets for developing selective small molecule drugs to treat cancer and inflammatory diseases. Based on this data, we are developing a growing portfolio of small molecule modulators of proprietary E3 ligases. Our scientists presented preclinical data on a small molecule inhibitor of the p27 E3 ubiquitin ligase, which regulates key signaling pathways involved in the onset and progression of cancer. The data demonstrate that treatment of cancer cells with inhibitors of the p27 E3 ubiquitin ligase dramatically 14 elevate the level of the p27 tumor suppressor protein, leading to cell cycle arrest and subsequent tumor cell death. The data further indicate that the p27 E3 ubiquitin ligase promotes apoptosis in tamoxifen-resistant breast cancer cells and multiple myeloma cells. CELGRO Celgro, our wholly owned subsidiary, is engaged in developing and applying proprietary biocatalytic synthesis technologies to the production of chirally pure agrochemicals and pharmaceuticals, and intermediates for their production, including for our own products. Many human pharmaceuticals and agrochemicals exist in two or more different three-dimensional configurations that are identical in chemical structure and are mirror images of each other. These conformations, known as enantiomers, or isomers, generally interact differently with biological targets. In clinical applications, one isomer may result in the desired therapeutic effect by stimulating or inhibiting a targeted biological function, while another isomer may be inactive or cause undesirable side effects. In contrast to racemic compositions, which contain two or more isomers, the use of chirally pure pharmaceuticals, containing only one isomer, can result in significant clinical benefits such as reduced toxicity and increased efficacy. In agrochemical applications, the use of chirally pure chemicals can result in a substantially reduced volume of product required to achieve the desired benefit, thereby potentially lowering manufacturing costs and reducing the environmental burden as compared with racemic chemicals. The production of chirally pure products is essential to current pharmaceutical and agrochemical development practices. Conventional chemical synthesis generally produces racemic mixtures of chemicals containing multiple isomeric forms, including the desired or active form, as well as undesired, inactive, competitive or toxic forms. The use of enzymes as specific, three-dimensional catalysts, referred to as "biocatalysis", can result in the exclusive production of the desired, active form. To commercialize this potential, we have developed unique and powerful capabilities for optimizing enzymatic reactions to be more specific, productive, cheaper and robust enough for use in conventional fine chemical operations. Since 1998, through our Celgro subsidiary, we have focused our biocatalysis technology development and application efforts on the agrochemical industry. We have demonstrated that our chiral technology can be enabling in agrochemical applications because it has the potential to significantly lower manufacturing costs compared to conventional technologies and other chiral technologies. Agrochemicals are highly price sensitive and, therefore, a process that produces chirally pure products at significant cost savings could be in substantial demand. Compared to our biocatalytic process, conventional technologies require more raw materials and greater plant capacity to produce the same effective quantity of product, while other chiral technologies require specialized equipment, more expensive chiral agents, more raw material and greater capacity for handling hazardous wastes produced in the separation process. In recent years, we have entered into technology development and application agreements with large agrochemical companies. Our approach has been to collaborate with these companies to adapt our biocatalytic technology to the manufacture of chirally pure versions of their existing crop protection products, whether sold originally as racemic mixtures or in chirally pure form, and then to license and transfer the technology to these companies in exchange for royalties. During the development phases of these collaborations, we typically receive combinations of development and milestone payments, exclusivity fees and minimum royalty payments. Celgro has also developed patents and methods for chirally pure versions of existing agrochemicals on its own, and is seeking to enter into license agreements with third parties to manufacture and sell the agrochemicals. On January 9, 1998, we had concluded the sale of our chiral intermediates production business to Cambrex Corporation. Under the terms of this sale, we had agreed not to compete in the pharmaceuticals fine chemicals business for a period of five years, which ended on January 9, 2003. During the past five years, while developing agrochemical applications, Celgro has also developed and patented new 15 biocatalytic technologies that are outside the technology license to Cambrex, and are of use for pharmaceutical as well as agrochemical applications. Accordingly, in 2003, Celgro is also engaging in discussions with pharmaceutical customers to find technology applications and license opportunities under these new patents. In addition, Celgro is looking at Celgene pharmaceutical candidates that have chiral intermediates to provide cost-effective production methods, and to strengthen the competitive and proprietary positions of these products. ADD/ADHD PROGRAM We have a major collaboration with Novartis concerning the entire Ritalin(Reg. TM) family of drugs. We developed Focalin(TM) (d-MPH), the chirally pure version of Ritalin(Reg. TM), that is approved for the treatment of attention deficit disorder and attention deficit hyperactivity disorder, or ADD/ADHD, in school-age children. The use of chirally pure compounds, such as Focalin(TM), can result in significant clinical benefits. Many non-chirally pure pharmaceuticals contain two configurations, known as isomers, which are mirror images of each other. Generally these isomers interact differently with their biological targets causing one isomer to have a beneficial effect and the other isomer to have either no effect or potentially undesirable side effects. In April 2000, we granted Novartis an exclusive license (except Canada) for the development and marketing of Focalin(TM) in return for substantial milestone payments and royalties on Focalin(TM) and the entire Ritalin(Reg. TM) family of drugs. In 2002, Novartis launched Focalin(TM) and Ritalin(Reg. TM) LA, the long-acting version of Ritalin(Reg. TM), in the United States. We have retained the exclusive commercial rights to Focalin(TM) for oncology-related disorders, such as cognitive dysfunction associated with chemotherapy. In Canada, we have licensed d-MPH to Biovail Corporation, which purchased $2.5 million dollars worth of our stock and will pay us licensing fees, milestone payments and royalties. In July 2001, Biovail Corporation filed a new drug submission with Canada's Therapeutic Products Program, or TPP, for d-MPH. (TPP is the governmental agency in Canada responsible for reviewing and approving or denying a New Drug Submission, which is an application filed with TPP for the purpose of review and possible subsequent marketing approval.) We have been issued patents for the use of d-MPH for the treatment of ADD/ADHD, and for the once-a-day administration of methlyphenidate drugs in a controlled or pulsed release formulation that includes both the chirally pure d-MPH and the racemic form. In addition, we have been issued process patents covering the manufacturing process for the active substance. ANTHROGENESIS In December 2002, we acquired Anthrogenesis Corp., a privately held biotherapeutics company pioneering the recovery of stem cells from human placental tissue that now operates as Celgene Cellular Therapeutics, a wholly owned subsidiary of Celgene. Celgene Cellular Therapeutics' proprietary technology allows for the procurement of large quantities of high-potential stem cells from human placental tissue. Celgene Cellular Therapeutics has developed proprietary methods for collecting, processing and storing placental stem cells and has organized three main business units: stem cell banking for transplantation, private stem cell banking and the development of biomaterials for organ and tissue repair. PLACENTAL STEM CELL TECHNOLOGY Celgene Cellular Therapeutics delivers stem cell therapies that are produced from renewable human placental sources and are initially directed toward major, unmet medical needs in the cancer field. Primarily, we will focus on blood cancers such as leukemias, lymphomas and myelomas. We have developed proprietary methods for collecting, processing and storing stem cells and other valuable biomaterials from human placental tissue, currently an unused byproduct of over four million annual U.S. births. Hematopoietic stem cells derived from this source can be immediately applied in bone marrow transplants for numerous cancer indications, in conjunction with chemotherapy and radiation. We are also developing and producing stem cell products to treat immunological diseases and inherited metabolic disorders, and for regenerative medicine applications such as cardiovascular, neurological and musculo-skeletal indications. 16 We believe placental stem cells may have clinically beneficial features and advantages, compared with stem cells derived from alternative sources, such as human embryo and fetal tissue, adult bone marrow and other tissues, and umbilical cord blood. In addition, placental stem cells are an economical and socially acceptable alternative to using stem cells derived from human embryos and fetal tissue in human therapy. These beneficial features may broaden the use of cell therapies as a standard of care for debilitating and life-threatening diseases and injuries. They potentially include the ability to: (i) produce multiple transplant units from a single placental source that meet and exceed current adult dosing standards, without using in vitro cell expansion techniques; (ii) source multiple stem cell phenotypes from a single placental source, including pluripotent, multipotent and hematopoietic stem cells, which are capable of developing into many differentiated cell types; (iii) achieve durable, long-term cell engraftment due to increased immune compatibility and the younger age of placental stem cells, compared with stem cells derived from adult sources, or non-adult cells that have been subjected to an interactive expansion regimen; and (iv) procure, process and bank a large inventory of transplant units meeting adult dose standards specific to the intended application and immediately available worldwide to physicians and patients. This would avoid additional time, cost and invasive medical procedures currently required to match donor transplant units for patients at critical, immediately life-threatening stages of disease. We believe these combined features can potentially overcome many current obstacles limiting commercialization of new stem cell therapies and can improve patient therapy. We have filed extensive patent applications covering the production and therapeutic use of placenta-derived stem cells and biomaterials. Materials and techniques developed by Celgene Cellular Therapeutics are already in use in its autologous (those stem cells that come directly from the individual using them) and allogeneic (those stem cells matched from distinct donors) stem cell banking programs. With our scientific collaborators, we have demonstrated the human placenta to be an abundant source for biotherapies, including stem cell transplant products, regenerative medicines and biomaterials for organ and tissue repair. We are leveraging the placenta as a large and renewable source of human stem cells and biomaterials, and currently focus on: (i) producing a large, rapidly accessible bank of matched adult-dose stem cells for patients with acute-stage, life-threatening diseases who require immediate treatment and cannot risk additional time identifying matched donors; (ii) delivering stem cell therapies for cancer indications where bone marrow transplant is an accepted but underutilized treatment due to inadequate or unavailable supply of suitably matched, transplantable stem cells, specifically blood cancers such as leukemias, lymphomas and myelomas; (iii) extending stem cell therapy to other diseases that have demonstrated clinical benefits, notably solid tumor cancers and certain immunological diseases and inherited metabolic disorders; and (iv) generating near-term revenue by co-developing and licensing regenerative therapies and biomaterials to commercial partners for organ and tissue repair. Celgene Cellular Therapeutics operates a state-licensed blood bank, is an FDA-registered cell therapy company and is recognized as one of the leading providers of stem cell banking services to private clients. In addition, we are planning human clinical studies of optimized, high-dose placental stem cell units in bone marrow transplants for oncology and hematology indications, to compare the distinct clinical benefits of placental stem cells with umbilical cord blood and adult stem cells currently used for these disease indications. We have also initiated preclinical studies in cardiac, neurologic and orthopedic regeneration to demonstrate the pluripotency, potential clinical efficacy and versatility of these cells in preparation for future clinical investigative programs. 17 PATENTS AND PROPRIETARY TECHNOLOGY Patents and other proprietary rights are important to our business. Thus, it is our policy to seek patent protection for our inventions, and also to rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. We own or control more than 125 U.S. patents, and have over 110 additional U.S. patent applications pending. Our U.S. patents include patents for a method of delivering a teratogenic drug to a patient who is not pregnant and an improvement thereof. We also have patent applications pending which are directed to this improvement, and are seeking worldwide protection for this improvement. While we have a policy to seek worldwide patent protection for our inventions, we have foreign patent rights corresponding to most but not all of our United States patents. Although THALOMID(Reg. TM) is approved for use associated with ENL, we do not currently have, nor do we intend to seek, patent protection relating to the use of THALOMID(Reg. TM) to treat ENL. Our San Diego-based research division seeks patent protection for molecular targets and drug discovery technologies, as well as therapeutic and diagnostic products and processes. Specifically, our San Diego research division has developed proprietary technology for use in molecular target discovery, regulatory pathway identification, assay design and pharmaceutical product candidates. As of 2003, and included in those described above, our San Diego research division owned, in whole or in part, 25 issued U.S. patents and had approximately 27 U.S. patent applications pending. An increasing percentage of our San Diego research division's recent patent applications have been related to potential product candidates or compounds. The division also holds licenses to dozens of U.S. patents and pending U.S. patent applications, some of which are licensed exclusively to third parties in connection with sponsored or collaborative research relationships. Celgene Cellular Therapeutics, which is our recently acquired cellular therapeutics division, seeks patent protection for the collection, processing, storage and uses of the mammalian placenta and the placental stem cells, and other biomaterials uncovered from these placenta. Our cellular therapeutics division also has sought additional patent protection for the use of placenta, their stem cells and biomaterials. As of 2003, the division owned, in whole or in part, 10 pending U.S. patent applications, and holds licenses to certain U.S. patents and pending applications, including those related to cord blood collection and storage. Under an agreement with The Rockefeller University, pursuant to which we have made a lump sum payment and issued stock options to The Rockefeller University and the inventors, we have obtained certain exclusive rights and licenses to manufacture, have manufactured, use, offer for sale and sell products that are based on compounds, which were identified in research carried out by The Rockefeller University and us, that have activity associated with TNF-. In particular, The Rockefeller University identified a method of using thalidomide and certain thalidomide-like compounds to treat certain symptoms associated with abnormal concentrations of TNF-, including those manifested in septic shock, cachexia and HIV infection. In 1995, The Rockefeller University was issued a U.S. patent which claims such methods. This U.S. patent expires in 2012 and is included in the patent rights exclusively licensed to us under the agreement with The Rockefeller University. However, The Rockefeller University did not seek corresponding patents in any other country. In August 2001, we entered into a new agreement, or the New Thalidomide Agreement, with EntreMed, Inc., Children's Medical Center Corporation and Bioventure Investments, KFT relating to patents and applications owned by CMCC, which agreement superceded several agreements already in place between CMCC, EntreMed and us. Pursuant to the New Thalidomide Agreement, CMCC directly granted to us an exclusive, worldwide, royalty-bearing license under the relevant patents and patent applications relating to thalidomide. Several U.S. patents have already issued to CMCC in this patent family; certain of these patents expire in 2014. Corresponding foreign patent applications and additional U.S. patent applications are still pending. In addition to the agreement with The Rockefeller University and the New Thalidomide Agreement, both of which relate to thalidomide, we entered into an agreement with CMCC and EntreMed in December 2002, pursuant to which we have been granted a worldwide, exclusive, royalty-bearing license 18 to certain CMCC patents and patent applications relating to thalidomide analogs, or the New Analog Agreement. The New Analog Agreement was executed in connection with the settlement of certain pending litigation between and among us, EntreMed, and the U.S. Patent and Trademark Office relating to the allowance of certain CMCC patent applications covering thalidomide analogs. These patent applications had been licensed exclusively to EntreMed in the field of thalidomide analogs. In conjunction with the settlement of these suits, we acquired equity securities in EntreMed, and EntreMed terminated its license agreements with CMCC relating to thalidomide analogs. In turn, under the New Analog Agreement, CMCC exclusively licensed to Celgene these patents and patent applications, which relate to analogs, metabolites, precursors and hydrolysis products of thalidomide, and all stereoisomers thereof. The New Analog Agreement grants us control over the prosecution and maintenance of the licensed thalidomide analog patent rights. The New Analog Agreement also grants us an option to inventions in the field of thalidomide analogs that may be developed at CMCC in the laboratory of Dr. Robert D'Amato, pursuant to the terms and conditions of a separate Sponsored Research Agreement negotiated between us and CMCC. Our success will depend, in part, on our ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties when necessary and conduct our business without infringing the proprietary rights of others. The patent positions of pharmaceutical and biotechnology firms, including ours, can be uncertain and involve complex legal and factual questions. In addition, the coverage sought in a patent application can be significantly reduced before the patent is issued. Consequently, we do not know whether any of our owned or licensed pending patent applications will result in the issuance of patents or, if any patents are issued, whether they will provide significant proprietary protection or commercial advantage, or whether they will be circumvented or infringed upon by others. There can be no assurance that additional patents will issue to us from any of our pending applications or that, if patents issue, such patents will provide us with significant proprietary protection or commercial advantage. Moreover, there can be no assurance that any of our existing patents will provide us with proprietary protection or commercial advantage. Nor can we guarantee that these patents will not be either infringed, invalidated or circumvented by others. Finally, we cannot guarantee that our patents or pending applications will not be involved in any interference proceedings before the U.S. Patent and Trademark Office. With respect to patents and patent applications we have licensed-in, there can be no assurance that additional patents will issue to any of the third parties from whom we have licensed patent rights, either with respect to thalidomide or thalidomide analogs, or that, if any new patents issue, such patents will provide us with significant proprietary protection or commercial advantage. Moreover, there can be no assurance that any of the existing licensed patents will provide us with proprietary protection or commercial advantage. Nor can we guarantee that these licensed patents will not be either infringed, invalidated or circumvented by others, or that the relevant agreements will not be terminated. Any termination of the licenses granted to Celgene by CMCC could have a material adverse effect on our business, financial condition and results of operations. Since patent applications filed in the United States on or before November 28, 2000 are maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature often lag behind actual discoveries, we cannot be certain that we, or our licensors, were the first to make the inventions covered by each of the issued patents or pending patent applications or that we, or our licensors, were the first to file patent applications for such inventions. In the event a third party has also filed a patent for any of our inventions, we, or our licensors, may have to participate in interference proceedings before the U.S. Patent and Trademark Office to determine priority of invention, which could result in the loss of a U.S. patent or loss of any opportunity to secure US. patent protection for the invention. Even if the eventual outcome is favorable to us, such interference proceedings could result in substantial cost to us. 19 We are aware of U.S. patents that have issued to third parties claiming subject matter relating to the NF-(Kappa Beta) pathway which could overlap with technology claimed in some of our pending NF-(Kappa Beta) patent applications. We believe that one or more interference proceedings may be initiated by the U.S. Patent and Trademark Office to determine priority of invention for this subject matter. While we cannot predict the outcome of any such proceedings, in the event we do not prevail, we believe that we can use alternative methods for our NF-(Kappa Beta) drug discovery program for which we have issued U.S. patents that are not claimed by the subject matter of the third party patents. We are also aware of three additional issued U.S. patents relating to the NF-(Kappa Beta) pathway. We believe that we have not infringed, and are not currently infringing, the claims of the patents. Nonetheless, we may in the future have to prove that we are not infringing these patents or we may be required to obtain licenses to one or more of these patents. However, we do not know whether such licenses will be available on commercially reasonable terms, or at all. Prosecution of patent applications and litigation to establish the validity and scope of patents, to assert patent infringement claims against others and to defend against patent infringement claims by others can be expensive and time-consuming. There can be no assurance that, in the event that claims of any of our owned or licensed patents are challenged by one or more third parties, any court or patent authority ruling on such challenge will determine that such patent claims are valid and enforceable. An adverse outcome in such litigation could cause us to lose exclusivity relating to the subject matter delineated by such patent claims and may have a material adverse effect on our business. If a third party is found to have rights covering products or processes used by us, we could be forced to cease using the products or processes covered by the disputed rights, subject to significant liabilities to such third party and/or required to license technologies from such third party. Also, different countries have different procedures for obtaining patents, and patents issued by different countries provide different degrees of protection against the use of a patented invention by others. There can be no assurance, therefore, that the issuance to us in one country of a patent covering an invention will be followed by the issuance in other countries of patents covering the same invention or that any judicial interpretation of the validity, enforceability or scope of the claims in a patent issued in one country will be similar to the judicial interpretation given to a corresponding patent issued in another country. Furthermore, even if our owned or licensed patents are determined to be valid and enforceable, there can be no assurance that competitors will not be able to design around such patents and compete with us using the resulting alternative technology. We also rely upon unpatented, proprietary and trade secret technology that we seek to protect, in part, by confidentiality agreements with our collaborative partners, employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. There can be no assurance that these agreements provide meaningful protection or that they will not be breached, that we would have adequate remedies for any such breach or that our trade secrets, proprietary know-how and technological advances will not otherwise become known to others. In addition, there can be no assurance that, despite precautions taken by us, others have not and will not obtain access to our proprietary technology or that such technology will not be found to be non-proprietary or not a trade secret. GOVERNMENTAL REGULATION Regulation by governmental authorities in the United States and other countries is a significant factor in the manufacture and marketing of pharmaceuticals and in our ongoing research and development activities. Many of our therapeutic products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical testing and clinical trials and other pre-marketing approval requirements by the FDA and regulatory authorities in other countries. In the United States, various federal and in some cases state statutes and regulations also govern or impact upon the manufacturing, safety, labeling, storage, record-keeping and marketing of such products. The lengthy process of seeking required approvals, and the continuing need for compliance with applicable statutes and regulations, require the expenditure of substantial resources. Regulatory approval, when and if obtained, may be limited in scope which may significantly limit the indicated uses for which a product may be marketed. Further, approved drugs, as well as their manufacturers, are subject to ongoing review and discovery of previously unknown problems with such products may result in restrictions on their manufacture, sale or use or in their 20 withdrawal from the market. Any failure by us, our collaborators or licensees to obtain or maintain, or any delay in obtaining, regulatory approvals could adversely affect the marketing of our products, and our ability to receive product revenue, royalty revenue or profit sharing payments. The activities required before a pharmaceutical may be marketed in the United States begin with preclinical testing not involving human subjects. Preclinical tests include laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of a product and its formulations. The results of these studies must be submitted to the FDA as part of an IND, which must be reviewed by the FDA primarily for safety considerations before proposed clinical trials in humans can begin. Typically, clinical trials involve a three-phase process. In Phase I, clinical trials are generally conducted with a small number of individuals to determine the early safety and tolerability profile and the pattern of drug distribution and metabolism within the body. If the Phase I trials are satisfactory, Phase II clinical trials are conducted with groups of patients in order to determine preliminary efficacy, dosing regimes and expanded evidence of safety. In Phase III, large-scale, multi-center, adequately powered and well-controlled comparative clinical trials are conducted with patients in an effort to provide enough data for the statistical proof of efficacy and safety required by the FDA and others. However, in some limited circumstances, Phase III trials may be modified to allow evaluation of safety and efficacy in a less regimented manner, which may allow us to rely on historical data relating to the natural course of disease in untreated patients. In some cases, as a condition of New Drug Application, or NDA, approval, confirmatory trials are required to be conducted after the FDA's approval of an NDA in order to resolve any open issues. The FDA requires monitoring of all aspects of clinical trials, and reports of all adverse events must be made to the agency, both before and after drug approval. The results of the preclinical testing and clinical trials are submitted to the FDA as part of an NDA for evaluation to determine if the product is safe and effective for approval to commence commercial sales. In responding to an NDA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not satisfy its regulatory approval criteria. When an NDA is approved, the manufacturer must employ a system for obtaining reports of experience and side effects that are associated with the drug and make appropriate submissions to the FDA. Pursuant to the Orphan Drug Act, a sponsor may request that the FDA designate a drug intended to treat a "rare disease or condition" as an "orphan drug." A rare disease or condition is defined as one which affects less than 200,000 people in the United States, or which affects more than 200,000 people, but for which the cost of development and making available the drug is not expected to be recovered from sales of the drug in the United States. Upon the approval of the first NDA for a drug designated as an orphan drug for a specified indication, the sponsor of the NDA is entitled to exclusive marketing rights in the United States for such drug for that indication for seven years. Orphan drugs may also be eligible for federal income tax credits for costs associated with the drug's development. Possible amendment of the Orphan Drug Act by the U.S. Congress and possible reinterpretation by the FDA are the subject of frequent discussion. FDA regulations reflecting certain definitions, limitations and procedures initially went into effect in January 1993 and were amended in certain respects in 1998. Therefore, there is no assurance as to the precise scope of protection that may be afforded by orphan drug status in the future or that the current level of exclusivity and tax credits will remain in effect. We have received from the FDA orphan drug approval for thalidomide for the treatment of ENL. We also have received orphan drug designations for thalidomide: for the treatment of multiple myeloma; for the treatment of HIV-associated wasting syndrome; for the treatment of the clinical manifestations of mycobacterial infection caused by mycobacterium tuberculosis and non-tuberculosis mycobacteria; for the treatment of severe Recurrent Apthous Stomatitis in severely, terminally compromised patients; and for the treatment of Crohn's disease. We also obtained orphan drug designation in Kaposi's sarcoma and primary brain malignancies as part of our agreement with CMCC. However, there can be no assurance that another company also holding orphan drug designation will not receive approval prior to us for the use of thalidomide for the treatment of one or more of these indications, other than ENL. If that were to happen, our applications for that indication could not be approved until the competing company's seven-year period of exclusivity expired. 21 Among the conditions for NDA approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures continually conform with the FDA's current Good Manufacturing Practice, or cGMP. In complying with cGMP, manufacturers must devote extensive time, money and effort in the area of production and quality control and quality assurance to maintain full technical compliance. Manufacturing facilities and company records are subject to periodic inspections by the FDA to ensure compliance. If a manufacturing facility is not in substantial compliance with these requirements, regulatory enforcement action may be taken by the FDA which may include seeking an injunction against shipment of products from the facility and recall of products previously shipped from the facility. Failure to comply with applicable FDA regulatory requirements can result in informal administrative enforcement actions such as warning letters, recalls or adverse publicity issued by the FDA or in legal actions such as seizures, injunctions, fines based on the equitable remedy of disgorgement, restitution and criminal prosecution. Steps similar to those in the United States must be undertaken in virtually every other country comprising the market for our products before any such product can be commercialized in those countries. The approval procedure and the time required for approval vary from country to country and may involve additional testing. There can be no assurance that approvals will be granted on a timely basis or at all. In addition, regulatory approval of prices is required in most countries other than the United States. There can be no assurance that the resulting prices would be sufficient to generate an acceptable return to us. COMPETITION The pharmaceutical and biotechnology industries in which we compete are each highly competitive. Our competitors include major pharmaceutical and biotechnology companies, many of which have considerably greater financial, technical and marketing resources than us. We also experience competition in the development of our products and processes from universities and other research institutions and, in some instances, compete with others in acquiring technology from such sources. Competition in the pharmaceutical industry, and specifically in the oncology and immunology areas being addressed by us, is particularly intense. Numerous pharmaceutical and biotechnology companies have extensive anit-cancer discovery and development activities. Bristol-Myers Squibb, Genentech, AstraZeneca, Millenium Pharmaceuticals, Genta, Cell therapeutics, Vertex Pharmaceuticals, IDEC Pharmaceuticals and Ilex Oncology are among the companies testing new compounds in the oncology field. The pharmaceutical and biotechnology industries have undergone, and are expected to continue to undergo, rapid and significant technological change, and competition is expected to intensify as technical advances in each field are made and become more widely known. In order to compete effectively, we will be required to continually upgrade our scientific expertise and technology, identify and retain capable management, and pursue scientifically feasible and commercially viable opportunities. Our competition will be determined in part by the indications for which our products are developed and ultimately approved by regulatory authorities. An important factor in competition will be the timing of market introduction of our or our competitors' products. Accordingly, the relative speed with which we can develop products, complete clinical trials and approval processes and supply commercial quantities of products to the market will be expected to be important competitive factors. Competition among products approved for sale will be based, among other things, on product efficacy, safety, convenience, reliability, availability, price and patent position. SIGNIFICANT ALLIANCES From time to time we enter into collaborative research and/or license agreements with other pharmaceutical companies in which in exchange for the rights to certain compounds, the partnering company will provide funding in the form of upfront payments, milestone payments or direct research funding. The following are our most significant collaborations. 22 NOVARTIS PHARMA AG We entered into an agreement with Novartis in April 2000 in which we granted to Novartis an exclusive license (excluding Canada) for the development and marketing of Focalin(TM) (d-MPH). We received a $10 million upfront payment in July 2000, a $5 million milestone payment for the acceptance of the NDA filing by the FDA in December 2000 and a $12.5 million milestone payment upon approval by the FDA to market Focalin(TM) in November 2001. We are currently selling Focalin(TM) to Novartis as well as receiving royalties on all of Novartis' Ritalin(Reg. TM) family of ADD- and ADHD-related products. NOVARTIS PHARMA AG We entered into a second collaborative agreement with Novartis in December 2000 for joint research of SERMs for the treatment and prevention of osteoporosis. We received a nonrefundable, upfront payment of $10 million, a $1 million milestone payment for the selection of the first compound to be advanced into preclinical studies and are entitled to receive additional milestone payments for specific preclinical, clinical and regulatory endpoints, as well as royalties upon commercialization of products receiving FDA and other regulatory marketing approval. The agreement was extended in December 2002 for an additional six months. MANUFACTURING THALOMID(Reg. TM) is formulated and encapsulated for us by Penn Pharmaceuticals Services Limited of Great Britain in an FDA-approved facility . Both the bulk manufacturing facility that produces the drug substance for THALOMID(Reg. TM) and the Penn facility meet FDA requirements. In certain instances, we may be required to make substantial capital expenditures to access additional manufacturing capacity. In addition, we entered into a contract with another cGMP certified bulk drug substance supplier for THALOMID(Reg. TM) in 2001. We received regulatory approval for that site in late 2001. We are actively seeking a backup manufacturer to provide additional capacity for the formulation and encapsulation of THALOMID(Reg. TM). Reformulated THALOMID(Reg. TM) capsules, introducing 100mg and 200mg strengths, were successfully launched on March 17, 2003. The bulk API (active pharmaceutical ingredient) for Focalin(TM) is manufactured and supplied by Johnson Matthey Inc. A Supply Agreement was executed in March 2003 with a second supplier, Seigfried USA Inc. The product is manufactured into tablets of different strengths and packaged by Mikart, Inc. for distribution. We are currently seeking a secondary manufacturer for tableting and packaging. INTERNATIONAL EXPANSION In November 2001, we signed agreements with Pharmion Corporation and Penn Pharmaceuticals Services Limited to expand the THALOMID(Reg. TM) franchise internationally. The strategic partnership combines Penn's FDA-compliant manufacturing capability, Pharmion's global development and marketing expertise and our extensive intellectual property. The new alliance is designed to accelerate the establishment of THALOMID(Reg. TM) as an important therapy in the international markets. Additionally, we acquired an exclusive option to purchase the branch of Penn Pharmaceutical that manufactures THALOMID(Reg. TM). The option, if exercised, would enable us to receive an imputed royalty of 36% less cost of goods on all international sales of THALOMID(Reg. TM) and to manage the manufacturing of THALOMID(Reg. TM). SALES AND COMMERCIALIZATION We have established an organization of approximately 160 persons to commercialize our products. These individuals have considerable experience in the pharmaceutical industry ,and many have experience with oncological and immunological products. We expect to expand our sales and commercialization group to support products we develop to treat oncological and immunological diseases. We intend to market and sell the products we develop for indications with accessible patient populations. For drugs with indications with larger patient populations, we may partner with other pharmaceutical companies. In addition, we are positioned to accelerate the expansion of these sales resources as appropriate to take advantage of product in-licensing and product acquisition opportunities. 23 EMPLOYEES As of March 1, 2003, we had 560 full-time employees, 289 of whom were engaged primarily in research and development activities, 161 of whom were engaged in sales and commercialization activities and the remainder of whom were engaged in executive and administrative activities. Of these employees, 201 have advanced degrees, including 105 who have doctorate degrees. We also maintain consulting arrangements with a number of scientists at various universities and other research institutions in Europe and the United States. FORWARD-LOOKING STATEMENTS Certain statements contained or incorporated by reference in this annual report are forward-looking statements concerning our business, financial condition, results of operations, economic performance and financial condition. Forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and within the meaning of Section 21E of the Securities Exchange Act of 1934 are included, for example, in the discussions about: - -- our strategy; - -- new product development or product introduction; - -- product sales, royalties and contract revenues; - -- expenses and net income; - -- our credit risk management; - -- our liquidity; - -- our asset/liability risk management; and - -- our operational and legal risks. These statements involve risks and uncertainties. Actual results may differ materially from those expressed or implied in those statements. Factors that could cause such differences include, but are not limited to, those discussed under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISK FACTORS WE HAVE A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT. We have sustained losses in each year since our incorporation in 1986. We sustained net losses of $100.0 million, which included $32.2 million attributable to litigation settlement and related agreements and $55.7 million related to an acquired in-process research and development charge in connection with the Anthrogenesis acquisition, and $1.9 million for the years ended December 31, 2002 and 2001. We had an accumulated deficit of $322.4 million at December 31, 2002. We expect to make substantial expenditures to further develop and commercialize our products. We also expect that our rate of spending will accelerate as the result of increased clinical trial costs and expenses associated with regulatory approval and commercialization of products now in development. IF WE ARE UNSUCCESSFUL IN DEVELOPING AND COMMERCIALIZING OUR PRODUCTS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED WHICH COULD IMPACT NEGATIVELY ON THE VALUE OF OUR COMMON STOCK. Many of our products and processes are in the early or mid-stages of development and will require the commitment of substantial resources, extensive research, development, preclinical testing, clinical trials, manufacturing scale-up and regulatory approval prior to being ready for sale. With the exception of Focalin(TM) and THALOMID(Reg. TM), all of our other products will require further development, clinical testing and regulatory approvals. If it becomes too expensive to sustain our present commitment of resources on a long-term basis, we will be unable to continue our necessary development. Furthermore, we cannot be certain that our clinical testing will render satisfactory results, or that we will receive 24 required regulatory approval for our products. If any of our products, even if developed and approved, cannot be successfully commercialized, our business, financial condition and results of operations could be materially adversely affected which could impact negatively on the value of our common stock. DURING THE NEXT SEVERAL YEARS, WE WILL BE VERY DEPENDENT ON THE COMMERCIAL SUCCESS OF THALOMID(Reg. TM), FOCALIN(TM) AND THE ENTIRE RITALIN(Reg. TM) PRODUCT LINE. At our present level of operations, we may not be able to attain profitability if physicians prescribe THALOMID(Reg. TM) only for patients who are diagnosed with ENL. Under current FDA regulations, we are precluded from promoting THALOMID(Reg. TM) outside this approved use. The market for the use of THALOMID(Reg. TM) in patients suffering from ENL is relatively small. We have conducted clinical studies that appear to show that THALOMID(Reg. TM) is active when used to treat disorders other than ENL, such as multiple myeloma, but we do not know whether we will succeed in receiving regulatory approval to market THALOMID(Reg. TM) for additional indications. FDA regulations place restrictions on our ability to communicate the results of additional clinical studies to patients and physicians without first obtaining approval from the FDA to expand the authorized uses for this product. In addition, if adverse experiences are reported in connection with the use of THALOMID(Reg. TM) by patients, this could undermine physician and patient comfort with the product, could limit the commercial success of the product and could even impact the acceptance of THALOMID(Reg. TM) in the ENL market. We are dependent upon royalties from Novartis Pharma AG's entire Ritalin(Reg. TM) product line as well as Focalin(TM), although we cannot directly impact their ability to successfully commercialize these products. WE FACE A RISK OF PRODUCT LIABILITY CLAIMS AND MAY NOT BE ABLE TO OBTAIN SUFFICIENT INSURANCE ON COMMERCIALLY REASONABLE TERMS OR WITH ADEQUATE COVERAGE. We may be subject to product liability or other claims based on allegations that the use of our technology or products has resulted in adverse effects, whether by participants in our clinical trials or by patients using our products. Thalidomide, when used by pregnant women, has resulted in serious birth defects. Therefore, necessary and strict precautions must be taken by physicians prescribing the drug to women with childbearing potential. These precautions may not be observed in all cases or, if observed, may not be effective. Use of thalidomide has also been associated, in a limited number of cases, with other side effects, including nerve damage. Although we have product liability insurance that we believe is appropriate, we may be unable to obtain additional coverage on commercially reasonable terms if required, or our coverage may be inadequate to protect us in the event claims are asserted against us. Our obligation to defend against or pay any product liability or other claim may be expensive and divert the efforts of our management and technical personnel. IF OUR PRODUCTS ARE NOT ACCEPTED BY THE MARKET, DEMAND FOR OUR PRODUCTS WILL DETERIORATE OR NOT MATERIALIZE AT ALL. It is necessary that our products, including THALOMID(Reg. TM) and Focalin(TM), achieve market acceptance once they receive regulatory approval, if regulatory approval is required. A number of factors render the degree of market acceptance of our products uncertain, including the extent to which we can demonstrate the products' efficacy, safety and advantages, if any, over competing products, as well as the reimbursement policies of third-party payors, such as government and private insurance plans. In particular, thalidomide, when used by pregnant women, has resulted in serious birth defects, and the negative history associated with thalidomide and birth defects may decrease the market acceptance of THALOMID(Reg. TM). In addition, the products that we are attempting to develop through our cellular therapeutics division may represent substantial departures from established treatment methods and will compete with a number of traditional drugs and therapies manufactured and marketed by major pharmaceutical companies. Furthermore, public attitudes may be influenced by claims that stem cell therapy is unsafe, and stem cell therapy may not gain the acceptance of the public or the medical community. If our products are not accepted by the market, demand for our products will deteriorate or not materialize at all. WE MAY EXPERIENCE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS. We have historically experienced, and expect to continue for the foreseeable future to experience, significant fluctuations in our quarterly operating results. These fluctuations are due to a number of 25 factors, many of which are outside our control, and may result in volatility of our stock price. Future operating results will depend on many factors, including: o demand for our products; o regulatory approvals for our products; o the timing of the introduction and market acceptance of new products by us or competing companies; o the timing and recognition of certain research and development milestones and license fees; and o our ability to control our costs. WE HAVE NO COMMERCIAL MANUFACTURING FACILITIES AND WE ARE DEPENDENT ON TWO SUPPLIERS FOR THE RAW MATERIAL AND ONE MANUFACTURER FOR THE FORMULATION AND ENCAPSULATION OF THALOMID(Reg. TM), AND ARE DEPENDENT ON TWO SUPPLIERS FOR THE RAW MATERIAL AND ONE MANUFACTURER FOR THE TABLETING AND PACKAGING OF Focalin(TM). We currently have no facilities for manufacturing any products on a commercial scale. Currently, we can obtain all of our bulk drug material for THALOMID(Reg. TM) from two suppliers, ChemSyn Laboratories, a Division of Eagle-Picher Technologies, L.L.C., and Sifavitor s.p.a., and we rely on a single manufacturer, Penn Pharmaceutical Services Limited, to formulate and encapsulate THALOMID(Reg. TM). In addition, we currently can obtain all of our bulk active pharmaceutical ingredient for Focalin(TM) from two suppliers, Johnson Matthey Inc. and Seigfried USA, Inc., and we rely on a single manufacturer, Mikart, Inc., for the packaging and tableting of Focalin(TM). Presently, we are actively seeking backups to each of Penn and Mikart. The FDA requires that all suppliers of pharmaceutical bulk material and all manufacturers of pharmaceuticals for sale in or from the United States achieve and maintain compliance with the FDA's current Good Manufacturing Practice, or cGMP, regulations and guidelines. (cGMP are regulations established by the FDA that govern the manufacture, processing, packing, storage and testing of drugs intended for human use.) If the operations of either Penn or Mikart were to become unavailable for any reason, any required FDA review and approval of the operations of an alternative could cause a delay in the manufacture of THALOMID(Reg. TM) or Focalin(TM). Although we have an option to purchase the THALOMID(Reg. TM) manufacturing operations of Penn, we intend to continue to utilize outside manufacturers if and when needed to produce our other products on a commercial scale. If our outside manufacturers do not meet our requirements for quality, quantity or timeliness, or do not achieve and maintain compliance with all applicable regulations, demand for our products or our ability to continue manufacturing such products could substantially decline, to the extent we depend on these outside manufacturers. WE HAVE LIMITED MARKETING AND DISTRIBUTION CAPABILITIES. Although we have an approximately 160-person commercialization group to support our products, we may be required to seek a corporate partner to provide marketing services with respect to our other products. Any delay in developing these resources could substantially delay or curtail the marketing of these products. We have contracted with Ivers Lee Corporation, d/b/a Sharp, a specialty distributor, to distribute THALOMID(Reg. TM). If Sharp does not perform its obligations, our ability to distribute THALOMID(Reg. TM) may be severely restricted. WE ARE DEPENDENT ON COLLABORATIONS AND LICENSES WITH THIRD PARTIES. Our ability to fully commercialize our products, if developed, may depend to some extent upon our entering into joint ventures or other arrangements with established pharmaceutical companies with the requisite experience and financial and other resources to obtain regulatory approvals and to manufacture and market such products. Our present joint ventures and licenses include an agreement with Novartis Pharma AG with respect to the joint research of SERMs, and a separate agreement wherein we have granted to Novartis an exclusive license (excluding Canada) for the development and commercialization of Focalin(TM), or d-MPH; an agreement with Biovail Corporation International, wherein we granted to 26 Biovail exclusive Canadian marketing rights for d-MPH; and agreements with Pharmion Corporation and Penn Pharmaceuticals Services Limited to expand the THALOMID(Reg. TM) franchise internationally. Our present and future arrangements may be jeopardized if any or all of the following occur: o we are not able to enter into additional joint ventures or other arrangements on acceptable terms, if at all; o our joint ventures or other arrangements do not result in a compatible work environment; o our joint ventures or other arrangements do not lead to the successful development and commercialization of any products; o we are unable to obtain or maintain proprietary rights or licenses to technology or products developed in connection with our joint ventures or other arrangements; or o we are unable to preserve the confidentiality of any proprietary rights or information developed in connection with our joint ventures or other arrangements. THE HAZARDOUS MATERIALS WE USE IN OUR RESEARCH AND DEVELOPMENT COULD RESULT IN SIGNIFICANT LIABILITIES THAT COULD EXCEED OUR INSURANCE COVERAGE AND FINANCIAL RESOURCES. We use some hazardous materials in our research and development activities. While we believe we are currently in substantial compliance with the federal, state and local laws and regulations governing the use of these materials, we cannot be certain that accidental injury or contamination will not occur. Any such accident or contamination could result in substantial liabilities, that could exceed our insurance coverage and financial resources. Additionally, the cost of compliance with environmental and safety laws and regulations may increase in the future, requiring us to expend more financial resources either in compliance or in purchasing supplemental insurance coverage. THE PHARMACEUTICAL INDUSTRY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION WHICH PRESENTS NUMEROUS RISKS TO US. The preclinical development, clinical trials, manufacturing, marketing and labeling of pharmaceuticals are all subject to extensive regulation by numerous governmental authorities and agencies in the United States and other countries. If we are delayed in receiving, or are unable to obtain at all, necessary governmental approvals, we will be unable to effectively market our products. The testing, marketing and manufacturing of our products require regulatory approval, including approval from the FDA and, in some cases, from the U.S. Environmental Protection Agency or governmental authorities outside of the United States that perform roles similar to those of the FDA and EPA. Certain of our pharmaceutical products, such as Focalin(TM), fall under the Controlled Substances Act of 1970 that requires authorization by the U.S. Drug Enforcement Agency of the U.S. Department of Justice in order to handle and distribute these products. The regulatory approval process presents several risks to us: o In general, preclinical tests and clinical trials can take many years, and require the expenditure of substantial resources, and the data obtained from these tests and trials can be susceptible to varying interpretation that could delay, limit or prevent regulatory approval. o Delays or rejections may be encountered during any stage of the regulatory process based upon the failure of the clinical or other data to demonstrate compliance with, or upon the failure of the product to meet, a regulatory agency's requirements for safety, efficacy and quality or, in the case of a product seeking an orphan drug indication, because another designee received approval first. o Requirements for approval may become more stringent due to changes in regulatory agency policy, or the adoption of new regulations or legislation. o The scope of any regulatory approval, when obtained, may significantly limit the indicated uses for which a product may be marketed and may impose significant limitations in the nature of warnings, precautions and contraindications that could materially affect the profitability of the drug. 27 o Approved drugs, as well as their manufacturers, are subject to continuing and on-going review, and discovery of previously unknown problems with these products or the failure to adhere to manufacturing or quality control requirements may result in restrictions on their manufacture, sale or use or in their withdrawal from the market. o Regulatory authorities and agencies may promulgate additional regulations restricting the sale of our existing and proposed products. o Once a product receives marketing approval, the FDA may not permit us to market that product for broader or different applications, or may not, grant us clearance with respect to separate product applications that represent extensions of our basic technology. In addition, the FDA may withdraw or modify existing clearances in a significant manner or promulgate additional regulations restricting the sale of our present or proposed products. o Our labeling and promotional activities relating to our products are regulated by the FDA and state regulatory agencies and, in some circumstances, by the Federal Trade Commission and DEA, and are subject to associated risks. If we fail to comply with FDA regulations prohibiting promotion of off-label uses and the promotion of products for which marketing clearance has not been obtained, the FDA could bring an enforcement action against us that could inhibit our marketing capabilities as well as result in penalties. In addition, stem cells intended for human use are subject to FDA regulations requiring, among other things, certain infectious disease testing. New FDA regulations anticipated in 2003 may relate to screening of potential donors and donations for certain infectious diseases and the establishment of quality controls, recordkeeping and other practices related to the manufacture of human tissue. Currently, we are required to be, and are, licensed to operate in New York and New Jersey, two of the states in which we currently collect placentas and umbilical cord blood for our allogeneic and private stem cell banking businesses. If other states adopt similar licensing requirements, we would need to obtain such licenses to continue operating. If we are delayed in receiving, or are unable to obtain at all, necessary licenses, we will be unable to provide services in those states which would impact negatively on our revenues. WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY. Our success will depend, in part, on our ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties, when necessary, and conduct our business without infringing upon the proprietary rights of others. The patent positions of pharmaceutical firms, including ours, can be uncertain and involve complex legal and factual questions. In addition, the coverage sought in a patent application may not be obtained or may be significantly reduced before the patent is issued. Consequently, if our pending applications, or a pending application that we have licensed-in from third parties, do not result in the issuance of patents or, if any patents that are issued do not provide significant proprietary protection or commercial advantage, our ability to sustain the necessary level of intellectual property upon which our success depends may be restricted. Moreover, different countries have different procedures for obtaining patents, and patents issued in different countries provide different degrees of protection against the use of a patented invention by others. Therefore, if the issuance to us or our licensor, in a given country, of a patent covering an invention is not followed by the issuance, in other countries, of patents covering the same invention, or if any judicial interpretation of the validity, enforceability or scope of the claims in a patent issued in one country is not similar to the interpretation given to the corresponding patent issued in another country, our ability to protect our intellectual property in other countries may be limited. Under the current patent laws, patent applications in the United States are maintained in secrecy from six to 18 months, and publications of discoveries in the scientific and patent literature often lag behind actual discoveries. Thus, we may discover, sometime in the future, that we, or the third parties from whom we have licensed patents or patent applications, were not the first to make the inventions covered by the patents and patent applications in which we have rights, or that such patents and patent applications were not the first to be filed on such inventions. In the event that a third party has also filed 28 a patent application for any of the inventions described in our patents or patent applications, or those we have licensed-in, we could become involved in an interference proceeding declared by the U.S. Patent and Trademark Office to determine priority of invention. Such an interference could result in the loss of an issued U.S. patent or loss of any opportunity to secure U.S. patent protection for that invention. Even if the eventual outcome is favorable to us, such interference proceedings could result in substantial cost to us. Furthermore, even if our patents, or those we have licensed-in, are issued, our competitors may still challenge the scope, validity or enforceability of our patents in court, requiring us to engage in complex, lengthy and costly litigation. Alternatively, our competitors may be able to design around such patents and compete with us using the resulting alternative technology. If any of our issued or licensed patents are infringed, we may not be successful in enforcing our intellectual property rights or defending the validity or enforceability of our issued patents. It is also possible that third-party patent applications and patents could issue with claims that cover certain aspects of the subject matter claimed in the patents owned or optioned by us or licensed to us, which may limit our ability to practice under our patents, and may impede our efforts to obtain meaningful patent protection of our own. If patents are issued to third parties that contain competitive or conflicting claims, we may be legally prohibited from pursuing research, development or commercialization of potential products or be required to obtain licenses to these patents or to develop or obtain alternative technology. We may be legally prohibited from using patented technology, may not be able to obtain any license to the patents and technologies of third parties on acceptable terms, if at all, or may not be able to obtain or develop alternative technologies. Consequently, if we cannot successfully defend against any patent infringement suit that may be brought against us by a third party, we may lose the ability to practice certain subject matter delineated by patent claims that we have exclusive rights to, whether by ownership or by license, and that may have a material adverse effect on our business. Further, we rely upon unpatented proprietary and trade secret technology that we try to protect, in part, by confidentiality agreements with our collaborative partners, employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. If these agreements are breached, we may not have adequate remedies for any such breach. Despite precautions taken by us, others may obtain access to or independently develop our proprietary technology or such technology may be found to be non-proprietary or not a trade secret. In addition, our right to practice the inventions claimed in some patents that relate to THALOMID(Reg. TM) arises under licenses granted to us by others, including The Rockefeller University and Children's Medical Center Corporation or CMCC. In addition to these patents, which relate to thalidomide, we have also licensed from CMCC certain patents relating to thalidomide analogs. In December 2002, we entered into an exclusive license agreement with CMCC and EntreMed. Inc. in connection with the settlement of certain pending litigation between and among us, EntreMed, and the U.S. Patent and Trademark Office relating to the issuance of certain CMCC patent applications covering thalidomide analogs. These patent applications had been licensed exclusively to EntreMed in the field of thalidomide analogs. In conjunction with the settlement of these suits, we acquired preferred shares and warrants which, if converted into EntreMed common shares, would constitute 49% of the outstanding shares of EntreMed, and EntreMed terminated its license agreements with CMCC relating to thalidomide analogs. In turn, CMCC exclusively licensed to us these patents and patent applications, which relate to analogs, metabolites, precursors and hydrolysis products of thalidomide, and all stereoisomers thereof. The December 2002 exclusive license to us is worldwide and royalty-bearing, and grants us complete control over the prosecution of the licensed thalidomide analog patent rights. The December 2002 agreement also grants us an option to inventions in the field of thalidomide analogs that may be developed at CMCC in the laboratory of Dr. Robert D'Amato, pursuant to the terms and conditions of a separate Sponsored Research Agreement negotiated between us and CMCC. While we believe these confidentiality and license agreements to be valid and enforceable, our rights under these agreements may not continue or disputes concerning these agreements may arise. If any of the foregoing should occur, we may be unable to rely upon our unpatented proprietary and trade secret 29 technology, or we may be unable to use the third party proprietary technology we have licensed-in, either of which may prevent or hamper us from successfully pursuing our business. THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID AND SIGNIFICANT TECHNOLOGICAL CHANGE. The pharmaceutical industry in which we operate is highly competitive and subject to rapid and significant technological change. Our present and potential competitors include major pharmaceutical and biotechnology companies, as well as specialty pharmaceutical firms, such as: o Bristol-Myers Squibb, Co., which potentially competes in clinical trials with our IMiDs(TM) and SelCIDs(TM); o Genentech Inc., which potentially competes in clinical trials with our IMiDs(TM) and SelCIDs(TM); o AstraZeneca, which potentially competes in clinical trials with our IMiDs(TM) and SelCIDs(TM); o Millennium Pharmaceuticals, which potentially competes in clinical trials with our IMiDs(TM) and SelCIDs(TM) as well as with THALOMID(Reg. TM); o Genta Inc., which potentially competes with our IMiDs(TM) and SelCIDs(TM) as well as with THALOMID(Reg. TM); o Cell Therapeutics, which potentially competes in clinical trials with our IMiDs(TM) and SelCIDs(TM) as well as with THALOMID(Reg. TM); o Vertex Pharmaceuticals Inc., which potentially competes in clinical trials with our kinase inhibitors; and o IDEC Pharmaceuticals Corporation and Ilex Oncology, Inc., both of which are generally developing drugs that address the oncology and immunology markets, although we are not aware of specific competing products. Many of these companies have considerably greater financial, technical and marketing resources than us. We also experience competition from universities and other research institutions and, in some instances, we compete with others in acquiring technology from these sources. The pharmaceutical industry has undergone, and is expected to continue to undergo, rapid and significant technological change, and we expect competition to intensify as technical advances in the field are made and become more widely known. The development of products or processes by our competitors with significant advantages over those that we are seeking to develop could cause the marketability of our products to stagnate or decline. SALES OF OUR PRODUCTS ARE DEPENDENT ON THIRD-PARTY REIMBURSEMENT. Sales of our products will depend, in part, on the extent to which the costs of our products will be paid by health maintenance, managed care, pharmacy benefit and similar health care management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other third-party payors. These health care management organizations and third-party payors are increasingly challenging the prices charged for medical products and services. Additionally, the containment of health care costs has become a priority of federal and state governments, and the prices of drugs have been targeted in this effort. If these organizations and third-party payors do not consider our products to be cost-effective, they may not reimburse providers of our products or, if they do, the level of reimbursement may not be sufficient to allow us to sell our products on a profitable basis. THE PRICE OF OUR COMMON STOCK HAS EXPERIENCED SUBSTANTIAL VOLATILITY AND MAY CONTINUE TO DO SO IN THE FUTURE. There has been significant volatility in the market prices for publicly traded shares of biopharmaceutical companies, including ours. In 2001, the price of our common stock fluctuated from a high of $38.88 to a low of $14.40. In 2002, the price of our common stock fluctuated from a high of $32.20 30 to a low of $11.32. On March 12, 2003, our common stock closed at a price of $24.00. The price of our common stock may not remain at or exceed current levels. The following factors may have an adverse impact on the market price of our common stock: o results of our clinical trials; o announcements of technical or product developments by our competitors; o market conditions for pharmaceutical and biotechnology stocks; o market conditions generally; o governmental regulation; o health care legislation; o public announcements regarding medical advances in the treatment of the disease states that we are targeting; o patent or proprietary rights developments; o changes in third-party reimbursement policies for our products; or o fluctuations in our operating results. THE NUMBER OF SHARES OF OUR COMMON STOCK ELIGIBLE FOR FUTURE SALE COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. Future sales of substantial amounts of our common stock could adversely affect the market price of our common stock. As of March 12, 2003, there were outstanding stock options and warrants for 10,766,099 shares of common stock, of which 9,660,459 were currently exercisable at an average exercise price range between $0.15 and $70.00, with an average exercise price of $19.20. These amounts include outstanding options and warrants of Anthrogenesis that we assumed as part of the merger (the "Merger") with Anthrogenesis on December 31, 2002 and that were converted into outstanding options and warrants of our common stock pursuant to an exchange ratio. WE MAY NOT REALIZE THE BENEFITS OF THE COMBINED BUSINESSES AS A RESULT OF THE ANTHROGENESIS ACQUISITION, WHICH COULD DIMINISH THE EXPECTED BENEFITS OF THE ACQUISITION. Achieving the expected benefits of the Anthrogenesis acquisition will depend in large part on the successful integration of certain aspects of the combined businesses in a timely and efficient manner. We must integrate the information systems, product development, administration and other operations of the combined company. This may be difficult and unpredictable because of possible cultural conflicts and different opinions on technical, operational and other integration decisions. We must also integrate the employees of the combined company. The operations, management and personnel of the combined company may not be compatible, and we may experience the loss of key personnel for that reason. We expect to incur costs from integrating Anthrogenesis' operations and personnel. These costs may be substantial and may include costs for: o employee retention and development; and o integration of operating policies, procedures and systems. If we are not successful in these integration efforts, we may not realize the full expected benefits of the Anthrogenesis acquisition. OUR SHAREHOLDER RIGHTS PLAN AND CERTAIN CHARTER AND BY-LAW PROVISIONS MAY DETER A THIRD PARTY FROM ACQUIRING US AND MAY IMPEDE THE STOCKHOLDERS' ABILITY TO REMOVE AND REPLACE OUR MANAGEMENT OR BOARD OF DIRECTORS. 31 Our board of directors has adopted a shareholder rights plan, the purpose of which is to protect stockholders against unsolicited attempts to acquire control of us that do not offer a fair price to all of our stockholders. The rights plan may have the effect of dissuading a potential acquirer from making an offer for our common stock at a price that represents a premium to the then current trading price. Our board of directors has the authority to issue, at any time, without further stockholder approval, up to 5,000,000 shares of preferred stock, and to determine the price, rights, privileges and preferences of those shares. An issuance of preferred stock could discourage a third party from acquiring a majority of our outstanding voting stock. Additionally, our board of directors has adopted certain amendments to our by-laws intended to strengthen the board's position in the event of a hostile takeover attempt. These provisions could impede the stockholders' ability to remove and replace our management and/or board of directors. Furthermore, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law, which may also dissuade a potential inquirer of our common stock. AVAILABLE INFORMATION Our current reports on Form 8-K, quarterly reports on Form 10-Q and annual reports on Form 10-K are electronically filed with the Securities and Exchange Commission (SEC), and all such reports and amendments to such reports filed have been and will be made available, free of charge, through our website (http:www.celgene.com) as soon as reasonably practicable after such filing. Such reports will remain available on our website for at least twelve months. The public may read and copy any materials filed by us with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, D.C. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. ITEM 2. PROPERTIES We lease a 44,500-square foot laboratory and office facility in Warren, New Jersey, under a lease with an unaffiliated party, which has a term ending in May 2007 with two five-year renewal options, a 29,000-square foot facility which has a term ending in July 2010 with two five-year renewal options, and an 11,400-square foot facility with a term ending in 2005. Monthly rental expenses for these facilities are approximately $74,000. We also lease an 18,000-square foot laboratory and office facility in North Brunswick, New Jersey, under a lease with an unaffiliated party that has a term ending in December 2009 with two five-year renewal options. Monthly rental expenses for this facility are approximately $50,200. We believe that our laboratory facilities are adequate for our research and development activities for at least the next 12 months. In December 2001, we entered into a lease to consolidate our San Diego operations into one building. The 78,200-square foot laboratory and office facility in San Diego, California was leased from an unaffiliated party and has a term ending in August 2012. Monthly rental expenses for this facility are approximately $172,000. The three leases for the 44,000-square feet of San Diego laboratory and office space recently vacated by us are coterminous and end in December 2003. Under the leases, we reimburse the landlord for taxes, insurance and operating costs associated with the properties and have an outstanding letter of credit for $150,000 in favor of the landlord that is fully collateralized by cash. Upon transferring our operations to the new facility, the 2003 lease expense and remaining unamortized leasehold improvements for the vacated properties were taken as a charge to earnings in the fourth quarter of 2002. Upon completion of the acquisition of Anthrogenesis on December 31, 2002, we assumed two separate leases in the same facility for office and laboratory space in Cedar Knolls, New Jersey. The leases are for a combined approximately 15,000 square feet with a monthly rental expense of approximately $10,000. Both leases have five year terms with one expiring in 2004 and one expiring in 32 2007 with a five year renewal option. In November of 2002, Anthrogenesis entered into a lease for an additional 11,000 square feet of laboratory space in Baton Rouge, Louisiana. The lease has a five year term with a three year renewel option. Monthly rental expense for this facility is approximately $7,500. ITEM 3. LEGAL PROCEEDINGS We are not engaged in any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 33 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the Nasdaq National Market under the symbol "CELG." The following table sets forth, for the periods indicated, the intra-day high and low bid prices per share of common stock on the Nasdaq National Market:
HIGH LOW ----------- ----------- 2002 Fourth Quarter ............... $ 25.50 $ 15.06 Third Quarter ................ 21.35 11.39 Second Quarter ............... 25.20 11.32 First Quarter ................ 32.20 21.52 2001 Fourth Quarter ............... $ 38.88 $ 23.45 Third Quarter ................ 29.50 20.50 Second Quarter ............... 36.48 14.40 First Quarter ................ 33.50 16.94
The last reported sales price per share of common stock on the Nasdaq National Market on March 12, 2002 was $24.00. As of March 12, 2002, there were approximately 662 holders of record of our common stock. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for funding growth and, therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future. EQUITY COMPENSATION PLAN INFORMATION Information on our common stock authorized for issuance under equity compensation plans is cross-referenced to Part III, Item 12, of this Annual Report on Form 10-K. 34 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following Selected Consolidated Financial Data should be read in conjunction with our Consolidated Financial Statements and the related Notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information included elsewhere in this Annual Report. The data set forth below with respect to our Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 and the Consolidated Balance Sheet data as of December 31, 2002 and 2001 are derived from our Consolidated Financial Statements which have been audited by KPMG LLP, independent certified public accountants, and which are included elsewhere in this Annual Report and are qualified by reference to such Consolidated Financial Statements and related Notes thereto. Some information has been derived from other audited consolidated financial statements. Our historical results are not necessarily indicative of future results of operations.
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------- 2002 2001 2000 1999 1998 IN THOUSANDS, EXCEPT PER SHARE DATA --------------- ------------ -------------- -------------- -------------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenue .............................. $ 135,746 $ 114,243 $ 84,908 $ 38,192 $ 19,276 Costs and operating expenses ............... 259,875 139,186 119,217 68,857 56,705 Interest income/(expense), net ............. 23,030 20,807 15,496 (1,990) 1,050 Tax benefit ................................ 98 1,232 1,810 3,018 -- ----------- --------- ---------- ---------- ---------- Loss from continuing operations ............ (101,001) (2,904) (17,003) (29,637) (36,379) Preferred stock dividend (including accretion and imputed dividends) ......... -- -- -- 818 25 ----------- --------- ---------- ---------- ---------- Loss from continuing operations applicable to common stockholders ................... $ (101,001) $ (2,904) $ (17,003) $ (30,455) $ (36,404) =========== ========= ========== ========== ========== Per share of common stock-basic and diluted: Loss from continuing operations applicable to common stockholders (1) ............... $ (1.31) $ (0.04) $ (0.25) $ (0.59) $ (0.75) =========== ========= ========== ========== ========== Weighted average number of shares of common stock outstanding (1) ............. 77,337 75,108 66,598 51,449 48,811 =========== ========= ========== ========== ==========
DECEMBER 31, ------------------------------------------------------------------ 2002 2001 2000 1999 1998 IN THOUSANDS ------------ ------------ ------------ ------------- ------------- CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents, and marketable securities ................................ $ 261,182 $ 310,041 $ 306,162 $ 28,947 $ 18,076 Total assets ................................ 327,287 353,982 346,726 46,873 31,486 Long-term obligations under capital leases and equipment notes payable ............... 40 46 633 1,828 2,656 Convertible notes ........................... -- 11,714 11,714 38,495 8,349 Accumulated deficit ......................... (322,367) (222,367) (220,455) (204,170) (173,715) Stockholders' equity (deficit) .............. 276,698 310,425 295,533 (9,727) 8,393
(1) Note: amounts are adjusted for the three-for-one stock split effected in April 2000. 35 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW We were organized in 1980 as a unit of Celanese Corporation, a chemical company. Our initial mandate was to apply biotechnology to the production of fine and specialty chemicals. Following the 1986 merger of Celanese Corporation with American Hoechst Corporation, we were spun off as an independent biopharmaceutical company. In July 1987, we completed an initial public offering of our common stock and commenced the research and development of chemical and biotreatment processes for the chemical and pharmaceutical industries. We discontinued the biotreatment operations in 1994 to focus on our targeted small molecule cancer and immunology compound development programs and our biocatalytic chiral chemistry program. Between 1990 and 1998, our revenue was generated primarily through the development and supply of chirally pure intermediates to pharmaceutical companies for use in new drug development and, to a lesser degree, from agrochemical research and development contracts. However, as revenue from THALOMID(Reg. TM) sales, license agreements and milestone payments related to our cancer and immunology programs increased, sales of chirally pure intermediates became a less integral part of our strategic focus. Accordingly, on January 9, 1998, we completed the sale of our chiral intermediates business to Cambrex Corporation for $15.0 million. Terms of the sale provided for a payment to Celgene of $7.5 million at closing and future royalties on product sales not to exceed the net present value on the initial date of the sale of $7.5 million, with a guarantee of certain minimum payments to Celgene beginning in the third year following the close of the agreement. In July 1998, we received approval from the FDA to market THALOMID(Reg. TM) (thalidomide) for use in ENL, a side effect of leprosy, and, in late September 1998, we commenced sales of THALOMID(Reg. TM) in the United States. Sales have grown rapidly each year since the launch and, in 2002, we recorded net sales of THALOMID(Reg. TM) of $119.1 million. On February 16, 2000, we completed a follow-on public offering to sell 10,350,000 shares of our common stock at a price of $33.67 per share, as adjusted for a three-for-one stock split effective April 2000. 8,802,000 shares were for our account and 1,548,000 were for the account of a selling shareholder pursuant to the conversion of $9,288,000 of the 9%, January 1999 convertible notes held by that shareholder. Our proceeds, net of offering expenses, were approximately $278.0 million. On April 19, 2000, we signed a license and development agreement with Novartis Pharma AG in which we granted to Novartis a license for d-MPH, our chirally pure version of Ritalin(Reg. TM). The agreement provides for significant upfront and milestone payments based on achieving various regulatory approvals and royalties on the entire family of Ritalin(Reg. TM) products upon approval of d-MPH by the FDA. We have retained the rights for the use of d-MPH in oncology indications. We received approval from the FDA to market d-MPH, or Focalin(TM), on November 14, 2001. On August 31, 2000, we completed a merger, accounted for as a pooling-of-interests, with Signal Pharmaceuticals, Inc., a privately held biopharmaceutical company focused on the discovery and development of drugs that regulate genes associated with disease. On December 31, 2002, we completed a merger, accounted for under the purchase method, with Anthrogenesis Corp., a privately held biotherapeutics company pioneering the recovery of stem cells from human placental tissue following the completion of a full-term, successful pregnancy. We have sustained losses in each year since our inception as an independent biopharmaceutical company in 1986. In 2002, we had a net loss of $100.0 million, including one-time charges primarily as a result of acquired in-process R&D related to the Anthrogenesis acquisition and a patent litigation settlement. At December 31, 2002, we had an accumulated deficit of $322.4 million. We expect to make substantial expenditures to further develop and commercialize THALOMID(Reg. TM), develop our other oncology and immunological disease programs, further develop and commercialize our stem cell recovery 36 efforts and advance our gene regulation and target discovery program. These expenditures are expected to be more than offset by increasing product sales, royalties, revenues from various research collaborations and license agreements with other pharmaceutical and biopharmaceutical companies, and investment income. Subject to the risks described elsewhere in this Annual Report on Form 10-K under "Risk Factors", we believe there are significant market opportunities for the pharmaceutical products and processes under development by us. To address these and potential future opportunities in a timely and competitive manner, we intend to seek out drug discovery and development collaborations and licensing arrangements with third parties. We have entered into agreements covering the manufacture and distribution for us of certain compounds, such as THALOMID(Reg. TM) and Focalin(TM), and the development by us of processes for producing chirally pure crop protection agents for license to agrochemical manufacturers. The latter development activities are performed through Celgro Corporation, our wholly owned agrochemical subsidiary. We have established a commercial sales, marketing and customer service organization to sell and support our products, and as of March 1, 2003, we employ approximately 160 persons in this capacity. We intend to develop and market our own pharmaceuticals for indications with economically accessible patient populations in our disease franchises. For drugs with indications outside the oncology and immunological disease fields and for larger patient populations, we may partner with other pharmaceutical companies. We currently partner with other companies for the development and commercialization of our chirally pure pharmaceutical and agrochemical products. We expect these arrangements typically will include some combination of license fees, milestone payments, reimbursement of research and development expenses and royalty arrangements. We also may acquire products or companies to expand our product portfolio and to augment our development and commercialization resources. Future operating results will depend on many factors, including demand for our products, regulatory approvals of our products, the timing of the introduction and market acceptance of new products by us or competing companies, the timing of research and development milestones and our ability to control costs. RESULTS OF OPERATIONS Fiscal Years Ended December 31, 2002, 2001 and 2000 Total revenue. Our total revenue for the year ended December 31, 2002 increased 19% to $135.7 million compared with $114.2 million for the same period in 2001. Total revenue in 2002 consisted of product sales of $122.9 million, of which $119.1 million were THALOMID(Reg. TM) sales and $3.8 million were sales of Focalin(TM), which received FDA approval in November 2001, and research contract revenue of $12.8 million compared with product sales of $84.2 million, of which $82.0 million were THALOMID(Reg. TM) sales and $2.2 million were sales of Focalin(TM), research contract revenue of $28.1 million and related party revenue of $1.9 million in 2001. THALOMID(Reg. TM) sales continue to grow in oncology as more clinical data is presented either in publications or at oncology meetings. Research contract revenue and royalty income in 2002, which decreased from 2001, included approximately $4.9 million of amortization of an upfront payment related to an agreement with Novartis and $4.7 million in royalty income from Novartis on sales of their Ritalin(Reg. TM) family of products. There was no related party revenue in 2002 as the initial terms of both related party agreements expired in 2001 and such entities are no longer considered related parties. Our total revenue for the year ended December 31, 2001 increased 35% to $114.2 million compared with $84.9 million for the same period in 2000. Total revenue in 2001 consisted of product sales of $84.2 million, of which $82.0 million were THALOMID(Reg. TM) sales and $2.2 million were sales of Focalin(TM), research contract revenue of $28.1 million and related party revenue of $1.9 million compared with product sales in 2000 of $62.7 million, all of which were THALOMID(Reg. TM) sales, research contract revenue of $15.9 million and related party revenue of $6.3 million in 2000. Research contract revenue in 2001, which increased from 2000, included approximately $10.4 million of amortization of upfront payments related to two separate agreements with Novartis and a milestone payment of $12.5 million from Novartis for receiving FDA approval to market Focalin(TM). Research contract revenue in 2000 consisted primarily of recognition of $4.6 million of the $10.0 million nonrefundable upfront license fee payment received in 37 connection with a collaborative agreement entered into with Novartis in April 2000, and a $5.0 million milestone payment related to the same agreement with Novartis. Related party revenue decreased in 2001 from 2000 as the initial terms of both related party agreements expired and such entities are no longer considered related parties. One of those agreements was extended and approximately $2.8 million was classified as research contract revenue in 2001. Cost of goods sold. Cost of goods sold in 2002 increased approximately 27% to $17.3 million, or 14% of product sales, from approximately $13.6 million, or 16% of product sales, in 2001. This increase was primarily related to the significant increase in THALOMID(Reg. TM) sales. Additionally, expenses related to product royalties on THALOMID(Reg. TM) sales increased due to larger royalty percentages as higher sales thresholds were met. Cost of goods sold for 2002 relating to Focalin(TM) sales continued to be favorably impacted as manufacturing costs incurred prior to Focalin's(TM) approval in November 2001 were expensed as research and development expenses. This favorability will continue until the quantity previously expensed is completely sold. Cost of goods sold in 2001 increased approximately 36% to $13.6 million, or 16% of product sales, from approximately $10.0 million, or 16% of product sales, in 2000, in line with the increase in product sales and therefore primarily volume related. Cost of goods sold for 2001 relating to Focalin(TM) sales was favorably impacted as manufacturing costs incurred prior to Focalin's(TM) approval in November 2001 were expensed as research and development expenses. Research and development expenses. Research and development expenses consist primarily of salaries and benefits, contractor fees, principally with contract research organizations to assist in our clinical development programs, clinical drug supplies for our clinical and preclinical programs as well as other consumable research supplies, and allocated facilities charges such as building rent and utilities. Research and development expenses in 2002 increased 25% to $84.9 million from $67.7 million in 2001. Approximately $49.1 million in 2002 was spent on THALOMID(Reg. TM) and its follow-on compounds, the IMiDs(TM) and SelCIDs(TM), primarily for preclinical toxicology and phase I/II clinical trials, the initiation of our phase III clinical trials in multiple myeloma and metastatic melanoma and legal expenses related to patent filings. We spent approximately $35.8 million in our gene regulation, target discovery and agro-chemical programs, primarily for internal headcount related expenses, laboratory supplies and product development costs. Research and development expenses in 2001 increased 20% to $67.7 million from $56.2 million in 2000. Approximately $33.1 million was spent on THALOMID(Reg. TM) and its follow-on compounds, the IMiDs(TM) and SelCIDs(TM), primarily for preclinical toxicology and phase I/II clinical trials, regulatory expenses for preparation of a supplementary New Drug Application, or sNDA, for THALOMID(Reg. TM) in multiple myeloma and legal expenses related to patent filings. Approximately $2.8 million was spent for Focalin(TM), primarily for drug supply that was expensed prior to FDA approval. We spent approximately $31.8 million in our gene regulation, target discovery and agro-chemical programs, primarily for internal headcount related expenses, laboratory supplies and product development costs. As a percent of total revenue, research and development expenses were approximately 63%, 59% and 66% in 2002, 2001 and 2000, respectively. Reference the table on page 4 of Part I -- Business section for the status of specific compounds. In general, estimated time to completion within the various stages of clinical development are as follows:
ESTIMATED COMPLETION CLINICAL PHASE PERIOD - ----------------------- --------------------- Phase I 1-2 years Phase II 2-3 years Phase III 2-3 years
Due to the significant risks and uncertainties inherent in preclinical tests and clinical trials associated with each of our research and development projects, the cost to complete such projects is not reasonably estimable. The data obtained from these tests and trials may be susceptible to varying interpretation that could delay, limit or prevent a project's advancement through the various stages of clinical development, which would significantly impact the costs incurred in bringing a project to completion. Selling, general and administrative expenses. Selling expenses consist of salaries and benefits for sales and marketing and customer service personnel, warehousing and distribution costs, and other commercial 38 expenses to support the sales force and the education and registration efforts underlying the S.T.E.P.S.(Reg. TM) program. General and administrative expenses consist primarily of salaries and benefits, outside services for legal, audit, tax and investor activities and allocations of facilities costs, principally for rent, utilities and property taxes. Selling, general and administrative expenses increased 20% in 2002 to $69.7 million from $58.0 million in 2001. The increased spending was primarily commercial expenses to support the commercialization of THALOMID(Reg. TM), with approximately a $4.9 million increase in sales and marketing expenses primarily related to the sales force expansion. Selling, general and administrative expenses increased 25% in 2001 to $58.0 million from $46.4 million in 2000. Similar to 2002, the increased spending in 2001 was primarily commercial expenses to support the commercialization of THALOMID(Reg. TM), with approximately a $2.7 million increase in sales and marketing expenses primarily related to the sales force expansion and an increase of $2.5 million in customer service and warehousing and distribution, primarily related to bringing the previously out-sourced customer service function in-house and a rollout of an enhanced S.T.E.P.S.(Reg. TM) program. As a percent of total revenue, selling, general and administrative expenses were approximately 51%, 51% and 55% in 2002, 2001 and 2000, respectively. Litigation settlement and related agreements. On December 31, 2002, we entered into a series of agreements with EntreMed, Inc. and Children's Medical Center Corporation to effectively terminate ongoing litigation relating to patents for thalidomide analogs and to grant an exclusive license to us for the rights to those patents. Under the terms of an Asset Purchase Agreement, we paid to EntreMed $10,000,000 for all thalidomide analog patents and associated clinical data and records, and the termination of any litigation surrounding those patents. Under the terms of a Securities Purchase Agreement, we acquired from EntreMed 3,350,000 shares of Series A Convertible Preferred Stock, and warrants for an additional 7,000,000 common shares for $16,750,000. The Series A Convertible Preferred Stock is convertible, at our option, into an aggregate of 16,750,000 shares of common stock at an initial conversion price of $1.00 per share provided, however, that the conversion price in effect from time to time shall be subject to certain adjustments. Dividends will accrue at 6% per annum on these preferred stock. We shall have the right to one vote for each share of Common Stock into which such share of Series A Convertible Preferred Stock could then be converted, and with respect to such vote, we shall have full voting rights and powers equal to the voting rights and powers of the holders of shares of Common Stock. The warrants have an exercise price of $1.50 per share, vest after six months from the date of grant and expire after seven years from the date of grant. The Company completed an assessment of the estimated realizable value of the investment. Considering the level of the Company's ownership interest in EntreMed, its history of operating losses and the fact that EntreMed is a clinical-stage biopharmaceutical company engaged primarily in research and development activities with proposed products and research programs in the early stage of clinical development, and, based on such assessment, the entire amount of such Preferred Stock was written down. We also signed an exclusive license agreement with CMCC that terminated any existing thalidomide analog agreements between CMCC and EntreMed and directly granted us an exclusive worldwide license for the analog patents. We paid to CMCC $2,500,000 under this agreement with another $2,500,000 payable between 2004 and 2006, the present value relating to which aggregating $2,201,500 was charged to 2002 earnings. Additonally, we entered into a five year sponsored research agreement with CMCC whereby we have committed $300,000 per year in funding. Additional payments are possible under the agreement depending on the successful development and commercialization of thalidomide analogs. We recorded a charge to earnings for the cost of these agreements and related expenses of $32,211,500 in 2002 including the write down of the EntreMed Series A Convertible Preferred Stock and certain legal expenses incurred in connection with the settlement. Acquired in-process research and development On December 31, 2002, we completed the acquisition of Anthrogenesis Corp. for an aggregate purchase price of $60.0 million (See Note 3). Anthrogenesis is an early-stage biotherapeutics company delivering stem cell therapies produced from renewable human placental sources/materials. We acquired Anthrogenesis to realize the substantial therapeutic and commercial potential of placental stem cells through its commercial and developmental infrastructure. 39 The acquisition of Anthrogenesis was accounted for using the purchase method of accounting for business combinations. Approximately $55.7 million of the total purchase consideration of $60.0 million was allocated to IPR&D, which was charged to expense at the acquisition date. In 2003, we do not expect the acquisition of Anthrogenesis to significantly impact the overall level of research and development expenses, or materially change our current product sales mix. Merger-related costs. We incurred one-time costs of $6.7 million related to the merger with Signal Pharmaceuticals, Inc. in 2000. These costs were primarily related to fees for financial advisors, accountants, lawyers and financial printers. Interest and other income and interest expense. Interest and other income increased approximately 11% in 2002 to $23.1 million from $20.9 million in 2001. The increase was primarily related to higher realized gains of approximately $5.0 million on sales of certain marketable securities offset by lower interest income on lower average cash balances and lower yields on our securities during 2002. Interest and other income increased approximately 19% in 2001 to $20.9 million from $17.6 million in 2000. The increase was primarily related to higher average cash balances and the recognition of a gain on the sale of certain marketable securities during 2001. Interest expense decreased 67% to approximately $27,000 in 2002 compared with approximately $83,000 in 2001. The decrease was primarily related to exercising the purchase options on the majority of our leased equipment during 2002. Interest expense decreased 96% to approximately $83,000 in 2001 compared with $2.1 million in 2000. The decrease was primarily related to an agreement with the convertible note-holders to eliminate the interest requirements in exchange for the right to hedge the shares underlying the convertible notes. Loss from continuing operations. The loss from continuing operations increased significantly in 2002 to $101.0 million from $2.9 million in 2001. The increased loss resulted from the acquisition of Anthrogenesis, whereby we incurred a charge of $55.7 million for in-process research and development costs, the litigation settlement and related agreements with EntreMed, Inc. and CMCC which resulted in a charge of $32.2 million, an increase of $32.8 million in other operating costs and expenses as explained above under "Cost of goods sold", "Research and development expenses" and "Selling, general and administrative expenses" and a decrease of $1.1 million in the net income tax benefit, partially offset by an increase in total revenue of $21.5 million as explained above under "Total revenues" and an increase in net interest and other income and expense of $2.2 million as explained above under "Interest and other income and expense". The loss from continuing operations decreased significantly in 2001, to $2.9 million from $17.0 million in 2000. The decreased loss resulted from an increase in total revenue of $29.3 million as explained above under "Total revenues" and an increase in net interest and other income and expense of $5.3 million as explained above under "Interest and other income and expense", partially offset by an increase in costs and expenses of $20.0 million as explained above under "Cost of goods sold", "Research and development expenses" and "Selling, general and administrative expenses." Gain on sale of chiral assets. We received royalty payments from Cambrex Corporation of approximately $1.0 million, $992,000 and $719,000 in 2002, 2001 and 2000, respectively, which represent additional portions of the purchase price paid by Cambrex for our chiral assets. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have financed our working capital requirements primarily through product sales, private and public sales of our debt and equity securities, income earned on the investment of proceeds from the sale of such securities and revenue from research contracts and license and milestone payments. Since our initial product launch in the third quarter of 1998, we have recorded net product sales totaling approximately $296.6 million through December 31, 2002. Our working capital at December 31, 2002 decreased approximately 18% to $251.8 million from $306.5 million in 2001. The decrease in working capital was primarily due to a lower combination of cash, cash equivalents and marketable securities and higher current liablilities. 40 Cash and cash equivalents increased to $85.5 million in 2002 from $47.1 million in 2001 while investments in marketable debt securities decreased to $175.7 million in 2002 from $262.9 million in 2001. Total cash, cash equivalents and marketable securities decreased by approximately $48.8 million reflecting increased spending for both commercial and research and development activities and the litigation settlement and related agreements with EntreMed and CMCC, partially offset by the receipt of funds from revenue received from research contracts and collection of receivables from sales of THALOMID(Reg. TM). We expect that our rate of spending will increase as the result of research and product development spending, increased clinical trial costs, increased expenses associated with the regulatory approval process and commercialization of products currently in development, increased costs related to the commercialization of THALOMID(Reg. TM) and increased capital investments. On February 16, 2000, we completed a public offering of 10,350,000 shares of our common stock, as adjusted for a three-for-one stock split effective April 2000. Proceeds from the transaction, net of expenses, were approximately $278.0 million. These funds, combined with the increasing revenue from product sales and various research agreements and collaborations, are expected to provide sufficient capital for our operations for the foreseeable future. CONTRACTUAL OBLIGATIONS Our major outstanding contractual obligations relate to our operating (facilities) leases. We lease a 44,500-square foot laboratory and office facility in Warren, New Jersey, under a lease with an unaffiliated party, which has a term ending in May 2007 with two five-year renewal options, a 29,000-square foot facility which has a term ending in July 2010 with two five-year renewal options, and an 11,400-square foot facility with a term ending in 2005. Monthly rental expenses for these facilities are approximately $74,000. We also lease an 18,000-square foot laboratory and office facility in North Brunswick, New Jersey, under a lease with an unaffiliated party that has a term ending in December 2009 with two five-year renewal options. Monthly rental expenses for this facility are approximately $50,200. In December 2001, we entered into another lease to consolidate our San Diego operations into one building. The 78,200-square foot laboratory and office facility in San Diego, California was leased from an unaffiliated party and has a term ending in August 2012. Monthly rental expenses for this facility are approximately $172,000. The three leases for the 44,000-square feet of San Diego laboratory and office space recently vacated by us are coterminous and end in December 2003. Under the leases, we reimburse the landlord for taxes, insurance and operating costs associated with the properties and have an outstanding letter of credit for $150,000 in favor of the landlord that is fully collateralized by cash. Upon transferring our operations to the new facility, the 2003 lease obligations and remaining unamortized leasehold improvements for the vacated properties were taken as a charge to earnings in the fourth quarter of 2002. Upon completion of the acquisition of Anthrogenesis on December 31, 2002, we assumed 2 separate leases in the existing facility for office and laboratory space in Cedar Knolls, New Jersey. The leases are for a combined space of approximately 15,000 square feet with a monthly rental expense of approximately $10,000. Both leases have original five year terms with one expiring in 2004 and one expiring in 2007 with a five year renewal option. In November of 2002, Anthrogenesis entered into a lease for an additional 11,000 square feet of laboratory space in Baton Rouge, Louisiana. The lease has a five year term with a three year renewel option. Monthly rental expense for this facility is approximately $7,500. For a schedule of payments related to the operating leases, refer to the table included in footnote 17(a) to the consolidated financial statements included elsewhere in this Annual Report. CRITICAL ACCOUNTING POLICIES In December 2001, the SEC requested that all registrants discuss their most "critical accounting policies" in management's discussion and analysis of financial condition and results of operations. The SEC indicated that a "critical accounting policy" is one which is both important to the portrayal of the 41 company's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included in this annual report, we believe the following accounting policy to be critical: Revenue Recognition. We have formed collaborative research and development agreements and alliances with several pharmaceutical companies. These agreements are in the form of research and development and license agreements. The agreements are for both early and late stage compounds and are focused on specific disease areas. For the early stage compounds, the agreements are relatively short-term agreements that are renewable depending on the success of the compounds as they move through preclinical development. The agreements call for nonrefundable upfront payments, milestone payments on achieving significant milestone events, and in some cases ongoing research funding. The agreements also contemplate royalty payments on sales if and when the compound receives FDA marketing approval. In accordance with Staff Accounting Bulletin No. 101 ("SAB 101") Revenue Recognition in Financial Statements, upfront payments are recorded as deferred revenue and recognized over the estimated service period. If the estimated service period is subsequently modified, the period over which the upfront fee is recognized is modified accordingly on a prospective basis. Revenue from the achievement of research and development milestones, which represent the achievement of a significant step in the research and development process, are recognized when and if the specific milestones are achieved. Continuation of certain contracts is dependent upon our achieving specific contractual milestones; however, none of the payments received to date are refundable regardless of the outcome of the project. Research funding is recorded in the period during which the expenses covered by the funding occurred. Acquired in-process research and development ("IPR&D"). IPR&D represents that portion of the purchase price of the Anthrogenesis acquisition that relates to the research and development activities, which are yet to demonstrate their technological feasibility and have no alternative future use. The estimated fair value of these projects is determined by employment of a discounted cash flow model. The discount rates used take into account the stage of completion and the risks surrounding the successful development and commercialization of each of the purchased in-process technology projects that were valued. The analysis included forecasted future cash flows that are expected to result from the progress made on the in-process project prior to the purchase dates. Appropriate operating expenses are deducted from the total forecasted net revenues to establish a forecast of net returns on the completed portion of the in-process technology. Finally, these net returns are discounted to a present value using discount rates that incorporate the weighted average cost of capital relative to the biotech industry and the Company as well as product specific risks associated with the purchased in-process research and development products. The product specific risk factors include the product's phase of development, likelihood of success, manufacturing process capability, scientific rationale, pre-clinical safety and efficacy data, target product profile, and development plan and takes into consideration an overall discount rate, which represents a risk premium to the Company's weighted average cost of capital for purchase valuation purposes. The forecast data in the analysis is based on internal product level forecast information maintained by management in the ordinary course of managing the business. The inputs used by management in analyzing IPR&D is based on assumptions, which management believes to be reasonable but which are inherently uncertain and unpredictable. These assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. The valuations used to estimate IPR&D require us to use significant estimates and assumptions, that if changed, may result in a different valuation for IPR&D. Valuations for the Anthrogenesis acquisition was completed by an independent third-party consulting firm in accordance with SEC guidelines. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for 42 Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its Obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. None of the provisions are expected to have a material effect on the Company's financial statements. CERTIFICATION OF FINANCIAL STATEMENTS The certifications by our Chief Executive Officer and Chief Financial Officer of this Annual Report on Form 10-K as required by Section 906 of the Sarbane-Oxley Act of 2002 (18 U.S.C. Section 1350), have been submitted to the Securities and Exchange Commission as additional correspondence accompanying this report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Our holdings of financial instruments are comprised of commercial paper, U.S. government and corporate securities. These financial instruments may be classified as securities available for sale and carried at fair value or held to maturity and carried at amortized cost depending upon our intent. Securities classified as available for sale are held for an indefinite period of time and are intended to be used to meet our ongoing liquidity needs. Unrealized gains and losses (which are deemed to be temporary) on available for sale securities, if any, are reported in a separate component of stockholders' equity. The cost of all debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization, along with realized gains and losses, is included in interest and other income. We do not use financial derivatives for investment or trading purposes. As of December 31, 2002 and 2001, all securities have been classified as available for sale. We have established guidelines relative to diversification and maturities to maintain safety and liquidity. These guidelines are reviewed periodically and may be modified depending on market conditions. Although our investments are subject to credit risk, our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or type of investment. Our investments are also subject to interest rate risk and will decrease in value if market interest rates increase. Due to the limited number of foreign currency transactions, our foreign exchange currency risk is minimal. The table below presents the principal amounts and related weighted average interest rates by year of maturity for our investment portfolio as of December 31, 2002:
2008 AND 2003 2004 2005 2006 2007 BEYOND TOTAL FAIR VALUE ------------ ------ ------------ ------------ ------------ ------------ ------------- ----------- (in Thousands $) Fixed Rate .................... $ 20,800 -- $ 20,510 $ 64,345 $ 22,500 $ 37,275 $ 165,430 $173,707 Average Interest Rate ......... 6.76% -- 8.02% 6.78% 6.26% 7.76% 7.08% Variable Rate ................. -- -- -- -- -- $ 2,000 $ 2,000 $ 2,000 Average Interest Rate ......... -- -- -- -- -- 8.00% 8.00% -------- -- -------- -------- -------- -------- --------- -------- Total ....................... $ 20,800 -- $ 20,510 $ 64,345 $ 22,500 $ 39,275 $ 167,430 $175,707
We do not use derivative financial instruments. 43 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Part IV, Item 16 of the this Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 44 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the information required by Part III (Items 10, 11, 12 (except as otherwise provided), 13 and 15) is being incorporated by reference herein from our definitive proxy statement (or an amendment to Form 10-K) to be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2002 in connection with our 2003 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION See Item 10. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the information required by Item 12 (Security Ownership of Certain Beneficial Owners and Management) is being incorporated by reference herein from our definitive proxy statement (or an amendment to Form 10-K) to be filed with the Securities and Exchange Commission within 120 days of the end of the fiscal year ended December 31, 2002 in connection with our 2003 Annual Meeting of Stockholders. The following table summarizes the equity compensation plans under which our common stock may be issued as of December 31, 2002. EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE NUMBER OF SECURITIES UNDER EQUITY TO BE ISSUED UPON WEIGHTED-AVERAGE COMPENSATION PLANS EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REFLECTED IN COLUMN PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS (A)) - --------------------------- ---------------------- ---------------------- ---------------------- (A) (B) (C) Equity compensation plans approved by security holders .................. 9,799,068 $ 22.42 1,023,692 Equity compensation plans not approved by security holders ......... 1,030,364 $ 11.37 137,031 Total ..................... 10,829,432 $ 21.37 1,160,723
The Anthrogenesis Corporation Qualified Employee Incentive Stock Option Plan has not been approved by our stockholders. As a result of the acquisition of Anthrogenesis, the Company acquired Anthrogenesis' Qualified Employee Incentive Stock Option Plan (the "Qualified Plan") and the Non-Qualified Recruiting and Retention Stock Option Plan (the "Non-Qualified Plan"). No future awards will be granted under the Non-Qualified Plan. The Qualified Plan authorizes the award of incentive stock options, which are stock options that qualify for special federal income tax treatment. The exercise price of any stock option granted under the Qualified Plan may not be less than the fair market value of the common stock on the date of grant. In general, each option granted under the Qualified Plan vests evenly over a four year period and expires 10 years from the date of grant, subject to earlier expiration in case of termination of employment. The vesting period is subject to certain acceleration provisions if a change in control occurs. No award will be granted under the Qualified Plan on or after December 31, 2008. 45 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See Item 10. ITEM 14. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended), based on their evaluation of these controls and procedures as of a date within ninety (90) days prior to the filing date of this Annual Report on Form 10-K, are effective. (b) Changes in Internal Controls. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation thereof, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES See Item 10. 46 PART IV ITEM 16. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K (a)(1),(1)(2) See Index to Consolidated Financial Statements and Consolidated Financial Statement Schedule immediately following Exhibit Index. (b) None (c) Exhibits The following exhibits are filed with this report or incorporated by reference:
EXHIBIT NO. EXHIBIT DESCRIPTION - -------- --------------------------------------------------------------------------------------------- 2.1 Purchase Option Agreement and Plan of Merger, dated April 26, 2002, among the Company, Celgene Acquisition Corp. and Anthrogenesis Corp. (incorporated by reference to Exhibit 2.1 of the Company's Registration Statement on Form S-4 dated November 13, 2002 (No. 333-101196). 2.2 Amendment to the Purchase Option Agreement and Plan of Merger, dated September 6, 2002, among the Company, Celgene Acquisition Corp. and Anthrogenesis Corp. (incorporated by reference to Exhibit 2.2 of the Company's Registration Statement on Form S-4 dated November 13, 2002 (No. 333-101196). 2.3 Asset Purchase Agreement by and between the Company and EntreMed, Inc., dated as of December 31, 2002 (incorporated by reference to Exhibit 99.6 of the Company's Schedule 13D filed on January 3, 2003). 2.4 Securities Purchase Agreement by and between EntreMed, Inc. and the Company, dated as of December 31, 2002 (incorporated by reference to Exhibit 99.2 of the Company's Schedule 13D filed on January 3, 2003). 3.1 Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1, dated July 24, 1987). 3.2 Bylaws of the Company (incorporated by reference to the Company's Current Report on Form 8-K, dated September 16, 1996). 10.1 Lease Agreement, dated January 16, 1987, between the Company and Powder Horn Associates (incorporated by reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1, dated July 24, 1987). 10.2 1986 Stock Option Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement dated April 13, 1990). 10.3 1992 Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement, dated May 30, 1997). 10.4 1995 Non-Employee Directors' Incentive Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement, dated May 24, 1999). 10.5 Form of Warrant to be issued in connection with the issuance of Series B Convertible Preferred Stock, pursuant to a Securities Purchase Agreement among the Company and certain Investors as set forth therein (the "Chancellor Entities"), such Warrants thereafter assigned by the Chancellor Entities to Deutsche Bank A.G. (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated June 10, 1997). 10.6 Rights Agreement, dated as of September 16, 1996, between the Company and American Stock Transfer & Trust Company (incorporated by reference to the Company's Registration Statement on Form 8A, filed on September 16, 1996), as amended on February 18, 2000 (incorporated by reference to the Company's Current Report on Form 8-K filed on February 22, 2000). 10.7 Form of indemnification agreement between the Company and each officer and director of the Company (incorporated by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996).
47
EXHIBIT NO. EXHIBIT DESCRIPTION - -------- ------------------------------------------------------------------------------------------ 10.8 Employment Agreement dated as of January 1, 2000 between the Company and John W. Jackson (incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.9 Employment Agreement dated as of January 1, 2000 between the Company and Sol J. Barer (incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.10 Manufacturing Agreement between Penn Pharmaceuticals Limited and the Company (incorporated by reference to the Company's Registration Statement on Form S-3 dated November 25, 1997 (No. 333-38891)). 10.11 Celgene Corporation Replacement Stock Option Plan (incorporated by reference to Exhibit 99.1 of the Company's Registration Statement on Form S-3 dated May 18, 1998 (No. 333-52963)). 10.12 Form of Stock Option Agreement to be issued in connection with the Celgene Corporation Replacement Stock Option Plan (incorporated by reference to Exhibit 99.2 of the Company's Registration Statement on Form S-3 dated May 18, 1998 (No. 333-52963)). 10.13 Amended and Restated 1998 Long-Term Incentive Plan (incorporated by reference to Exhibit A to the Company's Proxy Statement, filed May 1, 2001). 10.14 Stock Purchase Agreement dated June 23, 1998 between the Company and Biovail Laboratories Incorporated (incorporated by reference to the Company's Current Report on Form 8-K filed on July 17, 1998). 10.15 Employment Agreement dated as of January 1, 2000 between the Company and Robert J. Hugin (incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.16 Note Purchase Agreement dated January 20, 1999 between the Company and the Purchasers named on Schedule I to the agreement in connection with the purchase of $15,000,000 principal amount of the Company's 9.00% Senior Convertible Note Due January 20, 2004 (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.17 Form of 9.00% Senior Convertible Note Due January 20, 2004 (incorporated by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.18 Registration Rights Agreement dated as of January 20, 1999 between the Company and the Purchasers in connection with the issuance of the Company's 9.00% Senior Convertible Note Due January 20, 2004 (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.19 Note Purchase Agreement dated July 6, 1999 between the Company and the Purchasers named in Schedule I to the agreement in connection with the purchase of $15,000,000 principal amount of the Company's 9.00% Senior Convertible Note Due June 30, 2004 (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.20 Form of 9.00% Senior Convertible Note Due June 30, 2004 (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.21 Registration Rights Agreement dated as of July 6, 1999 between the Company and the Purchasers in connection with the issuance of the Company's 9.00% Senior Convertible Note Due June 30, 2004 (incorporated by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999). 10.22 Development and License Agreement between the Company and Novartis Pharma AG, dated April 19, 2000 (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000).
48
EXHIBIT NO. EXHIBIT DESCRIPTION - ---------- --------------------------------------------------------------------------------------------- 10.23 Collaborative Research and License Agreement between the Company and Novartis Pharma AG, dated December 20, 2000 (incorporated by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000). 10.24 Custom Manufacturing Agreement between the Company and Johnson Matthey Inc., dated March 5, 2001 (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.25 Manufacturing and Supply Agreement between the Company and Mikart, Inc., dated as of April 11, 2001 (incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.26 Distribution Services Agreement between the Company and Ivers Lee Corporation, d/b/a Sharp, dated as of June 1, 2000 (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001). 10.27 Amendment to 1998 Long-Term Incentive Plan, effective as of June 18, 2002 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). 10.28 Amendment No. 1 to 1992 Long-Term Incentive Plan, effective as of June 22, 1999 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002). 10.29 Amendment No. 1 to 1995 Non-Employee Directors' Incentive Plan, effective as of June 22, 1999 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002). 10.30 Amendment No. 2 to 1995 Non-Employee Directors' Incentive Plan, effective as of April 18, 2000 (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002). 10.31 Agreement dated August 2001 by and among the Company, Children's Medical Center Corporation, Bioventure Investments KFT and EntreMed Inc. (certain portions of the agreement have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment, which request has been granted) (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002). 10.32 Exclusive License Agreement among the Company, Children's Medical Center Corporation and, solely for purposes of certain sections thereof, EntreMed, Inc., effective December 31, 2002. 10.33 Supply Agreement between the Company and Sifavitor s.p.a, dated as of September 28, 1999. 10.34 Supply Agreement between the Company and Seigfried (USA), Inc., dated as of January 1, 2003. 10.35 Anthrogenesis Corporation Qualified Employee Incentive Stock Option Plan. 21.1 List of Subsidiaries. 23.1 Consent of KPMG LLP. 24.1 Power of Attorney (included in Signature Page).
49 SIGNATURES AND POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person or entity whose signature appears below constitutes and appoints John W. Jackson, Sol J. Barer and Robert J. Hugin, and each of them, its true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for it and in its name, place and stead, in any and all capacities, to sign any and all amendments to this Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all contents and purposes as it might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CELGENE CORPORATION By /s/ John W. Jackson ----------------------------- John W. Jackson Chairman of the Board and Chief Executive Officer Date: March 28, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------ ----------------------------------- --------------- /s/ John W. Jackson Chairman of the Board and March 31, 2003 --------------------------- Chief Executive Officer John W. Jackson /s/ Sol J. Barer Director, Chief Operating Officer March 31, 2003 --------------------------- Sol J. Barer /s/ Robert J. Hugin Director, Chief Financial Officer March 31, 2003 --------------------------- Robert J. Hugin /s/ Jack L. Bowman Director March 31, 2003 --------------------------- Jack L. Bowman /s/ Frank T. Cary Director March 31, 2003 --------------------------- Frank T. Cary /s/ Michael D. Casey Director March 31, 2003 --------------------------- Michael D. Casey
50
SIGNATURE TITLE DATE - -------------------------------- --------------------------------------- --------------- /s/ Arthur Hull Hayes, Jr. Director March 31, 2003 --------------------------- Arthur Hull Hayes, Jr. /s/ Gilla Kaplan Director March 31, 2003 --------------------------- Gilla Kaplan /s/ Richard C.E. Morgan Director March 31, 2003 --------------------------- Richard C.E. Morgan /s/ Walter L. Robb Director March 31, 2003 --------------------------- Walter L. Robb /s/ James R. Swenson Controller (Chief Accounting Officer) March 31, 2003 --------------------------- James R. Swenson
The foregoing constitutes a majority of the directors. 51 CERTIFICATIONS I, John W. Jackson, certify that: 1. I have reviewed this annual report on Form 10-K of Celgene Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ John W. Jackson --------------------- John W. Jackson Chairman of the Board Chief Executive Officer 52 I, Robert J. Hugin, certify that: 1. I have reviewed this annual report on Form 10-K of Celgene Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ Robert J. Hugin --------------------- Robert J. Hugin Chief Financial Officer 53 CELGENE CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----- Consolidated Financial Statements Independent Auditors' Report ........................................................... F-2 Consolidated Balance Sheets as of December 31, 2002 and 2001 ........................... F-3 Consolidated Statements of Operations -- Years Ended December 31, 2001, 2000 and 1999 .. F-4 Consolidated Statements of Stockholders' Equity (Deficit) -- Years Ended December 31, 2002, 2001 and 2000 ..................................................... F-5 Consolidated Statements of Cash Flows -- Years Ended December 31, 2002, 2001 and 2000 ........................................................................ F-8 Notes to Consolidated Financial Statements ............................................. F-10 Consolidated Financial Statement Schedule Schedule II -- Valuation and Qualifying Accounts ....................................... F-34
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Celgene Corporation: We have audited the consolidated financial statements of Celgene Corporation and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule as listed on the accompanying index. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and consolidated financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Celgene Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. As discussed in Note 2(4c) to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 141, "Business Combinations" effective July 1, 2001. /s/ KPMG LLP Short Hills, New Jersey January 29, 2003 F-2 CELGENE CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------------------- 2002 2001 ----------------- ----------------- ASSETS Current assets: Cash and cash equivalents ............................................... $ 85,475,088 $ 47,141,291 Marketable securities available for sale ................................ 175,706,555 262,900,049 Accounts receivable, net of allowance of $1,019,760 and $998,395 at December 31, 2002 and December 31, 2001, respectively .................. 17,659,065 13,415,101 Inventory ............................................................... 4,805,770 3,603,462 Other current assets .................................................... 12,449,429 9,362,423 -------------- -------------- Total current assets ................................................. 296,095,907 336,422,326 Plant and equipment, net ................................................ 19,600,063 10,645,647 Goodwill ................................................................ 2,972,784 -- Intangible assets ....................................................... 3,010,000 -- Other assets ............................................................ 5,607,974 6,914,445 -------------- -------------- Total assets ......................................................... $ 327,286,728 $ 353,982,418 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................ $ 16,515,634 $ 10,831,464 Accrued expenses ........................................................ 27,574,973 13,667,022 Current portion of capital leases and note obligation ................... 86,318 586,731 Current portion of deferred revenue ..................................... 109,327 4,882,668 -------------- -------------- Total current liabilities ............................................ 44,286,252 29,967,885 Long term convertible notes ............................................. -- 11,713,600 Capitalized leases and note obligation, net of current portion .......... 39,852 46,215 Deferred revenue, net of current portion ................................ 1,389,888 -- Other non-current liabilities ........................................... 4,872,784 1,829,251 -------------- -------------- Total liabilities .................................................... 50,588,776 43,556,951 -------------- -------------- Stockholders' equity: Preferred stock, $.01 par value per share, 5,000,000 authorized; none outstanding at December 31, 2002 and December 31, 2001 ................. -- -- Common stock, $.01 par value per share 120,000,000 shares authorized; issued 80,176,713 and 75,574,785 shares at December 31, 2002 and December 31, 2001, respectively. .............................. 801,768 755,748 Common stock in treasury, at cost; none at December 31, 2002, and 282 shares at December 31, 2001. ....................................... -- (2,804) Additional paid-in capital ................................................. 591,277,196 527,023,001 Accumulated deficit ........................................................ (322,367,256) (222,367,088) Deferred compensation ...................................................... -- (1,592,490) Notes receivable from stockholders ......................................... (42,000) (42,000) Accumulated other comprehensive income ..................................... 7,028,244 6,651,100 -------------- -------------- Total stockholders' equity ........................................... 276,697,952 310,425,467 -------------- -------------- Total liabilities and stockholders' equity ........................... $ 327,286,728 $ 353,982,418 ============== ==============
See accompanying notes to consolidated financial statements. F-3 CELGENE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------------------------------ 2002 2001 2000 ------------------- ----------------- ------------------ Revenue: Product sales ......................................... $ 122,921,166 $ 84,194,839 $ 62,675,879 Research contract and royalty income .................. 12,824,614 28,149,501 15,882,112 Related-party collaborative agreement revenue ......... -- 1,898,605 6,349,996 --------------- ------------- -------------- Total revenue ...................................... 135,745,780 114,242,945 84,907,987 --------------- ------------- -------------- Expenses: Cost of goods sold .................................... 17,322,108 13,571,401 9,986,743 Research and development .............................. 84,924,323 67,653,087 56,172,848 Selling, general and administrative ................... 69,716,760 57,961,795 46,389,311 Litigation settlement and related agreements .......... 32,211,500 -- -- Acquired in-process research and development .......... 55,700,000 -- -- Merger-related costs .................................. -- -- 6,668,110 --------------- ------------- -------------- Total expenses ..................................... 259,874,691 139,186,283 119,217,012 --------------- ------------- -------------- Operating loss ......................................... (124,128,911) (24,943,338) (34,309,025) Other income and expense: Interest and other income ............................. 23,057,635 20,890,006 17,576,856 Interest expense ...................................... 27,334 82,971 2,080,981 --------------- ------------- -------------- Loss before tax benefit ................................ (101,098,610) (4,136,303) (18,813,150) Tax benefit ............................................ 98,442 1,231,964 1,809,677 --------------- ------------- -------------- Loss from continuing operations ........................ (101,000,168) (2,904,339) (17,003,473) Discontinued operations: Gain on sale of chiral assets ......................... 1,000,000 991,973 719,103 --------------- ------------- -------------- Net loss ............................................... $ (100,000,168) $ (1,912,366) $ (16,284,370) =============== ============= ============== Per share of common stock-basic and diluted: Loss from continuing operations ....................... $ (1.31) $ (0.04) $ (0.25) Discontinued operations: Gain on sale of chiral assets ....................... $ 0.01 $ 0.01 $ 0.01 Net loss applicable to common stockholders ............ $ (1.29) $ (0.03) $ (0.24) Weighted average number of shares of common stock outstanding -- basic and diluted .............. 77,337,000 75,108,000 66,598,000 =============== ============= ==============
See accompanying notes to consolidated financial statements. F-4 CELGENE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
SIGNAL CONVERTIBLE PREFERRED STOCK COMMON STOCK -------------------------------- ------------------------- SHARES AMOUNT SHARES AMOUNT ---------------- --------------- ------------ ------------ Balances at January 1, 2000 ............. 24,492,639 $ 41,330,800 17,858,476 $ 178,584 Exercise of stock options and warrants ............................... 2,424,930 24,250 Issuance of common stock for employee benefit plans ................. 40,394 404 Issuance of common stock in follow-on offering ..................... 2,934,000 29,340 Costs related to follow-on offering ..... Conversion of long term convertible notes .................................. 4,358,260 43,583 Shares issued for stock split ........... 43,305,104 433,051 Conversion of Signal preferred stock (24,492,639) (41,330,800) 3,078,725 30,787 Deferred compensation ................... Amortization of deferred compensation ........................... Expense related to non-employee stock options .......................... Collection of notes receivable from stockholders ........................... Issuance of Signal preferred stock warrants for promissory note ........... Comprehensive loss: Net loss ............................... Net change in unrealized gain (loss) on available for sale securities ............................ Total comprehensive loss ................ Balances at December 31, 2000 ........... -- $ -- 73,999,889 $ 739,999 =========== ============= ========== ========= COMMON STOCK NOTES IN TREASURY ADDITIONAL RECEIVABLE ----------------- PAID-IN ACCUMULATED DEFERRED FROM SHARES AMOUNT CAPITAL DEFICIT COMPENSATION STOCKHOLDERS -------- -------- ---------------- ------------------- ----------------- -------------- Balances at January 1, 2000 ............. -- $ -- $ 154,393,662 $ (204,170,352) $ (1,272,014) $ (95,600) Exercise of stock options and warrants ............................... 10,433,513 Issuance of common stock for employee benefit plans ................. 1,047,351 Issuance of common stock in follow-on offering ..................... 278,524,620 Costs related to follow-on offering ..... (885,160) Conversion of long term convertible notes .................................. 26,780,983 Shares issued for stock split ........... (433,051) Conversion of Signal preferred stock 41,301,822 Deferred compensation ................... 6,706,274 (6,706,274) Amortization of deferred compensation ........................... 3,087,681 Expense related to non-employee stock options .......................... 970,309 Collection of notes receivable from stockholders ........................... 33,600 Issuance of Signal preferred stock warrants for promissory note ........... 450,000 Comprehensive loss: Net loss ............................... (16,284,370) Net change in unrealized gain (loss) on available for sale securities ............................ Total comprehensive loss ................ Balances at December 31, 2000 ........... -- $ -- $ 519,290,323 $ (220,454,722) $ (4,890,607) $ (62,000) == ==== ============= =============== ============= ========== ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) TOTAL -------------- ----------------- Balances at January 1, 2000 ............. $ (91,904) $ (9,726,824) Exercise of stock options and warrants ............................... 10,457,763 Issuance of common stock for employee benefit plans ................. 1,047,755 Issuance of common stock in follow-on offering ..................... 278,553,960 Costs related to follow-on offering ..... (885,160) Conversion of long term convertible notes .................................. 26,824,566 Shares issued for stock split ........... -- Conversion of Signal preferred stock 1,809 Deferred compensation ................... -- Amortization of deferred compensation ........................... 3,087,681 Expense related to non-employee stock options .......................... 970,309 Collection of notes receivable from stockholders ........................... 33,600 Issuance of Signal preferred stock warrants for promissory note ........... 450,000 Comprehensive loss: Net loss ............................... (16,284,370) Net change in unrealized gain (loss) on available for sale securities ............................ 1,001,783 1,001,783 ------------- Total comprehensive loss ................ (15,282,587) ------------- Balances at December 31, 2000 ........... $ 909,879 $ 295,532,872 ========== =============
See accompanying notes to consolidated financial statements. F-5 CELGENE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
SIGNAL CONVERTIBLE COMMON STOCK PREFERRED STOCK COMMON STOCK IN TREASURY ADDITIONAL ----------------- ------------------------- ---------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL ------- ------ ----------- ------------ -------- ------------- ---------------- Balances at January 1, 2001 ......... -- $ -- 73,999,889 $ 739,999 -- $ -- $ 519,290,323 Exercise of stock options and warrants ........................... 1,544,625 15,446 6,760,473 Issuance of common stock for employee benefit plans ............. 29,014 290 741,219 Issuance of common stock for services ........................... 1,257 13 37,776 Purchase of treasury stock .......... (282) (2,804) Reduction of deferred compensation for terminations ...... (832,711) Amortization of deferred compensation ....................... Expense related to non-employee stock options and restricted stock granted to employees ............... 1,025,921 Collection of notes receivable from stockholders ....................... Comprehensive income: Net loss ........................... Net change in unrealized gain (loss) on available for sale securities ......................... Less: reclassification adjustment for gain included in net loss ...... Net unrealized gain (loss) on securities ......................... Total comprehensive income .......... Balances at December 31, 2001 ....... -- $ -- 75,574,785 $ 755,748 (282) $ (2,804) $ 527,023,001 == ==== ========== ========= ==== ========= ============= ACCUMULATED NOTES OTHER RECEIVABLE COMPREHENSIVE ACCUMULATED DEFERRED FROM INCOME DEFICIT COMPENSATION STOCKHOLDERS (LOSS) TOTAL ------------------- ----------------- -------------- -------------- ---------------- Balances at January 1, 2001 ......... $ (220,454,722) $ (4,890,607) $ (62,000) $ 909,879 $ 295,532,872 Exercise of stock options and warrants ........................... 6,775,919 Issuance of common stock for employee benefit plans ............. 741,509 Issuance of common stock for services ........................... 37,789 Purchase of treasury stock .......... (2,804) Reduction of deferred compensation for terminations ...... 832,711 -- Amortization of deferred compensation ....................... 2,465,406 2,465,406 Expense related to non-employee stock options and restricted stock granted to employees ............... 1,025,921 Collection of notes receivable from stockholders ....................... 20,000 20,000 Comprehensive income: Net loss ........................... (1,912,366) (1,912,366) Net change in unrealized gain (loss) on available for sale securities ......................... 6,760,396 6,760,396 Less: reclassification adjustment for gain included in net loss ...... (1,019,175) (1,019,175) Net unrealized gain (loss) on securities ......................... 5,741,221 ------------- Total comprehensive income .......... 3,828,855 ------------- Balances at December 31, 2001 ....... $ (222,367,088) $ (1,592,490) $ (42,000) $ 6,651,100 $ 310,425,467 =============== ============= ========== ============ =============
See accompanying notes to consolidated financial statements. F-6 CELGENE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
SIGNAL CONVERTIBLE COMMON STOCK PREFERRED STOCK COMMON STOCK IN TREASURY ----------------- ------------------------- ----------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT -------- -------- ------------ ------------ --------- ------------- Balances at January 1, 2002 ........... -- $ -- 75,574,785 $ 755,748 (282) $ (2,804) Exercise of stock options and warrants ............................. 1,246,600 12,466 Issuance of common stock for employee benefit plans ............... 35,398 354 1,160 4,351 Purchase of treasury stock ............ (878) (1,547) Conversion of long term convertible notes .................... 1,864,549 18,645 Shares issued for Anthrogenesis acquisition .......................... 1,455,381 14,555 Reduction of deferred compensation for terminations ........ Amortization of deferred compensation ......................... Expense related to non-employee stock options and restricted stock granted to employees ................. Income tax benefit upon exercise of stock options ........................ Comprehensive loss: Net loss ............................. Net change in unrealized gain (loss) on available for sale securities .......................... Less: reclassification adjustment for gain included in net loss ....... Net unrealized gain (loss) on securities .......................... Total comprehensive loss .............. Balances at December 31, 2002 ......... -- $ -- 80,176,713 $ 801,768 -- $ -- == ==== ========== ========= ===== ========= ACCUMULATED NOTES OTHER ADDITIONAL RECEIVABLE COMPREHENSIVE PAID-IN ACCUMULATED DEFERRED FROM INCOME CAPITAL DEFICIT COMPENSATION STOCKHOLDERS (LOSS) ---------------- ------------------- ----------------- -------------- -------------- Balances at January 1, 2002 ........... $ 527,023,001 $ (222,367,088) $ (1,592,490) $ (42,000) $ 6,651,100 Exercise of stock options and warrants ............................. 3,955,141 Issuance of common stock for employee benefit plans ............... 961,055 Purchase of treasury stock ............ Conversion of long term convertible notes .................... 11,694,955 Shares issued for Anthrogenesis acquisition .......................... 47,426,482 Reduction of deferred compensation for terminations ........ (327,748) 327,748 Amortization of deferred compensation ......................... 1,264,742 Expense related to non-employee stock options and restricted stock granted to employees ................. 467,223 Income tax benefit upon exercise of stock options ........................ 77,087 Comprehensive loss: Net loss ............................. (100,000,168) Net change in unrealized gain (loss) on available for sale securities .......................... 6,323,272 Less: reclassification adjustment for gain included in net loss ....... (5,946,128) Net unrealized gain (loss) on securities .......................... Total comprehensive loss .............. Balances at December 31, 2002 ......... $ 591,277,196 $ (322,367,256) $ -- $ (42,000) $ 7,028,244 ============= =============== ============= ========== ============ TOTAL ---------------- Balances at January 1, 2002 ........... $ 310,425,467 Exercise of stock options and warrants ............................. 3,967,607 Issuance of common stock for employee benefit plans ............... 965,760 Purchase of treasury stock ............ (1,547) Conversion of long term convertible notes .................... 11,713,600 Shares issued for Anthrogenesis acquisition .......................... 47,441,037 Reduction of deferred compensation for terminations ........ -- Amortization of deferred compensation ......................... 1,264,742 Expense related to non-employee stock options and restricted stock granted to employees ................. 467,223 Income tax benefit upon exercise of stock options ........................ 77,087 Comprehensive loss: Net loss ............................. (100,000,168) Net change in unrealized gain (loss) on available for sale securities .......................... 6,323,272 Less: reclassification adjustment for gain included in net loss ....... (5,946,128) -------------- Net unrealized gain (loss) on securities .......................... 377,144 -------------- Total comprehensive loss .............. (99,623,024) -------------- Balances at December 31, 2002 ......... $ 276,697,952 ==============
See accompanying notes to consolidated financial statements. F-7 CELGENE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 2002 2001 2000 ------------------- ----------------- ------------------ Cash flows from operating activities: Loss from continuing operations ............................... $ (101,000,168) $ (2,904,339) $ (17,003,473) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of long-term assets ............ 5,181,708 5,086,048 3,722,467 Provision for accounts receivable allowances ................. 294,533 553,168 130,000 Realized gain on marketable securities available for sale (5,946,128) (1,019,175) -- Non-cash acquired in-process research and development 55,700,000 -- -- Non-cash stock-based compensation ............................ 467,223 3,529,116 4,057,990 Amortization of premium on marketable securities available for sale ......................................... 366,967 212,066 -- Amortization of debt issuance and warrant costs .............. -- 28,560 700,000 Amortization of discount on note obligations ................. -- -- 274,848 Shares issued for employee benefit plans ..................... 965,760 741,509 1,047,755 Change in current assets & liabilities, excluding the effect of acquisition: Increase in accounts receivable .............................. (4,166,202) (4,122,269) (4,938,569) (Increase)decrease in inventory .............................. (1,198,433) 662,795 (1,810,198) (Increase)decrease in other operating assets ................. (2,916,715) 2,284,583 (10,649,979) Increase in accounts payable and accrued expenses ............ 19,298,041 5,750,073 9,793,831 Increase(decrease) in deferred revenue ....................... (4,866,000) (12,456,906) 13,239,782 --------------- -------------- -------------- Net cash used in operating activities ......................... (37,819,414) (1,654,771) (1,435,546) --------------- -------------- -------------- Cash flows from investing activities: Capital expenditures .......................................... (11,077,313) (7,869,661) (9,637,333) Cash outflow on Anthrogenesis acquisition, net of cash acquired ..................................................... (10,298,604) -- -- Proceeds from sales and maturities of marketable securities available for sale ........................................... 133,265,430 119,789,801 139,575,925 Purchases of marketable securities available for sale ......... (40,115,630) (231,373,743) (276,264,605) Proceeds from sale of chiral intermediate assets .............. 1,000,000 991,973 719,103 --------------- -------------- -------------- Net cash used in investing activities ......................... 72,773,883 (118,461,630) (145,606,910) --------------- -------------- -------------- Cash flows from financing activities: Net proceeds from follow-on public offering ................... -- -- 277,668,800 Proceeds from notes receivable from stockholders .............. -- 20,000 33,600 Proceeds from exercise of common stock options and warrants ..................................................... 3,967,607 6,775,919 10,457,762 Purchase of treasury stock .................................... (1,547) (2,804) -- Repayment of capital lease and note obligations ............... (586,732) (929,258) (1,593,127) --------------- -------------- -------------- Net cash provided by financing activities ..................... 3,379,328 5,863,857 286,567,035 --------------- -------------- -------------- Net increase (decrease) in cash and cash equivalents .......... 38,333,797 (114,252,544) 139,524,579 Cash and cash equivalents at beginning of period .............. 47,141,291 161,393,835 21,869,256 --------------- -------------- -------------- Cash and cash equivalents at end of period .................... $ 85,475,088 $ 47,141,291 $ 161,393,835 =============== ============== ==============
See accompanying notes to consolidated financial statements. F-8 CELGENE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
YEARS ENDED DECEMBER 31, -------------------------------------------------- 2002 2001 2000 ---------------- -------------- -------------- Supplemental schedule of non-cash investing and financing activity: Change in net unrealized gain(loss) on marketable securities available for sale ............................... $ (377,144) $ 5,741,221 $ 1,001,783 ============ =========== ============ Issuance of common stock upon the conversion of convertible notes and accrued interest thereon, net ......... $ 11,713,600 $ -- $ 26,737,824 ============ =========== ============ Issuance of common stock upon the conversion of convertible preferred stock and Signal preferred stock $ -- $ -- $ 41,330,800 ============ =========== ============ Deferred compensation relating to stock options .............. $ (327,748) $ (832,711) $ 6,706,274 ============ =========== ============ Issuance of common stock, options and warrants in connection with acquisition of Anthrogenesis ................ $ 47,441,037 $ -- $ -- ============ =========== ============ Supplemental disclosure of cash flow information: Interest paid ................................................ $ 27,334 $ 82,971 $ 3,114,144 ============ =========== ============ Cash received related to tax benefit ......................... $ -- $ 1,231,964 $ 1,809,677 ============ =========== ============
See accompanying notes to consolidated financial statements. F-9 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 (1) NATURE OF BUSINESS AND BASIS OF PRESENTATION Celgene Corporation and its subsidiaries (collectively "Celgene" or the "Company") is a fully-integrated biopharmaceutical company engaged in the discovery, development and commercialization of novel therapies designed to treat cancer and immunological diseases through regulation of cellular, genomic and proteomic targets. THALOMID(Reg. TM) (thalidomide), the Company's lead product, was approved for sale in the United States by the U.S. Food and Drug Administration on July 16, 1998, and sales of THALOMID(Reg. TM) in 2002 totaled $119.1 million. THALOMID(Reg. TM) is being evaluated in clinical trials for the treatment of solid tumor and hematological cancers as well as serious inflammatory diseases. In November 2001, Celgene received FDA approval for Focalin(TM), its refined version of Ritalin(Reg. TM), for the treatment of attention deficit disorder/attention deficit hyperactivity disorder. Focalin(TM) is marketed by Novartis Pharma AG. Under the agreement with Novartis, Celgene will collect royalties on the entire Ritalin(Reg. TM) family of products. Several classes of small molecule drugs highlight Celgene's product pipeline: IMiDs(TM) (Immunomodulatory Drugs), SelCIDs(TM) (Selective Cytokine Inhibitory Drugs), SERMs (Selective Estrogen Receptor Modulators), benzopyrans, kinase inhibitors, tubulin inhibitors and ligase modulators. These classes are novel and proprietary oral agents that are being developed for the treatment of solid tumor and hematological cancers and chronic inflammatory diseases, such as Crohn's disease and rheumatoid arthritis. On August 31, 2000, the Company completed its merger with Signal Pharmaceuticals, Inc., a privately held San Diego-based biopharmaceutical company focused on the discovery and development of drugs that regulate genes associated with disease. The Company issued 3,710,144 shares of its common stock for all the outstanding common shares of Signal at an exchange ratio of ..1257 of a share of Celgene common stock for each share of Signal common stock. Immediately prior to the consummation of the merger, all Signal preferred shares were converted into Signal common shares on a one-for-one basis. In addition, Celgene issued 380,607 options for all the Signal options outstanding at the closing date. The purchase price also included approximately $6.7 million representing merger related costs which consisted of transaction fees for financial advisors, attorneys, accountants and other related charges. The merger was accounted for as a pooling-of-interests. All prior period consolidated financial statements of Celgene have been restated to include the results of operations, financial position and cash flows of Signal. On December 31, 2002, the Company completed its merger with Anthrogenesis Corporation, a privately held New Jersey based biotherapeutics company pioneering the recovery of stem cells from human placental tissue following the completion of a full-term, successful pregnancy. The Company issued 1,455,381 shares of its common stock for all the outstanding common shares of Anthrogenesis at an exchange ratio of .4545 of a share of Celgene common stock for each share of Anthrogenesis common stock. An additional 1,247,203 shares are issuable upon the exercise of Anthrogenesis' outstanding stock options and warrants. Including the fair value of the options and warrants and direct costs of the merger, the purchase price of the merger was approximately $60.0 million. The merger was accounted for using the purchase method of accounting. The consolidated financial statements include the accounts of Celgene Corporation and its subsidiaries. All inter-company transactions have been eliminated. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. The Company is subject to certain risks and uncertainties such as uncertainty of product development, uncertainties regarding regulatory approval, no assurance of market acceptance of products, risk of product liability, uncertain scope of patent and proprietary rights, intense competition, and rapid technological change. F-10 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) CASH EQUIVALENTS At December 31, 2002 and 2001, cash equivalents consisted principally of highly liquid funds invested in commercial paper, money market funds, and United States government securities such as treasury bills and notes. These instruments are stated at cost, which approximates market value because of the short maturity of these investments. (B) MARKETABLE SECURITIES All of the Company's marketable securities are classified as securities available for sale in current assets and are carried at fair value. Such securities are held for an indefinite period of time and are intended to be used to meet the ongoing liquidity needs of the Company. Unrealized gains and losses (which are deemed to be temporary), if any, are reported in a separate component of stockholders' equity. The cost of the debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization, along with realized gains and losses, is included in interest income. The cost of securities is based on the specific identification method. A decline in the market value of any available-for-sale below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Premiums and discounts are amortized or accreted over the life of the related available-for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned. (C) CONCENTRATION OF CREDIT RISK Cash, cash equivalents, and marketable securities are financial instruments that potentially subject the Company to concentration of credit risk. The Company invests its excess cash primarily in U.S. government and agency securities and marketable debt securities of financial institutions and corporations with strong credit ratings. The Company also has established guidelines relative to diversification and maturities to maintain safety and liquidity. These guidelines are reviewed periodically and may be modified to take advantage of trends in yields and interest rates. The Company has for a majority of its investments held them to maturity. However, the Company has the ability to sell these investments before maturity and has therefore classified the investments as available for sale. The Company has not experienced any significant losses on its investments. (D) INVENTORY Inventories are carried at the lower of cost or market using the first-in, first-out (FIFO) method. (E) PLANT AND EQUIPMENT Plant and equipment are stated at cost. Depreciation of plant and equipment is provided using the straight-line method. The estimated useful lives of fixed assets are as follows: Laboratory equipment and machinery ..... 5 years Furniture and fixtures ................. 5 years Computer Equipment ..................... 3 years
Amortization of leasehold improvements is calculated using the straight-line method over the remaining term of the lease or the life of the asset, whichever is shorter. Maintenance and repairs are charged to operations as incurred, while renewals and improvements are capitalized. F-11 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) (F) GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of costs over the fair value of identifiable net assets of businesses acquired. The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. At the time of adoption of SFAS No. 142, the Company did not have any goodwill or other intangible assets with an indefinite useful life. (G) IMPAIRMENT OF LONG-LIVED ASSETS SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The Company adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not affect the Company's financial statements. In accordance with SFAS No. 144, long-lived assets, such as property, plant, and equipment, software costs and purchased intangibles subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet. Goodwill and intangible assets not subject to amortization are tested at least annually for impairment, and are tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. Prior to the adoption of SFAS No. 144, the Company accounted for long-lived assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. (H) OTHER ASSETS Other assets include capitalized costs associated with a new customer service system, an enhanced S.T.E.P.S.(Reg. TM) system, certain patent rights and licensed technology. Costs associated with the customer service system and the enhanced S.T.E.P.S.(Reg. TM) system, which were developed and implemented during 2000 and 2001, respectively, were capitalized in accordance with Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed and Obtained for Internal Use, and are amortized over their estimated useful life of three years from the date the system was ready for its intended use. At December 31, 2002 and 2001, computer software costs totaled approximately $4.2 million and $5.3 million, respectively, which is net of $4.4 million and $2.0 million in accumulated amortization, respectively. The cost of patent rights is amortized using the straight-line method over the F-12 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) life of the patents. The weighted average remaining patent life at December 31, 2002 is 9 years. Licensed technology is stated at cost and depreciated over the estimated useful life of three years using the straight-line method. At December 31, 2002 and 2001, patent rights and licensed technology totaled $0.9 million and $1.0 million, respectively which is net of $1.6 million and $1.5 million in accumulated amortization, respectively. (I) BUSINESS COMBINATIONS In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 requires that all business combinations be accounted for under a single method--the purchase method. Use of the pooling-of-interests method no longer is permitted. SFAS No. 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. Subsequent to SFAS 141 becoming effective, the Company completed its merger with Anthrogenesis on December 31, 2002, which was accounted for using the purchase method of accounting. The Company's merger with Signal, which was completed on August 31, 2000, was accounted for as a pooling-of-interests. (J) ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT ("IPR&D") The value assigned to acquired in-process research and development is determined by identifying those acquired specific in-process research and development projects that would be continued and for which (a) technological feasibility has not been established at the acquisition date, (b) there is no alternative future use, and (c) the fair value is estimable with reasonable reliability. (K) RESEARCH AND DEVELOPMENT COSTS All research and development costs are expensed as incurred. These include all internal costs, external costs related to services contracted by the Company and research services conducted for others. Research and development costs consist primarily of salaries and benefits, contractor fees, clinical drug supplies for preclinical and clinical development programs, consumable research supplies and allocated facility and administrative costs. (L) INCOME TAXES The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. Research and development tax credits will be recognized as a reduction of the provision for income taxes when realized. (M) REVENUE RECOGNITION Revenue from the sale of products is recognized upon product shipment. Provisions for discounts for early payments, rebates and sales returns under terms customary in the industry are provided for in the same period the related sales are recorded. Revenue under research contracts is recorded as earned under the contracts, as services are provided. In accordance with SEC Staff Accounting Bulletin No. 101, upfront nonrefundable fees associated with license and development agreements where the Company has continuing involvement in the agreement, are recorded as deferred revenue and recognized over the estimated service period. If the estimated service period is subsequently modified, the period over which the up-front fee is recognized is modified accordingly on a prospective basis. Revenues from the achievement of research and development milestones, which represent the achievement of a significant step in the research and development process, are recognized when and if the milestones are achieved. Continuation of certain contracts and grants are dependent upon the Company achieving specific F-13 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) contractual milestones; however, none of the payments received to date are refundable regardless of the outcome of the project. Grant revenue is recognized in accordance with the terms of the grant and as services are performed, and generally equals the related research and development expense. Until October 2001, Axys Pharmaceutical was treated as a related party, as the previous Chief Executive Officer of Axys served on the Signal Board of Directors at the time Signal and Axys entered into a collaboration agreement prior to the merger with Celgene. The initial term of that agreement expired in October 2001. Therefore revenue recognized subsequent to October 2001 is no longer classified as related party. Accordingly, there was no related party revenue recorded in 2002, and $1.9 million and $2.5 million of related party revenue was recorded in 2001 and 2000, respectively. Serono S.A. was treated as a related party based on its ownership interest in Signal at the time Signal and Serono entered into a collaboration agreement. The initial term of the agreement expired in November 2000 and while the agreement has been extended, Serono is no longer considered a related party. Accordingly, revenue from Serono of $3.8 million was recognized in 2000 as related party revenue. As a result of the merger with Signal, revenues from these companies have ceased being classified as related party revenue upon the expiration of the initial term of the respective agreements. (N) STOCK OPTION PLANS The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed plan stock options. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, as amended, established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123, as amended. When the exercise price of employee or director stock options is less than the fair value of the underlying stock on the grant date, the Company records deferred compensation for the difference and amortizes this amount to expense over the vesting period of the options. Options or stock awards issued to non-employees and consultants are recorded at their fair value as determined in accordance with SFAS No. 123 and EITF No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services and recognized over the related vesting period. F-14 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) The following table illustrates the effect on net loss and net loss per share as if the fair-value-based method under SFAS No. 123 had been applied.
2002 2001 2000 ------------------- ----------------- ------------------ Net loss applicable to common stockholders: As reported ....................................... $ (100,000,168) $ (1,912,366) $ (16,284,370) Add stock-based employee compensation expense included in reported net income ......... 1,515,208 2,675,074 3,087,681 Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards ......... (18,101,000) (22,990,000) (21,727,000) --------------- -------------- -------------- Pro forma ......................................... $ (116,585,960) $ (22,227,292) $ (34,923,689) Net loss per common share basic and diluted: As reported ....................................... $ (1.29) $ (0.03) $ (0.24) Pro forma ......................................... (1.51) (0.30) (0.52)
The pro forma effects on net loss applicable to common stockholders and net loss per common share for 2002, 2001 and 2000 may not be representative of the pro forma effects in future years since compensation cost is allocated on a straight-line basis over the vesting periods of the grants, which extends beyond the reported years. The weighted-average fair value per share was $8.13, $9.83 and $16.44 for stock options granted in 2002, 2001 and 2000, respectively. The Company estimated the fair values using the Black-Scholes option pricing model and used the following assumptions:
2002 2001 2000 ---------- ---------- ---------- Risk-free interest rate ....................... 2.02% 3.52% 4.84% Expected stock price volatility ............... 58% 57% 57% Expected term until exercise (years) .......... 2.89 2.81 2.81 Expected dividend yield ....................... 0% 0% 0%
(O) EARNINGS PER SHARE "Basic" earnings (loss) per common share equals net income (loss) applicable to common stockholders divided by weighted average common shares outstanding during the period. "Diluted" earnings per common share would equal net income applicable to common stockholders divided by the sum of weighted average common shares outstanding during the period plus common stock equivalents if dilutive. The Company's basic and diluted per share amounts are the same since the assumed exercise of stock options, and warrants, and the conversion of convertible debentures and preferred stock are all anti-dilutive. The number of common stock equivalents excluded from the calculation were 11,046,271 in 2002, 10,128,670 in 2001 and 11,033,930 in 2000. (P) COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) consists of net losses and the change in net unrealized gains (losses) on securities classified as available for sale and is presented in the consolidated statements of stockholders' equity (deficit). (Q) FINANCIAL INSTRUMENTS The fair value, which equals carrying value, of marketable securities available for sale is based on quoted market prices. For all other financial instruments, their carrying value approximates fair value due to the short maturity of these instruments. F-15 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) (R) WAREHOUSING AND DISTRIBUTION EXPENSES Warehousing and distribution expenses are included in selling, general and administrative expenses and totaled approximately $3.5 million, $5.4 million and $4.5 million in 2002, 2001, and 2000, respectively. (S) RECENTLY ISSUED ACCOUNTING STANDARDS In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's financial statements. The disclosure requirements are effective for consolidated financial statements of interim or annual periods ending after December 15, 2002. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements. (3) ANTHROGENESIS ACQUISITION As discussed in Note 1, on December 31, 2002, Celgene completed the acquisition of Anthrogenesis Corp., for an aggregate purchase price of $60.0 million. Anthrogenesis is an early-stage biotherapeutics company delivering stem cell therapies produced from renewable human placental sources/materials. The Company acquired Anthrogenesis to realize the substantial therapeutic and commercial potential of placental stem cells through its commercial and developmental infrastructure. The merger was consummated pursuant to the Purchase Option Agreement and Plan of Merger, dated April 26, 2002, as amended. The Company issued 1,455,381 shares of common stock valued at $31.2 million for all the outstanding shares of Anthrogenesis at an exchange ratio of .4545 of a share of Celgene common stock for each share of Anthrogenesis common stock outstanding. The Company also issued 1,247,203 Celgene stock options and warrants in exchange for all the Anthrogenesis stock options and warrants at the same exchange ratio. All of the Anthrogenesis options and warrants were vested at the time of their assumption by Celgene, or the exercise price of such options and warrants exceeded the market price of Celgene stock on the date of acquisition. The fair value of these options and warrants aggregating $16.7 million was included in the acquisition purchase price and were determined using the Black-Scholes model using the following assumptions: F-16 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) -- Fair market value of the underlying shares was based on the average closing price of Celgene's common stock on December 31, 2002. -- Risk free interest rate of 2%. -- Expected stock price volatility of 65%. -- Expected term until exercise 2.5 to 3 years. -- Expected dividend yield 0%. In addition, an outstanding convertible loan of $8.5 million due to the Company from Anthrogenesis, bearing interest at prime plus 2%, was also included in the purchase price. The purchase price also includes $3.6 million representing acquisition related costs, which consisted of transaction fees for financial advisors, attorneys, accountants and other related charges. The acquisition of Anthrogenesis was structured as a tax-free reorganization under Section 368(a) of the Internal Revenue Code and was accounted for using the purchase method of accounting for business combinations. The consolidated financial statements as of December 31, 2002 includes the net assets and liabilities of Anthrogenesis. The purchase price was allocated to the assets purchased and liabilities assumed based upon their respective fair values, with the excess of the purchase price over the estimated fair market value of net tangible and intangible assets acquired allocated to goodwill based on a third-party valuation report, as follows: Current assets ........................... $ 2,671,319 Property and equipment ................... 649,028 Non current assets ....................... 8,864 IPR&D .................................... 55,700,000 Intangible assets ........................ 3,010,000 Goodwill ................................. 2,972,784 ------------ Total assets acquired .................... 65,011,995 ------------ Current liabilities ...................... (3,547,463) Non current liabilities .................. (1,429,740) ------------ Total liabilities assumed ................ (4,977,203) ------------ Net assets acquired ...................... $ 60,034,792 ============
Approximately $55.7 million of the purchase price represents the estimated fair value of IPR&D projects that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed in the consolidated statement of income upon the acquisition date. Intangible assets acquired represent supplier agreements and customer lists and have a weighted average useful life of 11.6 years. Amortization expense for the next five fiscal years is expected to be approximately $315,000 per year. The goodwill from the Anthrogenesis acquisition has been allocated to the Company's Stem Cell Therapy segment. In accordance with SFAS 142, Goodwill and Other Intangible Assets, the Company will not amortize goodwill resulting from this acquisition, but will review it at least annually for potential impairment issues. This goodwill is not deductible for tax purposes. The allocation may be adjusted over the next three quarters as integration plans are finalized, as allowed by SFAS 141, Business Combinations. IPR&D represents that portion of the purchase price of an acquisition related to the research and development activities which are yet to demonstrate their technological feasibility and have no alternative future use. Accordingly, the IPR&D of $55.7 million was charged to operations upon the acquisition date. The estimated fair value of these projects was determined by employment of a F-17 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) discounted cash flow model. The discount rates used take into account the stage of completion and the risks surrounding the successful development and commercialization of each of the purchased in-process technology projects that were valued. The analysis included forecasted future cash flows that were expected to result from the progress made on the in-process project prior to the purchase dates. Appropriate operating expenses were deducted from the total forecasted net revenues to establish a forecast of net returns on the completed portion of the in-process technology. Finally, these net returns were discounted to a present value using discount rates that incorporate the weighted average cost of capital relative to the biotech industry and the Company as well as product specific risks associated with the purchased in-process research and development products. The product specific risk factors included the product's phase of development, likelihood of success, manufacturing process capability, scientific rationale, pre-clinical safety and efficacy data, target product profile, and development plan. In addition to the product specific risk factors, an overall discount rate of 36% was used for the purchase valuation, which represents a risk premium to the Company's weighted average cost of capital. The forecast data in the analysis was based on internal product level forecast information maintained by management in the ordinary course of managing the business. The inputs used by management in analyzing IPR&D was based on assumptions, which management believed to be reasonable but which are inherently uncertain and unpredictable. These assumptions may be incomplete or inaccurate, and no assurance can be given that unanticipated events and circumstances will not occur. The following unaudited pro forma results of operations of Celgene for the years ended December 31, 2002 and 2001, assumes the acquisition of Anthrogenesis has been accounted for using the purchase method of accounting as of January 1, 2002 and 2001, and assumes the purchase price has been allocated to the assets purchased and the liabilities assumed based on fair values at the date of acquisition. Anthrogensis' results of operations included in the following unaudited pro forma financial information are derived from their unaudited financial statements for the year ended December 31, 2002 and their audited financial statements for the year ended December 31, 2001. The unaudited pro forma net loss and loss per share amounts for both the years include the charge for purchased research and development of approximately $55.7 million, which was recognized at the acquisition date, and also include an adjustment to reflect amortization of intangibles recorded in conjunction with the acquisition. The unaudited pro forma results of operations is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial positions that would have occurred if the transactions had been consummated at the dates indicated, nor is it necessarily indicative of future operating results or financial position of the combined companies and should not be construed as representative of these amounts for any future dates or periods.
YEAR ENDED DECEMBER 31, ----------------------------------- 2002 2001 ----------------- --------------- Total revenues ............. $ 138,000,424 $ 115,521,280 Net loss ................... (112,897,451) (63,930,099) Net loss per share ......... $ (1.43) $ (0.83)
Prior to the merger, when two senior executives of the Company served on the Board of Directors of Anthrogenesis, the Company entered into the following transactions with Anthrogenesis: In April 2001, the Company entered into a license and development agreement with Anthrogenesis for the development of a human angiogenesis assay system for screening the effect of certain molecules on the process of neovascularization. The Company paid $250,000 for a one year exclusive, royalty-free license to all assay system technology. This payment was expensed upon the signing of the agreement. In December 2001, the Company entered into a second development agreement with Anthrogenesis for a period of one year which required Anthrogenesis to perform certain development work on several of the Company's compounds. The Company recorded a development fee of $250,000 which was amortized over the term of the agreement. F-18 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) (4) LITIGATION SETTLEMENT AND RELATED AGREEMENTS On December 31, 2002, the Company entered into a series of agreements with EntreMed, Inc. and Children's Medical Center Corporation to effectively terminate ongoing litigation relating to patents for thalidomide analogs and to grant an exclusive license to Celgene for the rights to those patents. Under the terms of an Asset Purchase Agreement the Company paid to EntreMed, $10,000,000 in cash for all thalidomide analog patents and associated clinical data and records and the termination of any litigation surrounding those patents. Under the terms of a Securities Purchase Agreement, the Company acquired from EntreMed 3,350,000 shares of Series A Convertible Preferred Stock and warrants exercisable into an additional 7,000,000 common shares for an aggregate cash consideration of $16,750,000. The Series A Convertible Preferred Stock is convertible, at the option of the Company, into an aggregate of 16,750,000 shares of common stock at an initial conversion price of $1.00 per share provided, however, that the conversion price in effect from time to time shall be subject to certain adjustments. Dividends will accrue at 6% per annum on the preferred stock. The Company shall have the right to one vote for each share of Common Stock into which such share of Series A Convertible Preferred Stock could then be converted and with respect to such vote the Company shall have full voting rights and powers equal to the voting rights and powers of the holders of shares of Common Stock. The warrants have an exercise price of $1.50 per share, vest after six months from the date of grant and expire after seven years from the date of grant. The Company completed an assessment of the estimated realizable value of the investment. Considering the level of the Company's ownership interest in EntreMed, its history of operating losses and the fact that EntreMed is a clinical-stage biopharmaceutical company engaged primarily in research and development activities with proposed products and research programs in the early stage of clinical development, and, based on such assessment, the entire amount of such Preferred Stock was written down. The Company signed an exclusive license agreement with CMCC which terminated any existing thalidomide analog agreements between CMCC and EntreMed and directly granted to Celgene an exclusive worldwide license for the analog patents. The Company paid to CMCC $2,500,000 under this agreement with another $2,500,000 payable between 2004 and 2006, the present value relating to which aggregating $2,201,500 was charged to 2002 operations. Additional payments are possible under the agreement depending on the successful development and commercialization of thalidomide analogs. Celgene recorded a charge to earnings for the cost of these agreements and related expenses of $32,211,500 in 2002 including write down of the EntreMed Convertible Preferred Stock and certain legal expenses incurred in connection with the settlement. (5) MARKETABLE SECURITIES AVAILABLE FOR SALE The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of available-for-sale securities by major security type and class of security at December 31, 2002 and 2001, were as follows:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 2002 COST GAIN LOSS VALUE - ------------------------------------ ---------------- ------------ --------------- -------------- Government agencies ................ $ 149,906 1,795 -- 151,701 Government bonds and notes ......... 553,593 5,235 -- 558,828 Corporate debt securities .......... 167,974,812 9,428,832 (2,407,618) 174,996,026 ------------- --------- ---------- ----------- $ 168,678,311 9,435,862 (2,407,618) 175,706,555 ============= ========= ========== ===========
F-19 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED)
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 2001 COST GAIN LOSS VALUE - ------------------------------------ --------------- -------------- ----------------- --------------- Government agencies ................ $ 24,668,882 $ 318,218 $ -- $ 24,987,100 Government bonds and notes ......... 553,594 15,076 -- 568,670 Corporate debt securities .......... 231,026,473 7,603,951 (1,286,145) 237,344,279 ------------- ----------- ------------ ------------- $ 256,248,949 $ 7,937,245 $ (1,286,145) $ 262,900,049 ============= =========== ============ =============
Maturities of debt securities classified as available-for-sale were as follows at December 31, 2002:
AMORTIZED FAIR COST VALUE --------------- --------------- Due within one year ............................ $ 21,122,872 $ 21,237,984 Due after one year through five years .......... 107,152,079 111,899,755 Due after five years through ten years ......... 38,560,675 40,568,816 Due after ten years ............................ 1,842,682 2,000,000 ------------- ------------- $ 168,678,308 $ 175,706,555 ============= =============
(6) INVENTORY
DECEMBER 31, ------------------------------- 2002 2001 -------------- -------------- Raw materials ................................. $ 2,680,398 $ 763,662 Work in process ............................... 555,232 1,710,305 Finished goods ................................ 1,570,140 1,129,495 ----------- ----------- $ 4,805,770 $ 3,603,462 =========== ===========
(7) PLANT AND EQUIPMENT Plant and equipment consists of the following:
DECEMBER 31, -------------------------------- 2002 2001 --------------- -------------- Laboratory equipment and machinery ......... $ 16,306,960 $ 9,172,226 Leasehold improvements ..................... 10,915,557 7,297,768 Computer equipment ......................... 3,944,806 2,957,346 Furniture and fixtures ..................... 3,456,798 2,731,996 Leased equipment ........................... 1,089,617 3,514,146 Construction in progress ................... 388,121 68,511 ------------ ------------ 36,101,859 25,741,993 Less: accumulated depreciation and amortization .............................. 16,501,796 15,096,346 ------------ ------------ $ 19,600,063 $ 10,645,647 ============ ============
F-20 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) (8) ACCRUED EXPENSES Accrued expenses consists of the following:
DECEMBER 31, ------------------------------- 2002 2001 -------------- -------------- Professional and consulting fees ......... $ 2,949,560 $ 3,514,287 Accrued compensation 11,579,121 4,847,558 Accrued interest, royalties and license fees .. 3,852,105 1,925,109 Accrued sales returns and rebates ............. 4,728,674 1,710,903 Accrued facility costs ........................ 2,445,025 -- Other ......................................... 2,020,488 1,669,165 ---------- ---------- $27,574,973 $13,667,022 ========== ==========
(9) CONVERTIBLE DEBT On September 16, 1998, the Company issued convertible notes to an institutional investor in the amount of $8.75 million. The notes had a five-year term and a coupon rate of 9.25% with interest payable on a semi-annual basis. The notes contained a conversion feature that allowed the note holders to convert the notes into common shares at $3.67 per share. These notes were issued at a discount of $437,500 which was being amortized over three years. On October 16, 2000, all of the notes were converted into 2,386,387 common shares. On January 20, 1999, the Company issued to an institutional investor convertible notes in the amount of $15.0 million. The notes had a five year term and a coupon rate of 9% with interest payable on a semi-annual basis. The notes contained a conversion feature that allowed the note holders to convert the notes into common shares after one year at $6.00 per share. Issuance costs of $750,000 incurred in connection with these notes were being amortized over three years. Just prior to the Company's follow-on offering on February 16, 2000, a portion of the notes totaling $9.3 million were converted into 1,548,000 common shares and included in the public offering. On May 17, 2000, an additional $4.0 million of the notes were converted into 666,399 common shares and issued to the note holders. On June 14, 2002, the remaining notes having a carrying value of $1.7 million were converted into 285,601 common shares. On July 6, 1999, the Company issued to an institutional investor convertible notes in the amount of $15.0 million. The notes had a five year term and a coupon rate of 9% with interest payable on a semi-annual basis. The notes contained a conversion feature that allows the note holders to convert the notes into common shares after one year at $6.33 per share. There was no fee or discount associated with these notes. On July 6, 2000, $5.0 million of the notes were converted to 789,474 common shares. On June 14, 2002, the remaining notes having a carrying value of $10.0 million were converted into 1,578,948 common shares. On September 26, 2000, the Company entered into an agreement with the note holders of the January 1999 and the July 1999 notes that allows the note holders to take a "short position" in the common stock (as defined in the respective Note Purchase Agreements) of the Company with certain limitations on transactions resulting in a "short position" based upon the level of the stock price. In exchange for the Company consenting to waive the provisions that prohibit short sales, the note holders waived the right to the receipt of any interest after the effective date of August 24, 2000. At December 31, 2001, the fair value of the Company's convertible notes exceeded their carrying value reflecting the increase to $31.92 per share in the market value of the Company's common stock. An increase in the market price of the Company's common stock over the conversion price has the effect of increasing the fair value of the convertible notes. (10) SECURED PROMISSORY NOTE In November 1996, the Company issued a secured promissory note for $3.0 million. The proceeds of the note payable were used for general corporate purposes and working capital. The note payable accrued interest at a rate of 14% and was secured by certain assets of the Company. The outstanding obligation at December 31, 1999 of approximately $396,000 was repaid upon its due date during May 2000. F-21 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) (11) STOCKHOLDERS' EQUITY PREFERRED STOCK The Board of Directors has the authority to issue, at any time, without further stockholder approval, up to 5,000,000 shares of preferred stock, and to determine the price, rights, privileges, and preferences of those shares. RIGHTS PLAN During 1996, the Company adopted a shareholder rights plan ("Rights Plan"). The Rights Plan involves the distribution of one "Right" as a dividend on each outstanding share of the Company's common stock to each holder of record on September 26, 1996. Each Right shall entitle the holder to purchase one-tenth of a share of common stock. The Rights trade in tandem with the common stock until, and are exercisable upon, certain triggering events, and the exercise price is based on the estimated long term value of the Company's common stock. In certain circumstances, the Rights Plan permits the holders to purchase shares of the Company's common stock at a discounted rate. The Company's Board of Directors retains the right at all times prior to acquisition of 15% of our voting common stock by an acquiror, to discontinue the Rights Plan through the redemption of all rights or to amend the Rights Plan in any respect. On February 17, 2000, the Company's Board of Directors approved an amendment to the Rights Plan changing the initial exercise price thereunder from $100.00 per Right (as defined in the original Rights Plan agreement) to $700.00 per Right and extending the final expiration date of the Rights Plan to February 17, 2010. (12) STOCK BASED COMPENSATION (A) STOCK OPTIONS AND RESTRICTED STOCK AWARDS The Company has two equity incentive plans ("Incentive Plans") that provide for the granting of options, restricted stock awards, stock appreciation rights, performance awards and other stock-based awards to employees and officers of the Company to purchase not more than an aggregate of 4,200,000 shares of common stock under the 1992 plan and 8,500,000 shares of common stock under the 1998 plan, as amended, subject to adjustment under certain circumstances. As a result of the merger with Signal, the Company also assumed the former Signal stock option plans. The options issued pursuant to the former Signal plans converted into Celgene options upon consummation of the merger at a .1257-for-1 exchange ratio. No additional options will be granted from the former Signal plans. As a result of the acquisition of Anthrogenesis, the Company also assumed the former Anthrogenesis stock option plans. Options that had been granted prior to Celgene's acquisiton of Anthrogenesis were granted at the fair market value of Anthrogenesis at the date of grant, as determined by the Anthrogenesis Board of Directors. Anthrogenesis options generally vested immediately and have a life of ten years from the date of grant. The Anthrogenesis options converted into Celgene options at an exchange ratio of .4545. The Management Compensation and Development Committee of the Board of Directors (the "Committee") determines the type, amount and terms, including vesting, of any awards made under the Incentive Plans. The 1992 Plan terminated in 2002 and the 1998 Plan will terminate in 2008. With respect to options granted under the Incentive Plans, the exercise price may not be less than the fair market value of the common stock on the date of grant. In general, each option granted under the Plans vests evenly over a three or four year period and expires 10 years from the date of grant, subject to earlier expiration in case of termination of employment. The vesting period for options and restricted stock awards granted under the Plans is subject to certain acceleration provisions if a change in control, as defined in the Plans, occurs. F-22 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) On and after September 19, 2000, stock options granted to executives at the vice-president level and above contain a reload feature which provides that if (1) the optionee exercises all or any portion of the stock option (a) at least six months prior to the expiration of the stock option, (b) while employed by the Company and (c) prior to the expiration date of the 1998 Long-Term Incentive Plan and (2) the optionee pays the exercise price for the portion of the stock option exercised or pays applicable withholding taxes by using common stock owned by the optionee for at least six months prior to the date of exercise, the optionee shall be granted a new stock option under the 1998 Long-Term Incentive Plan on the date all or any portion of the stock option is exercised to purchase the number of shares of common stock equal to the number of shares of common stock exchanged by the optionee to exercise the stock option or to pay withholding taxes thereon. The reload stock option will be exercisable on the same terms and conditions as apply to the original stock option except that (x) the reload stock option will become exercisable in full on the day which is six months after the date the original stock option is exercised, (y) the exercise price shall be the fair market value (as defined in the 1998 Long-Term Incentive Plan) of the common stock on the date the reload stock option is granted and (z) the expiration of the reload stock option will be the date of expiration of the original stock option. An optionee may not reload the reload stock option unless otherwise permitted by the Company's Compensation Committee. As of December 31, 2002, the Company has issued 620,000 stock options to executives which contain the reload features noted above. On June 16, 1995, the stockholders of the Company approved the 1995 Non-Employee Directors' Incentive Plan, which provides for the granting of non-qualified stock options to purchase an aggregate of not more than 1,050,000 shares of common stock (subject to adjustment under certain circumstances) to directors of the Company who are not officers or employees of the Company ("Non-Employee Directors"). Each new Non-Employee Director, upon the date of election or appointment, receives an option to purchase 20,000 shares of common stock. Additionally, upon the date of each annual meeting of stockholders, each continuing Non-Employee Director receives an option to purchase 10,000 shares of common stock (or a pro rata portion thereof for service less than one year). The shares subject to each non-employee director's option grant of 20,000 shares vest in four equal annual installments commencing on the first anniversary of the date of grant. The shares subject to an annual meeting option grant vest in full on the date of the first annual meeting of stockholders held following the date of grant. On June 22, 1999, the stockholders of the Company approved an amendment to the 1995 Non-Employee Directors' Incentive Plan that a.) increased the number of shares authorized to 1,800,000 and b.) provided for a discretionary grant upon the date of each annual meeting of an additional option to purchase up to 5,000 shares to a non-employee director who serves as a member (but not a chairman) of a committee of the Board of Directors and up to 10,000 shares to a non-employee director who serves as the chairman of a committee of the Board of Directors. All options are granted at an exercise price that equals the fair market value of the Company's common stock at the grant date and expire 10 years after the date of grant. This plan terminates in 2005. F-23 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) The following table summarizes the stock option activity for the aforementioned Plans:
OPTIONS OUTSTANDING ---------------------------- WEIGHTED AVERAGE SHARES EXERCISE AVAILABLE PRICE PER FOR GRANT SHARES SHARE --------------- --------------- ---------- Balance January 1, 2000 ........... 3,279,374 7,355,531 4.50 Authorized ....................... 2,417,100 -- -- Expired .......................... -- -- -- Granted .......................... (3,266,281) 3,261,281 42.20 Exercised ........................ -- (2,569,570) 3.66 Cancelled ........................ 99,555 (99,555) 19.62 Repurchases ...................... 2,197 -- -- ---------- ---------- ------ Balance December 31, 2000 ......... 2,531,945 7,947,687 20.05 Authorized ....................... 2,000,000 -- -- Expired .......................... -- -- -- Granted .......................... (1,111,450) 1,111,450 26.04 Exercised ........................ -- (1,304,960) 4.74 Cancelled ........................ 457,249 (457,249) 34.49 Repurchases ...................... 190 -- -- ---------- ---------- ------ Balance December 31, 2001 ......... 3,877,934 7,296,928 $ 22.80 Authorized ....................... -- -- -- Expired .......................... (73,706) -- -- Granted .......................... (3,204,884) 3,204,884 21.13 Exercised ........................ -- (279,117) 5.58 Cancelled ........................ 423,627 (423,627) 30.19 Repurchases ...................... 721 -- -- Assumed on acquisition ........... 137,031 1,030,364 11.37 ---------- ---------- ------- Balance December 31, 2002 ......... 1,160,723 10,829,432 21.37 ========== ========== =======
The following table summarizes information concerning options outstanding under the Incentive Plans at December 31, 2002:
WEIGHTED WEIGHTED WEIGHTED NUMBER AVERAGE AVERAGE NUMBER AVERAGE OUTSTANDING EXERCISE REMAINING EXERCISABLE EXERCISE RANGE OF EXERCISE PRICE AT 12/31/02 PRICE TERM (YRS.) AT 12/31/02 PRICE - ------------------------- ------------- ---------- ------------- ------------- ----------- $0.15 - 3.50 ............ 854,656 $ 2.26 4.8 854,656 $ 2.26 3.51 - 6.00 ............ 2,193,854 3.00 5.6 2,069,568 5.11 6.01 - 24.00 ........... 3,381,771 16.67 9.0 3,062,688 16.21 24.01 - 30.00 .......... 2,895,075 26.04 8.0 2,059,419 26.25 30.01 - 50.00 .......... 368,526 36.63 7.6 230,893 35.71 50.01 - 70.00 .......... 1,135,550 64.27 7.6 761,522 64.11 --------- -------- --- --------- -------- 10,829,432 $ 21.37 7.5 9,038,746 $ 19.27 ========== ======== === ========= ========
The Company recorded $6,706,274 and $1,024,244 of deferred compensation for options granted under the former Signal plans during 2000 and 1999, respectively, representing the difference between the option exercise price and the estimated fair value of the underlying stock for financial statement presentation purposes. The Company amortized the deferred compensation over the vesting period of the options and recorded $1,264,742, $2,465,406 and $3,087,681 of compensation expense during the years F-24 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) ended December 31, 2002, 2001 and 2000, respectively. During 2002, the Company reversed $327,748 of deferred compensation related to option holders who are no longer providing services to the Company. During 2001, the Company issued to certain employees an aggregate of 52,500 restricted stock awards. Such restricted stock awards will vest on September 19, 2006 unless certain conditions are met prior to the vesting date. The restricted stock awards provide for accelerated vesting during specified intervals in 25% increments if certain milestones relating to research and development activities and the level of the Company's stock price are met over the next three years. The fair value of these restricted stock awards at the grant date amounted to $1,385,625 which is being recorded as compensation expense over the contractual vesting period. During 2002 and 2001, the Company recorded $250,466 and $209,668, respectively, in compensation expense relating to these restricted stock awards, which is classified as selling, general and administrative expenses. Former non-employee directors of Signal, who entered into consulting agreements with Celgene effective August 31, 2000, held unvested stock options to purchase 36,457 shares of the Company's common stock. As a result, the Company is required to record compensation expense relative to the fair value of such options which is being recognized over the remaining vesting period for such options. During 2002, 2001 and 2000 the Company recorded $216,757, $854,042 and $970,309 in compensation expense relating to stock, stock options or warrants issued to consultants, advisors or financial institutions, respectively. (B) WARRANTS In connection with the placement of the Series B Convertible Preferred Stock in June 1997, the Company issued warrants to purchase 1,557,690 shares of common stock at an exercise price of $2.50 per share with a term of four years from the issuance date which ended on June 1, 2002. In May 2002, the remaining 967,693 warrants were exercised and the equivalent number of common shares were issued. As of December 31, 2002, there were no warrants outstanding. Upon the completion of the Anthrogenesis acquisition, Celgene assumed the Anthrogenesis warrants then outstanding. Anthrogenesis had issued warrants to investors at exercise prices equivalent to the per share price of their investment. Celgene has 216,839 warrants outstanding to acquire an equivalent number of shares of Celgene common stock at an average exercise price of $13.14 per warrant. (13) EMPLOYEE BENEFIT PLANS The Company has an investment savings plan and a deferred compensation plan for certain employees, of which the investment savings plan qualifies under Section 401(k) of the Internal Revenue Code. The Company's contributions to the savings plan are discretionary and have historically been made in the form of the Company's common stock. Such contributions are based on specified percentages of employee contributions and aggregated a total expense charged to operations of $2.9 million in 2002, $1.4 million in 2001 and $1.2 million in 2000. During 2000, the Company's Board of Directors approved a deferred compensation plan effective September 1, 2000. Eligible participants, which include certain top-level executives of the Company as specified by the plan, can elect to defer up to 25% of the participant's base salary, 100% of cash bonuses and restricted stock and stock options gains (both subject to a minimum deferral of 50% of each award of restricted stock or stock option gain approved by the Committee for deferral). Company contributions to the deferred compensation plan represent a 100% match of the participant's deferral up to a specified percentage (ranging from 10% to 25%, depending on the employee's position as specified in the plan) of the participant's base salary. The Company recorded $371,150, $359,608 and $52,541 in expense associated with the matching of the deferral of compensation for 2002, 2001 and 2000, respectively. All amounts are 100% vested at all times, except with respect to restricted stock, which will not be vested F-25 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) until the date the applicable restrictions lapse. At December 31, 2002 and 2001, the Company had a deferred compensation liability included in other non-current liabilities in the consolidated balance sheets of approximately $2.7 million and $1.6 million, respectively, which included the participant's elected deferral of salaries and bonuses, the Company's matching contribution and earnings on deferred amounts as of that date. The plan provides participants eight investment options for amounts they elect to defer. Such options include a combination of funds that offer the investor the option to spread their risk across a diverse group of investments. These investment choices include an equity and equity index fund, a bond fund, a fund that is balanced between equities and bonds, a fund that invests worldwide, a growth fund and a fund that invests in mid to large cap companies and seeks capital appreciation. (14) SPONSORED RESEARCH AND LICENSE AGREEMENT Novartis Pharma AG On April 19, 2000, the Company entered into an agreement with Novartis Pharma AG wherein the Company granted to Novartis an exclusive worldwide license for the development and marketing of d-methylphenidate, or d-MPH, its chirally pure version of Ritalin(Reg. TM). The Company also granted rights to all its related intellectual property and patents, including new formulations of the currently marketed Ritalin(Reg. TM). Celgene received a $10.0 million, nonrefundable, upfront license fee payment in July 2000 and is entitled to receive substantial milestone payments in addition to royalties on the entire family of Ritalin(Reg. TM) drugs. The upfront license fee of $10.0 million was recognized as revenue over a 17 month period commencing June 2000 which was management's estimate of the period of time required to fulfill its obligations related to obtaining FDA approval of the immediate release form of d-MPH. The Company received FDA approval to market the drug in November 2001. Accordingly, the Company recognized approximately $5.4 million and $4.6 million of research contract revenue in 2001 and 2000, respectively. The Company also received a milestone payment of $5.0 million in December 2000 upon acceptance of the New Drug Application, or NDA, by the FDA for d-MPH. The milestone payment was recognized as research contract revenue in December 2000. The Company received an additional milestone payment of $12.5 million in November 2001, upon FDA approval to market the drug which was recognized as research contract revenue. The Company incurred costs related to the agreement of approximately $0.0, $2.8 million and $9.4 million in 2002, 2001 and 2000, respectively. In December 2000, the Company signed a collaborative research agreement with Novartis for joint research of selective estrogen receptor modulator compounds, or SERMs, for the treatment and prevention of osteoporosis. The Company received a nonrefundable, upfront payment of $10.0 million and is entitled to receive milestone payments for specific preclinical, clinical and regulatory endpoints, as well as royalties upon commercialization of products receiving FDA marketing approval. The upfront payment was amortized over the two year research period. The Company incurred costs of approximately $1.8 million and $2.0 in 2002 and 2001, respectively, related to this agreement. The agreement was extended in December 2002 for an additional six months. Axys On October 15, 1999, the Company entered into a two-year collaborative research and license agreement with Axys to develop and commercialize certain compounds for use in the prevention and/or treatment of certain human diseases. The Company received an initial non-refundable license fee of $2.0 million, which was amortized over the term of the agreement, and the potential to receive additional payments based on the achievement of certain program milestones, as well as royalties upon commercial sales of certain products, if any. The Company also has the right to exercise a profit share option in the United States and possibly other territories at a predetermined point during development in lieu of royalties on product sales. In addition, Axys agreed to pay the Company certain amounts for the full time equivalent F-26 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) personnel working on the research. During 2001 and 2000, Axys paid $1.1 million and $1.5 million, respectively, to the Company, which represents the approximate cost of the full-time equivalent personnel working on the related research. This agreement expired in October 2001 and has not been renewed. Nippon Kayaku In February 1998, the Company entered into a two-year collaborative research and license agreement with Nippon Kayaku to develop and commercialize products based on or derived from a compound supplied by Nippon Kayaku for the treatment and prevention of diseases and disorders of the CNS and PNS. Nippon Kayaku agreed to pay the Company certain amounts for the full-time equivalent personnel working on the research. Nippon Kayaku paid $2.3 million in 2000 to the Company, which represents the approximate cost of the full-time equivalent personnel working on the related research. Each party was obligated to pay the other royalties on future product sales arising from the collaboration. This agreement expired in 2000 and has not been renewed. In February 2000, following the initial research phase of the collaboration, the Company executed an interim agreement with Nippon Kayaku under which the Company agreed to enter into a joint agreement to develop and commercialize neuroprotectant drugs for PNS and CNS disorders. In July 2000, the Company and Nippon Kayaku mutually agreed to conclude their collaboration. Nippon Kayaku was granted a worldwide, royalty-free license to certain compounds involved in the collaboration. Dupont In December 1997, the Company entered into a three-year collaborative research and license agreement with DuPont Pharmaceuticals to develop and commercialize novel products for the treatment and prevention of human immunodeficiency virus and hepatitis C virus infection. The Company received an initial non-refundable license fee of $1.0 million, which was amortized over the term of the agreement, and the potential to receive additional payments based on the achievement of certain program milestones, as well as royalties upon commercial sales of certain products, if any. In addition, DuPont agreed to pay the Company certain amounts for the full time equivalent personnel working on the research. Dupont paid $2.0 million in 2000 to the Company, which represents the approximate cost of the full-time equivalent personnel working on the related research. The agreement expired in 2000 and has not been renewed. Serono In November 1997, the Company entered into a three-year collaborative research, development and license agreement with Serono to perform research within the field of the modulation of NF-(Kappa Beta). The Company will receive payments based on the achievement of certain program milestones, as well as royalties upon commercial sales of certain products, if any. In addition, Serono made quarterly payments to the Company to fund research efforts. During 2001 and 2000, Serono paid $2.8 million and $3.0 million, respectively, to the Company, which represents the approximate cost of the full-time equivalent personnel working on the related research. Serono purchased shares of Signal's Series F Preferred Stock (which were ultimately exchanged into Celgene shares pursuant to the Signal merger) in conjunction with the license agreement. The original agreement was extended for one year and expired in November 2001. The agreement has not been renewed and the selected compounds have been transferred to Serono for further development, for which the Company will receive royalties upon commercial sales of such products, if any, as described above. F-27 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) (15) INCOME TAXES At December 31, 2002 and 2001, the tax effects of temporary differences that give rise to deferred tax assets are as follows:
2002 2001 ---------------- ---------------- Deferred assets: Federal and state net operating loss carryforwards ........ $ 143,719,598 $ 131,547,226 Capitalized research expenses ............................. 7,011,354 7,008,725 Research and experimentation tax credit carryforwards ..... 7,686,315 7,366,596 Plant and equipment, principally due to differences in depreciation ............................................. 1,879,831 1,841,857 Patents, principally due to differences in amortization ... 5,615,352 113,569 Accrued and other expenses ................................ 4,801,761 6,261,988 Unrealized losses on securities ........................... 6,686,332 -- -------------- -------------- Total deferred tax assets ................................ 177,400,543 154,139,961 Valuation allowance ......................................... (177,400,543) (154,139,961) -------------- -------------- Net deferred tax assets .................................. $ -- $ -- ============== ==============
During 2002, 2001 and 2000, the Company recognized a tax benefit of $652,618, $1,231,964 and $1,809,677, respectively, from the sale of certain State net operating loss carryforwards. In 2002, the Company also recognized state tax expense of $554,176 as a result of recent legislation in New Jersey, which has placed a temporary suspension on the usage of state net operating losses. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2002, the Company had Federal net operating loss carryforwards of approximately $371,400,000 and combined State net operating loss carryforwards of approximately $228,824,000 that will expire in the years 2003 through 2022. State net operating loss carryforwards differ from Federal net operating loss carryforwards primarily due to the fact that the Company sold approximately $84,150,000 of its State net operating loss carryforwards through December 31, 2002, and approximately $58,426,000 has expired. The Company also has research and experimentation credit carryforwards of approximately $7,686,000 that expire in the years 2003 through 2022. Ultimate utilization/availability of such net operating losses and credits may be curtailed if a significant change in ownership occurs. Signal experienced an ownership change, as that term is defined in section 382 of the Internal Revenue Code, when it was merged with Celgene. As such, there is an annual limitation on the use of this Net Operating Loss in the amount of approximately $11,580,000. Anthrogenesis also experienced an ownership change when acquired at December 31, 2002. Approximately $8,500,000 of deferred tax assets acquired in the Anthrogenesis acquisition at December 31, 2002 consisted primarily of net operating losses: as such there may be an annual limitation on the Company's ability to utilize the acquired net operating losses in the future. Upon realization of the Anthrogenesis acquired tax assets, the Company will credit the benefit to the related acquired goodwill and other intangibles. Of the deferred tax asset related to the Federal and State net operating loss carryforwards, approximately $67,304,000 relates to a tax deduction for non qualified stock options. The Company will increase paid in capital when these benefits are realized for tax purposes. The Company realized stock option deduction benefits in 2002 for New Jersey state income tax purposes and has increased paid in capital in the amount of approximately $77,000. F-28 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) (16) DISCONTINUED OPERATION On January 9, 1998, the Company concluded an agreement with Cambrex Corporation for Cambrex to acquire Celgene's chiral intermediate business for approximately $15.0 million. The Company received $7.5 million upon the closing of the transaction, and will receive future royalties with a present value not exceeding $7.5 million, with certain minimum royalty payments in the third through sixth year following the closing of the transaction. Included in the transaction are the rights to Celgene's enzymatic technology for the production of chirally pure intermediates for the pharmaceutical industry, including the current pipeline of third party products and the equipment and personnel associated with the business. Pursuant to the minimum royalty provision of the agreement, the Company received $1.0 million, $991,973 and $719,103 during 2002, 2001 and 2000, respectively. (17) COMMITMENTS AND CONTINGENCIES (A) LEASES The Company leases its offices and research facilities under several operating lease agreements. The minimum annual rents may be subject to specified annual rental increases. The non-cancelable lease terms for the operating leases expire at various dates between 2004 and 2012 and each agreement includes renewal options ranging from one or two additional three or five-year terms. Under the terms of one of these lease arrangements, the Company has an outstanding letter of credit for $150,000 in favor of the lessor, which is fully collateralized by cash. In general, the Company is also required to reimburse the lessors for real estate taxes, insurance, utilities, maintenance and other operating costs associated with the leases. The Company entered into a new lease arrangement in December 2001 to consolidate the Company's California research division into one building. The division completed the occupation of the new facility during the fourth quarter of 2002. The lease obligation relating to the remaining term of the old lease arrangement, which expires on December 31, 2003, aggregating approximately $1.0 million, was recognized as an expense for the year ended December 31, 2002 and the net book value with respect to related leasehold improvements and other unamortized assets aggregating $1.1 million was written off during the same period. The Company leased an additional 11,400 square feet of office space in Warren, N.J. in September, 2002. In July 1997, the Company entered into an equipment leasing agreement; under the agreement, the Company could lease up to $1.0 million of equipment for a three year term after which the Company could purchase the equipment for a nominal value. The Company leased $675,000 of laboratory equipment under this agreement in two separate take-downs, and the second three year term expired in June of 2001. Accordingly, the Company has purchased all the equipment for a nominal value. In addition, the Company leases certain laboratory equipment and machinery and office furniture under other capital lease arrangements with three year terms and options to extend the lease term to five years. Assets held under capital leases, net of accumulated amortization of $218,231 and $1,039,214 as of December 31 2002 and 2001, respectively, are included in plant and equipment and the amortization of these assets is included with depreciation expense. F-29 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments as of December 31, 2002 are:
OPERATING CAPITAL YEAR ENDING DECEMBER 31 LEASES LEASES - -------------------------------------------------- -------------- ----------- 2003 ...................................... $ 4,261,914 $ 91,072 2004 ...................................... 3,301,510 31,726 2005 ...................................... 3,338,176 9,603 2006 ...................................... 3,203,857 -- 2007 ...................................... 3,264,012 -- Thereafter ................................ 12,261,125 -- ------------ Total minimum lease payments .............. $ 29,630,594 132,401 ============ Less amount representing interest ......... 6,231 -------- Present value of net minimum capital lease payments ........................... 126,170 Less current installments of obligations under capital leases ..................... 86,318 -------- Obligations under capital leases, excluding current installments ..................... $ 39,852 ========
Total facilities rental expense under operating leases, excluding the write-off of the old Signal facility, amounted to $3.0 million, $2.3 million and $2.1 million in 2002, 2001 and 2000, respectively. (B) EMPLOYMENT AGREEMENTS The Company has employment agreements with certain officers and employees. Employment contracts provide for an increase in compensation reflecting annual reviews and related salary adjustment. Compensation expense related to the contracts aggregated $1.7 million in 2002. The outstanding commitment for ongoing employment contracts as of December 31, 2002 is approximately $2.1 (excluding any change in control provisions). (C) CONTRACTS Pursuant to the terms of a research and development agreement with The Rockefeller University , the Company has purchased for cash and stock options the world-wide exclusive license to manufacture and market any drugs, including THALOMID(Reg. TM), which may result from the research performed at Rockefeller and funded by the Company. The portion of the agreement that provides for research services to be performed by Rockefeller is renewable for one year terms upon agreement of both parties. Under terms of the current research agreement extension, the Company was committed to pay Rockefeller $504,000 annually for research. The agreement expired in 2002 and has not been renewed. The Company has an agreement with Penn Pharmaceutical, Ltd. of Great Britain for the production of THALOMID(Reg. TM). Penn manufactures THALOMID(Reg. TM) and sells it exclusively to the Company. The agreement has been extended through 2003 for facility payments totaling approximately $540,000. In October 1997, the Company entered into a contract with Boston University to manage the surveillance registry which is intended to monitor compliance to the requirements of the Company's S.T.E.P.S.(Reg. TM) (System for THALOMID(Reg. TM) Education and Prescribing Safety) program for all THALOMID(Reg. TM) patients. The contract is renewable for one year terms upon agreement of both parties and is currently being renegotiated for 2003. F-30 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) In December 1997, the Company entered into a research agreement with the University of Glasgow for clinical testing and evaluation of certain of Celgene's patented compounds. Under terms of the agreement, the Company agreed to pay the University approximately $200,000 in two annual installments. The term of the original agreement was for two years and is renewable for one year terms. The agreement has been renewed for 2003. In 1998, the Company paid $280,000 in cash and issued shares of common stock related to a license agreement with the University of Massachusetts and capitalized the value as purchased technology. The Company has future commitments to make additional payments based on the achievement of certain milestones, as well as royalties upon commercial sales, if any, of certain products. Such fees or milestone payments may also involve the issuance of shares of common stock, which would be recorded at fair value at the date of issuance. In March 2001, the Company entered into a Master Services Agreement with PPD Development, LLC, ("PPD"), a contract research organization, under which project addenda may be executed from time to time for PPD to provide services in support of clinical development projects. In 2001, the Company executed such project agreements. The Company incurred expenses of $1.1 million in 2002 and it is anticipated that it will incur expenses of approximately $1.2 million in 2003. In May 2001, the Company entered into an agreement with Pharmacia to conduct a collaborative study of THALOMID(Reg. TM) in combination with CAMPTOSAR(Reg. TM) (irinotecan) and 5-fluorouracil and leucovorin for the treatment of metastatic colorectal cancer. The Company incurred expenses of approximately $1.3 million in 2002 and expects to incur expenses of approximately $2.2 million in 2003. In November, 2001, the Company entered into a license agreement with Pharmion Corporation and Pharmion GmbH ("Pharmion") in which the Company granted an exclusive royalty-bearing license for its intellectual property covering thalidomide and S.T.E.P.S.(Reg. TM) in Europe and selected other countries outside North America in exchange for licensing payments and royalties. The agreement will terminate upon the tenth anniversary of the initial European regulatory approval of thalidomide, and pursuant to the agreement, the Company will receive $300,000 on a quarterly basis beginning in December 2001 until the initial European regulatory approval is received. In November, 2001, concurrent with the Pharmion License agreement, the Company entered into an agreement with Penn Pharmaceuticals, Ltd and its shareholders in which Penn granted an option to purchase their thalidomide Dedicated Containment Facilities, or DCF, and related thalidomide assets. The Company has three years in which to exercise the option. The purchase price will be determined in the future based on a formula defined in the agreement. In December, 2002, the Company signed a Master Services Agreement with PharmaNet, Inc., a contract research organization, to provide services in the management of two pivotal clinical trials for Thalomid in multiple myeloma. The Company incurred expenses of approximately $1.9 million in 2002 and anticipates expenses of approximately $8.0 million in 2003. The Company has signed a letter of intent and anticipates signing a master services agreement in the near future with Icon Clinical Research, a contract research organization, to provide services in the management of several pivotal clinical trials for REVIMID(TM) in multiple myeloma and metastatic melanoma. The Company incurred expenses of $2.8 million in 2002 and anticipates expenses of approximately $7.7 million in 2003. (D) CONTINGENCIES The Company believes it maintains insurance coverage adequate for its current needs. The Company's operations are subject to environmental laws and regulations which impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, F-31 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) storage and disposal of solid and hazardous wastes. The Company reviews the effects of such laws and regulations on its operations and modifies its operations as appropriate. The Company believes it is in substantial compliance with all applicable environmental laws and regulations. (18) SEGMENTS SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, requires the use of the management approach in identifying and disclosing financial information about segments of an enterprise. The management of the Company has determined that pursuant to the acquisition of Anthrogenesis (see Note 3), as of December 31, 2002, the Company operates in two business segments--human pharmaceuticals and stem cell therapies. The accounting policies of the segments are the same as described in the summary of accounting policies. HUMAN PHARMACEUTICALS The human pharmaceutical segment is engaged in the discovery, development and commercialization of pharmaceutical therapies designed to treat cancer and immunological diseases. The segment markets and sells its products in the United States and Canada. All of the Company's customers are located in North America. In 2002, 2001 and 2000, six customers accounted for 92%, 87% and 85% of total product sales revenue, respectively. At December 31, 2002, 2001 and 2000, these same customers had outstanding accounts receivable balances that represented 92%, 88% and 80% of the total accounts receivable balance, respectively. The segment estimates an allowance for doubtful accounts based on the creditworthiness of its customers as well as general economic conditions. Consequently, an adverse change in those factors could affect the Company's estimate of its bad debts. STEM CELL THERAPIES The stem cell segment delivers stem cell therapies that are produced from renewable human placental sources and initially directed toward major, unmet medical needs in the cancer field, with a primary focus on blood cancers such as leukemias, lymphomas and myelomas. The segment also engages in the private client banking of autologous stem cells and the development of an allogeneic bank for stem cell transplants. A reconciliation of the segment assets to the consolidated total assets as of December 31, 2002 is provided below: Human Pharmaceuticals ................ $ 56,793,090 Stem Cell Therapies .................. 9,311,995 Unallocated Corporate Assets ......... 261,181,643(1) ---------------- Total Assets ......................... $ 327,286,728 ================
(1) Unallocated corporate assets consist of cash and cash equivalents and marketable securities available for sale. F-32 CELGENE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 - (CONTINUED) (19) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED, --------------------------------------------- DECEMBER 31, SEPTEMBER 30, JUNE 30, 2002 2002 2002 -------------- --------------- -------------- (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenue ....................... $ 37,173 $ 34,258 $ 33,621 Gross profit (1) .................... 28,909 26,467 26,249 Litigation settlement and related agreements ......................... 32,212 -- -- Acquired in-process research and development ........................ 55,700 -- -- Tax benefit ......................... 98 -- -- Net income(loss) .................... $ (96,425) $ (1,037) $ (1,715) =========== ============ ============ Per share of common stock- basic and diluted: Net income(loss)-basic .............. $ (1.22) $ (0.01) $ (0.02) Net income(loss)-diluted ............ $ (1.22) $ (0.01) $ (0.02) Weighted average number of shares of common stock outstanding-basic .................. 78,715,000 78,583,000 76,377,000 Weighted average number of shares of common stock outstanding-diluted ................ 78,715,000 78,583,000 76,377,000 THREE MONTHS ENDED, --------------------------------------------------------------------------- MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 2002 2001 2001 2001 2001 -------------- -------------- --------------- -------------- -------------- (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Total revenue ....................... $ 30,694 $ 41,735 $ 26,178 $ 23,931 $ 22,399 Gross profit (1) .................... 23,974 22,006 18,463 15,841 14,313 Litigation settlement and related agreements ......................... -- -- -- -- -- Acquired in-process research and development ........................ -- Tax benefit ......................... -- 1,232 -- -- -- Net income(loss) .................... $ (823) $ 6,736 $ (6,342) $ (2,419) $ 113 ============ ============ ============ ============ ============ Per share of common stock- basic and diluted: Net income(loss)-basic .............. $ (0.01) $ 0.09 $ (0.08) $ (0.03) $ 0.00 Net income(loss)-diluted ............ $ (0.01) $ 0.08 $ (0.08) $ (0.03) $ 0.00 Weighted average number of shares of common stock outstanding-basic .................. 75,625,000 75,511,000 75,356,000 75,113,000 74,439,000 Weighted average number of shares of common stock outstanding-diluted ................ 75,625,000 81,674,000 75,356,000 75,113,000 80,608,000
(1) Gross profit is calculated as Product sales less Cost of goods sold F-33 SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS CELGENE CORPORATION
BALANCE AT ADDITIONS BALANCE AT BEGINNING OF CHARGED TO END OF YEAR EXPENSE OR SALES DEDUCTIONS YEAR -------------- -------------------- ------------ ----------- Year ended December 31, 2002 Allowance for doubtful accounts .......... 707,690 294,533 272,967 729,256 Allowance for sales returns .............. 857,494 4,777,853 (1) 2,852,561 2,782,786 Allowance for customer discounts ......... 290,705 2,411,966 (1) 2,412,167 290,504 ------- --------------- --------- --------- 1,855,889 7,484,352 5,537,695 3,802,546 ========= ================= ========= ========= Year ended December 31, 2001 .............. Allowance for doubtful accounts .......... 231,437 553,168 76,915 707,690 Allowance for sales returns .............. 381,088 2,440,460 (1) 1,964,054 857,494 Allowance for customer discounts ......... 151,140 1,785,306 (1) 1,645,741 290,705 --------- ----------------- --------- --------- 763,665 4,778,934 3,686,710 1,855,889 ========= ================= ========= ========= Year ended December 31, 2000 Allowance for doubtful accounts .......... 101,437 130,000 -- 231,437 Allowance for sales returns .............. 75,327 2,522,000 (1) 2,216,239 381,088 Allowance for customer discounts ......... 20,000 1,304,000 (1) 1,172,860 151,140 --------- ----------------- --------- --------- 196,764 3,956,000 3,389,099 763,665 ========= ================= ========= =========
(1) Amounts are a reduction from gross sales F-34 EX-10.32 3 ex10-32.txt EXHIBIT 10.32 EXHIBIT 10.32 EXCLUSIVE LICENSE AGREEMENT among CELGENE CORPORATION, CHILDREN'S MEDICAL CENTER CORPORATION, and, solely for purposes of Sections 1, 2.4, 2.5, 2.6, 4.2, 4.6, 8.2, 9.4, 11, 12, 13, and 16 hereof, ENTREMED, INC. EXCLUSIVE LICENSE AGREEMENT --------------------------- This Exclusive License Agreement ("Agreement") is made effective this 31st day of December, 2002 ("Effective Date") by and among CELGENE CORPORATION, a Delaware corporation having an address at 7 Powder Horn Drive, Warren, New Jersey, 07059, ("Celgene"), CHILDREN'S MEDICAL CENTER CORPORATION, a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts and having its principal office at 300 Longwood Avenue, Boston, Massachusetts 02115 ("CMCC"), and, solely for purposes of Sections 1, 2.4, 2.5, 2.6, 4.2, 4.6, 8.2, 9.4, 11, 12, 13, and 16 hereof, EntreMed, Inc., a Delaware corporation located at 9640 Medical Center Drive, Rockville, Maryland 20850 ("EntreMed"). RECITALS -------- WHEREAS EntreMed and Celgene are parties to that certain civil action captioned Celgene Corporation v. James E. Rogan and EntreMed, Inc., Case Number 1:02CV02277 (RBW), pending in the United States District Court for the District of Columbia, and that certain civil action captioned EntreMed, Inc. v. Celgene, Civil Action No. DKC-02-3787, pending in the United States District Court for the District of Maryland Southern Division (collectively, the "Litigations"); WHEREAS EntreMed and Celgene desire to settle the Litigations and, in connection therewith, to enter into an Asset Purchase Agreement by and between EntreMed, Inc. and Celgene dated December 31, 2002 ("Asset Purchase Agreement"), pursuant to which EntreMed will sell to Celgene certain assets relating to Thalidomide Analogs (as hereinafter defined); WHEREAS CMCC is the owner of certain Analog Patents (as hereinafter defined) relating to Thalidomide Analogs, and has exclusively licensed same to EntreMed pursuant to that certain Analog Agreement dated August 6, 2001 ("EntreMed Analog Agreement") and that certain License Agreement dated July 9, 2002 ("EntreMed 3-Amino Agreement"; the EntreMed Analog Agreement and the EntreMed 3-Amino Agreement, collectively, the "EntreMed Analog Agreements")); WHEREAS, in connection with the transactions contemplated by the Asset Purchase Agreement, EntreMed, CMCC and Celgene desire to terminate the EntreMed Analog Agreements, and for Celgene to enter into this Agreement, pursuant to which 2 CMCC shall directly grant Celgene an exclusive, worldwide license under the Analog Patents; WHEREAS this Agreement will supercede and replace in its entirety the EntreMed Analog Agreements, which shall automatically terminate without further action by any party upon execution hereof by Celgene and CMCC; and WHEREAS this Agreement is entered into pursuant to, and is a condition precedent to, the closing of the transactions contemplated by the Asset Purchase Agreement. NOW, THEREFORE, in consideration of the mutual promises and other good and valuable consideration, the parties agree as follows: 1. DEFINITIONS ----------- 1.1. "Affiliate" means and includes, as applied to any party, any corporation, company, partnership, joint venture, individual or other entity that controls, is controlled by or is under common control with such party, and "control" shall mean the direct and indirect ownership of at least fifty percent (50%) or the maximum percentage allowed by applicable law, whichever is less, of the outstanding stock or voting rights entitled to elect directors. 1.2. "Amino Thalidomide" means the compound with the following chemical structure: [GRAPHIC OMITTED] 1.3. "Amino Thalidomide Product" means and includes any product that contains Amino Thalidomide as an active ingredient. 3 1.4. "Analog Field" means and includes any and all uses of any Thalidomide Analog, alone or in combination, including without limitation (a) in humans and animals, and (b) for any and all diagnostic, prophylactic, therapeutic, and research and development uses. 1.5. "Analog Patents" means and includes: (a) the United States and foreign patents and patent applications listed in Appendix A; (b) the United States and foreign patents issued from applications listed in Appendix A; (c) all United States and foreign divisional and continuations of the patents and patent applications listed in Appendix A, and all resulting United States and foreign patents; (d) all United States continuation-in-part applications and equivalent foreign applications, and all resulting patent(s), that are directed to subject matter described in the United States and foreign patents and patent applications listed in Appendix A; (e) claims of all later-filed United States and foreign patent applications, and of the resulting patents, that are directed to subject matter described in the United States or foreign patents or patent applications in this Section 1.5; (f) all reissues, re-examinations, renewals and extensions of any United States or foreign patents or patent applications described in this Section 1.5. 1.6. "Confidential Information" means all materials, trade secrets or other information, including, without limitation, proprietary information and materials (whether or not patentable) regarding a party's technology, products, business information or objectives, which is designated as confidential in writing by the disclosing party, whether by letter or by the use of an appropriate stamp or legend, prior to or at the time any such material, trade secret or other information is disclosed by the disclosing party to the other party. Notwithstanding the foregoing to the contrary (a) materials, trade secrets or other information which is orally or visually disclosed by a party shall constitute Confidential Information if the disclosing party indicated at the time of such disclosure that such materials, trade secrets or other information were confidential and, within ten (10) business days after such disclosure, delivers to the other party a written document or documents describing the materials, trade secrets or other information and referencing the place and date of such oral or visual disclosure and the names of the persons to whom such disclosure was made, and (b) materials, trade secrets or other information which is disclosed in writing without an appropriate letter, stamp or legend shall constitute Confidential Information if the disclosing party, within ten (10) days after such disclosure, delivers to the other party a written document or documents describing the materials, trade secrets or other information, referencing the place and date of such written disclosure and the names of the persons to whom such disclosure was made. 4 1.7. "Licensed Method" means and includes any method the practice of which, by an unlicensed third party, would infringe any of the Analog Patents. 1.0. "Licensed Product" means and includes (a) any Amino Thalidomide Product; (b) any Revimid Product; (c) any product, the making, using, offering for sale, sale, or importation of which, by an unlicensed third party, would infringe any of the Analog Patents; and (d) any product that is disclosed as a species or encompassed by a genus described at column 7, line 1 through column 11, line 50 of U.S. Patent No. 5,712,291 which will not be unreasonably interpreted to encompass products that are not genuine thalidomide analogues including, without limitation, compounds currently referred to as SelCids(TM). 1.9. "Net Sales Revenue" means the gross amount received by the seller for sales of a Licensed Product to third parties, less: (i) cost of freight, postage, and freight insurance; (ii) sales taxes, value added taxes, excise taxes, and customs duties; (iii) cost of export licenses and any taxes, fees or other charges associated with the exportation or importation of such Licensed Product; (iv) rebates accrued, incurred or paid to Federal and State Medicaid and Medicare and any other price reductions required by a governmental agency; (v) rejected shipments, returns, recalls and retroactive deductions; (vi) the amount received for sales which become the subject of a subsequent temporary or partial recall by a regulatory agency for safety or efficacy reasons outside the control of the seller; and (vii) customary cash, quantity, and trade discounts, provided, however, that a sale or transfer to an Affiliate or Sublicensee for a sale by such Affiliate or Sublicensee shall not be considered a sale for the purposes of this provision but the resale by such Affiliate or Sublicensee shall be a sale for such purpose. 1.10. "Revimid" means the compound with the following chemical structure: [GRAPHIC OMITTED] 5 1.11. "Revimid Product" means and includes any product that contains Revimid as an active ingredient. 1.12. "Sponsored Research" means research conducted at CMCC in the Analog Field by, or under the direct supervision of, Dr. Robert D'Amato, the results of which Dr. D'Amato and CMCC are legally able to option to Celgene in accordance with Section 5 of this Agreement. 1.13. "Sponsored Research Invention" means and includes all inventions or discoveries in the Analog Field that are conceived or reduced to practice, actually or constructively, during and in the conduct of the Sponsored Research and that are not inventions or discoveries disclosed in or claimed by any of the Analog Patents. 1.14. "Sponsored Research Know-How" means and includes any and all technical information discovered or learned in connection with the Sponsored Research that is reasonably necessary or useful for practicing any Sponsored Research Patents, including all, formulas, methods, plans, samples, data, processes, specifications, characteristics, equipment, design, know-how, experience and trade secrets. 1.15. "Sponsored Research Method" means and includes any method the practice of which, by an unlicensed third party, would infringe any of the Sponsored Research Patents, expressly excluding any and all Licensed Methods. 1.16. "Sponsored Research Patent" means and includes and, and all patents and patent applications, worldwide, that describe or claim any Sponsored Research Invention. 1.17. "Sponsored Research Product" means and includes any product the making, using, offering for sale, saie, or importation of which, by an unlicensed third party, would infringe any of the Sponsored Research Patents, expressly excluding any and all Licensed Products. 1.18. "Sublicensee" means any corporation, partnership, business organization, or other third party entity or individual that is not controlled directly or indirectly by Celgene and to whom Celgene sublicenses any of the rights granted to Celgene hereunder. 1.19. "Thalidomide" means the chemical described as 2-(2,6- Dioxo-3-piperidinyl)-lH- isoindole-1,3(2H)-dione (or as otherwise defined in the Merck Index, entry 9390, 12th ed.), and pharmaceutically acceptable salts thereof. 1.20. "Thalidomide Analog" means and includes any and all analogs, metabolites, precursors, and hydrolysis products of Thalidomide, and all stereoisomers of each of the foregoing, including without limitation (a) all such compounds disclosed, generically or specifically, or claimed by any of the Analog Patents, (b) Amino Thalidomide and all stereoisomers and metabolites thereof; and (c) Revimid, and all stereoisomers and 6 metabolites thereof. 2. GRANTS, RELEASES AND COVENANTS NOT TO SUE ----------------------------------------- 2.1 Grant of License. CMCC hereby grants to Celgene a world-wide, exclusive royalty-bearing license, with the right to sublicense, subject to the provisions of Section 2.2 and 2.3 under CMCCs entire right, title and interest in and to the Analog Patents, to make, use, offer for sale, sell, import, practice, and otherwise dispose of any and all Licensed Products and Licensed Methods in the Analog Field. CMCC shall retain a royalty-free, non-exclusive, irrevocable license to practice Licensed Products and Licensed Methods under the Analog Patents for internal, non-commercial research purposes only. 2.2 Rights and Obligations Related to Government Funding. 2.2.1 Reservation of Rights. The rights granted to Celgene pursuant to Section 2.1 shall be subject to any reserved rights of the United States government pursuant to 35 U.S.C. Section 200 et seq. 2.2.2 Election of Title. In accordance with 35 U.S.C. Section 202, and all rules, laws and regulations promulgated in connection therewith, CMCC shall duly (a) disclose to the relevant Federal agency (as defined in 35 U.S.C. Section 201) all subject inventions (as defined in 35 U.S.C. Section 201) within the Analog Patents, including any arising after the Effective Date hereof, and (b) elect to retain title therein. 2.3. Notwithstanding the license granted in Section 2.1, CMCC shall have the right to grant a research license to the Analog Patents, including Licensed Methods and Licensed Products other than Revimid or a Revimid Product, to non-profit, non-commercial institutions for internal, non-commercial research purposes only, subject to Celgene's prior written consent, which shall not be unreasonably withheld. CMCC shall provide Celgene with a copy of each agreement related to any such license a reasonable time prior to its execution, but no less than twenty (20) business days, in order to allow Celgene to review and comment on same, and CMCC agrees to consider any such comments in good faith. Subject only to this Section 2.3 and Section 2.2.1 herein, CMCC hereby agrees that it shall not grant any other licenses, to make, have made, use, lease and/or sell Licensed Products or to utilize Licensed Methods during the period of time in which this Agreement is in effect. 2.4. Transfer of Materials. As soon as reasonably possible following the Effective Date, but in no event later than forty-five (45) days after such date, CMCC and EntreMed shall provide to Celgene originals or copies of all records, data and documentation relating to the Analog Patents, including without limitation true and complete copies of the prosecution files for all of the Analog Patents, expressly excluding any documents relating to either of 7 the litigations that would be immune from discovery under the attorney-client privilege or a work product immunity. 2.5. Settlement of the Litigations. Each of the Celgene, EntreMed and CMCC (the "Releasing Party"), on behalf of itself and its present and former officers, directors, employees, investors, shareholders, administrators, predecessor and successor corporations, Affiliates, agents, and assigns, hereby fully and forever releases, acquits and discharges each of the other Parties and its officers, directors, employees, investors, shareholders, administrators, predecessor and successor corporations, Affiliates, agents, independent contractors, vendors, vendees, customers, attorneys, all other persons acting for or on behalf of any or all of them, and the predecessors, successors, and assigns of each, of and from any claim, duty, obligation or cause of action relating to any matters of any kind, whether presently known or unknown, suspected or unsuspected, that the Releasing Party may have resulting from, or connected in any way with, the matters and things set forth and alleged, or which might have been set forth or alleged, in either of the Litigations. The foregoing releases do not extend to any claim or cause of action arising out of this Agreement. Without limiting the foregoing, it is understood that Celgene and EntreMed have entered into a separate Settlement and Mutual Release Agreement. 2.6. Covenant Not to Sue. EntreMed and CMCC each covenants and agrees, on behelf of itself and its present and former officers, directors, employees, investors, shareholders, administrators, predecessor and successor corporations, Affiliates, agents, and assigns, that it shall not assert, not assist in the assertion, of any claims, counterclaims, defenses or demands against Celgene, and its present and former officers, directors, employees, investors, shareholders, administrators, predecessor and successor corporations, Affiliates, agenets, independent contractors, vendors, vendees, customers, attorneys, all other persons acting for or on behalf of any or all of them, and the predecessors, successors, and assigns of each, for, on, or by reason of (a) any fact or circumstance alleged or involved in, or which gave rise to, any claim, counterclaim or defense asserted or that could have been asserted in either of the Litigations, and whether or not based in whole or in part on any fact or circumstance occurring on or after the date of execution of this Agreement, or (b) the making, using, offering for sale, sale or importation of any Licensed Product or Licensed Method. The foregoing covenant not to sue does not extend to or include any action by EntreMed or CMCC relating to enforcement of this Agreement. Without limiting the foregoing, it is understood that Celgene and EntreMed have entered into a separate Settlement and Mutual Release Agreement. 3. DILIGENCE --------- 3.1. Diligence by Celgene. Celgene shall use reasonable efforts, either directly or through any Sublicensee(s), to initiate and continue clinical development relating to one Licensed Product including either an Amino Thalidomide Product or Revimid Product, and 8 to publish the results thereof, consistent with contemporaneous reasonable scientific and business practices and judgments in the pharmaceutical industry and to secure regulatory approval and to make at least one Licensed Product available to the public. 3.2. Celgene's Discretion. CMCC agrees that (i) the decision regarding which Licensed Product to pursue regulatory approval of, and/or to fund and conduct clinical trials of, shall be made by and in the sole discretion of Celgene; and (ii) with respect to the manner in which any regulatory approval is sought and/or clinical trials are funded and conducted, Celgene shall have sole discretion, including, without limitation, complete control over any regulatory submissions for such Licensed Product to the appropriate regulatory agencies worldwide, including whether, when, and how to file, maintain, withdraw, or abandon an application for regulatory approval of same. In the event that Celgene determines, in the exercise of reasonable business judgment and consistent with then-prevailing scientific standards in the pharmaceutical industry, that the continued development of, and pursuit of regulatory approval for, Celgene's Licensed Product is not warranted or advisable, Celgene may, in its sole discretion, discontinue same, and Celgene's diligence obligations hereunder shall be deemed to be satisfied with respect to that Licensed Product. 3.3. Discontinuation of Development. In the event that Celgene fails to develop at least one Licensed Product pursuant to Section 3.1, then Celgene agrees to negotiate in good faith with CMCC to sublicense under commercially reasonable terms a Licensed Product to a third party. 3.4. CMCC's Right to Terminate for Lack of Due Diligence. Celgene acknowledges that the primary objective of CMCC with respect to the licenses granted hereby is to promote the development and marketing of Licensed Methods and Licensed Products for the public good. To this end, CMCC shall have the right to terminate this Agreement pursuant to Section 6.3 if Celgene fails to exercise reasonable diligence under Section 3.1 or 3.3. 4. PAYMENTS -------- 4.1. Payments to CMCC. In consideration for the termination of the EntreMed Analog Agreements and the rights and licenses granted herein, Celgene shall make the following payments to CMCC: 4.1.1. Lump Sum Payment. On the Effective Date of this Agreement, a one-time, lump sum, up-front payment of two and one- half million United States dollars ($2,500,000.00); and 4.1.2. Sponsored Research Funding. On the Effective Date, and on each of the immediately succeeding four anniversaries of such Effective Date, a non-terminable lump-sum payment of three-hundred thousand 9 United States Dollars ($300,000.00) to be used solely and exclusively to fund CMCC Sponsored Research. The parties agree that they will separately enter into and conclude by January 31, 2003, a sponsored research agreement with the terms pertinent to the Sponsored Research Funding provided for in this Agreement. In the event that Dr. D'Amato ceases to conduct Sponsored Research, or ceases to be employed by or otherwise affiliated with CMCC, then CMCC shall promptly notify Celgene, and propose a new principal investigator. Celgene may, in its sole discretion, agree to continue the Sponsored Research Funding with the new principal investigator or reject this investigator and Celgene's payment obligations under this Section 4.1.2 shall immediately terminate, effective as of the date of such cessation. In the event that Dr. D'Amato ceases to conduct Sponsored Research at CMCC but continues such research at another academic institution then the remainder of such sponsored research funding will transfer to the new institution. 4.2. Lump-Sum Payment to EntreMed. In consideration for the termination of the EntreMed Analog Agreements, and the settlement of the Litigations, Celgene shall pay to EntreMed, on the Effective Date of this Agreement, consideration as provided for in the Asset Purchase Agreement. 4.3. Running Royalties. ----------------- 4.3.1. On An Amino Thalidomide Product. In further consideration for the rights and license granted herein with respect to Amino Thalidomide, Celgene shall pay to CMCC, until the later of the termination of this Agreement or March 1,2013 plus the number of days equivalent to any patent term extension granted to Celgene for an Amino Thalidomide Product under 35 U.S.C. Section 156 with respect to March 1, 2013 only, a royalty equal to two and one-half percent (2.5%) of the Net Sales Revenue received by Celgene for sales of an Amino Thalidomide Product. 4.3.2. On A Revimid Product. In further consideration for the rights and license granted herein with respect to Revimid, Celgene shall pay to CMCC, until the later of the termination of this Agreement or March 1,2013 plus the number of days equivalent to any patent term extension granted to Celgene for a Revimid Product under 35 U.S.C. Section 156 with respect to March 1,2013 only, a royalty equal to one percent (1.0%) of the Net Sales Revenue received by Celgene for sales of a Revimid Product. 10 4.3.3. On A Licensed Product. In further consideration for the rights and license granted herein with respect to Licensed Products other than an Amino Thalidomide Product or a Revimid Product, Celgene shall pay to CMCC, a royalty equal to one percent (1.0%) of the Net Sales Revenue received by Celgene for sales of a Licensed Product other than an Amino Thalidomide Product or a Revimid Product. Celgene shall be obligated to pay such royalties under 4.3.3 beginning on the Effective Date and continuing until the latest of: (i) the termination or expiration of this Agreement; (ii) March 1,2013; or (iii) if such Licensed Product is disclosed as a species or encompassed by genus in U.S. provisional application no. 60/310,261, filed August 6, 200l or U.S. patent application no. 10/213,194, filed August 6, 2002 until August 6, 2021. It is expressly understood and agreed that Celgene shall not owe CMCC any royalties for an Amino Thalidomide Product or a Revimid Product other than that recited in Section 4.3.1 and 4.3.2, respectively. 4.3.4. Pre-Approval Royalties. Notwithstanding Sections 4.3.1,4.3.2, and 4.3.3 above, Celgene shall not be obligated to pay any royalty on Net Sales Revenues on sales of Licensed Products of under two hundred and fifty thousand U.S. dollars ($250,000.00) prior to receiving all necessary approvals to market any such product. 4.4. Sublicensee Revenue. If Celgene grants a sublicense ofits exclusive rights under this Agreement with respect to a Licensed Product other than a Revimid Product, Celgene shall pay to CMCC ten percent (l0%) of (a) any non-royalty consideration, including but not limited to any sublicensing and/or milestone payments, received by Celgene from such Sublicensee in exchange for the sublicense of Celgene's rights to such Licensed Product other than a Revimid Product hereunder, respectively, and (b) any royalty income paid by such Sublicensee to Celgene on Net Sales Revenue received by such Sublicensee for the sale of such Licensed Product other than a Revimid Product, respectively, including, without limitation, ten percent (10%) of any lump-sum commercialization milestone payments due to Celgene upon the occurrence of certain threshold levels of sales by such Sublicensee. It is understood that CMCC will not receive less than a royalty equal to (a) two and one-half percent (2.5%) of the Net Sales Revenue received by a Sublicensee for sales of an Amino Thalidomide Product, and (b) one percent (1%) of the Net Sales Revenue received by a Sublicensee for sales of a Revimid Product or a Licensed Product, excluding an Amino Thalidomide Product. It is further expressly understood that Celgene shall not owe CMCC any non-royalty consideration, including but not limited to any sublicensing and/or milestone payments received by Celgene from any Sublicensee for a Revimid Product. 11 4.5. Milestone Payments. 4.5.1 For a Revimid Product. In further consideration for the rights and licensed granted herein with respect to a Revimid Product, Celgene shall pay to CMCC, four and one-quarter million United States dollars ($4,250,000.00) within thirty (30) days after the first final approval by the United States Food and Drug Administration of a New Drug Application (NDA) filed by Celgene to market a Revimid Product. 4.5.2. For an Amino Thalidomide Product. In further consideration for the rights and licensed granted herein with respect to an Amino Thalidomide Product, Celgene shall pay to CMCC those payments owed to CMCC by EntreMed as of the Effective Date under Sections 4.1.2,4.1.3 and 4.1.4 of the EntreMed 3-Amino Agreement as follows: (a) $150,000 (one hundred and fifty thousand US. dollars) on May 17, 2003; (b) $525,000 (five hundred and twenty-five thousand U.S. dollars) due upon initiation of the first Phase III clinical trial for any indication for an Amino Thalidomide Product; and (c) $750,000 (seven hundred and fifty thousand U.S. dollars) due upon submission of an NDA (New Drug Application) for any indication for an pino Thalidomide Product. 4.5.3. On A Licensed Product. In further consideration for the rights and license granted herein with respect to Licensed Products other than an Amino Thalidomide Product or a Revimid Product, Celgene shall pay to CMCC the following payments: (a) $500,000 (five hundred thousand U.S. dollars) on January 1, 2004; (b) $l,000,000 (one million U.S. dollars) on January 1, 2005; (c) $1,000,000 (one million U.S. dollars) on January 1, 2006; and (d) $3,000,000 (three million US. dollars) within thirty (30) days after the first final approval by the United States Food & Drug Administration of a New Drug Application (NDA) filed by Celgene to market a Licensed Product other than a Revimid Product or an Amino Thalidomide Product. The payments due under Sections 4.5.3(a), (b) 12 and (c) shall be payable at the time specified above irrespective of any termination of this Agreement. 4.6. No Further Consideration. It is expressly acknowledged and agreed by the parties that, except as expressly set forth in this Section 4, Celgene shall have no obligation to pay to either EntreMed or CMCC any additional consideration in exchange for the settlement of the Litigations, the termination of the EntreMed Analog Agreements, or the rights and licenses granted to Celgene hereunder, and that no other consideration, including without limitation any royalty payments, shall be due to either EntreMed or CMCC for the making, using, offering for sale, sale, importation, practice or other disposition, by or on behalf of Celgene or any sublicensee thereof, of any Licensed Product or Licensed Method. 4.7. Records. Celgene shall keep full, true and accurate books of account containing all particulars that may be necessary for the purpose of showing the amounts payable to CMCC hereunder. Said books of account shall be kept at Celgene's principal place of business or the principal place of business of the appropriate division of Celgene to which this Agreement relates. Said books and the supporting data shall be retained for five (5) years following the end of the calendar year to which they pertain, and, upon reasonable advance written notice to Celgene, open to the inspection of CMCC or its agents for the sole purpose of verifying Celgene's royalty statement or compliance in other respects with this Agreement and not prior to the first sale of a Licensed Product. CMCC can request auditing of said books and supporting data no more than once each calendar year. Any such audit shall be conducted at CMCC's sole expense and during the normal business hours of Celgene by an independent certified public accountant selected by CMCC that is reasonably acceptable to Celgene. 4.8. Reports. Celgene, within forty-five (45) days after March 31, June 30, September 30 and December 31, of each year, shall deliver to CMCC true and accurate reports, giving such particulars of the business conducted by Celgene and its Sublicensees during the preceding three-month period under this Agreement as shall be pertinent to a royalty accounting hereunder. These shall include at least the following: 4.8.1. Quantity of Licensed Products sold. 4.8.2. Total billings for Licensed Products sold. 4.8.3. Accounting for all Licensed Products sold. 4.8.4. Deductions applicable as provided in Section 1.9. 4.8.5. Total royalties due. 4.8.6. Names and addresses of all Sublicensees of Celgene. 13 4.9. With each such report submitted, Celgene shall pay to CMCC the royalties due and payable under this Agreement. If no royalties shall be due, Celgene shall so report. On or before the ninetieth (90th) day following the close of Celgene's fiscal year, Celgene shall provide CMCC with Celgene's certified financial statements for the preceding fiscal-year including at a minimum, a Balance Sheet and an Operating Statement. 4.10. The royalty payments set forth in this Agreement shall, if overdue, bear interest until payment at a per annum rate of two percent (2%) above the prime rate in effect at the Fleet Bank of Boston on the due date. The payment of such interest shall not foreclose CMCC from exercising any other rights it may have as a consequence of the lateness of any payment. 5. OPTION TO SPONSORED RESEARCH INVENTIONS --------------------------------------- 5.1. Notice of Sponsored Research Inventions. CMCC shall notify Celgene in writing of each Sponsored Research Invention within thirty (30) days after CMCC becomes aware of same, and such notice shall describe each Sponsored Research Invention in detail sufficient to permit evaluation by Celgene. 5.2. Grant of Exclusive Option. CMCC hereby grants Celgene an exclusive option ("Option") to enter into a License Agreement granting Celgene and its Affiliates (a) an exclusive, worldwide, royalty-bearing license, with the right to sublicense, under any Sponsored Research Patents, and (b) a non-exclusive, worldwide license, with the right to sublicense, under any Sponsored Research Know-How, in each case to make, use, offer for sale, sell, import, practice and otherwise dispose of any and all products and methods in the Analog Field. The term of the Option granted to Celgene hereunder shall begin on the Effective Date hereof and terminate, on a Sponsored Research Invention-by-Sponsored Research Invention basis, nine (9) months after receipt by Celgene of the notice set forth in Section 5.1 of this Agreement ("Option Period"). 5.3. Exercise of Option by Celgene. Celgene may exercise its Option with respect to any Sponsored Research Invention, and the related Sponsored Research Patents and Sponsored Research Know-How, at any time during the relevant Option Period by providing written notice to CMCC stating that it is exercising such Option. With respect to any particular Sponsored Research Invention, if Celgene expressly rejects its Option or the Option Period lapses without any such written notice from Celgene, then CMCC shall have no further obligation to Celgene with respect to such Sponsored Research Invention, it being understood and agreed that Celgene's rights and Option with respect to each other Sponsored Research Invention, and the related intellectual property, shall continue in full force and effect. 14 5.4. Negotiation of Agreement. Upon the first exercise by Celgene of any Option set forth in Section 5.2 hereof, CMCC and Celgene agree to negotiate in good faith for up to ninety (90) days, or any mutually agreed-upon extension thereof ("Negotiation Period"), for the financial and other material terms of the a license agreement, which shall be in accordance with Section 5.5 of this Agreement ("License Agreement"). CMCC agrees that it will not, during any Option Period and the Negotiation Period, solicit, offer, negotiate or enter into with any third party any agreement, contract or understanding that would be inconsistent with the grant of the Options to Celgene hereunder. If the parties are unable to negotiate and execute a mutually acceptable License Agreement within the Negotiation Period, CMCC shall have no further obligation to Celgene with respect to the Sponsored Research Invention that was the subject of such first-exercised Option, and the terms and conditions of this Section 5.4 shall apply to each subsequently exercised Option until a License Agreement is executed. 5.5. Consideration for License Agreement. In addition to the licenses set forth in Section 5.2 of this Agreement, and in consideration of the rights and licenses granted to Celgene under the License Agreement pursuant to Section 5.4, Celgene shall pay, on a worldwide, annual basis, a commercially reasonable royalty on Net Sales Revenues (as defined herein, mutatis mutandis) received for the sale of Sponsored Research Products or Sponsored Research Methods which royalty rate shall be negotiated in good faith. 6. TERM AND TERMINATION -------------------- 6.1. Term. Unless otherwise terminated by operation of law or by acts of Celgene or CMCC in accordance with the terms of this Agreement, this Agreement shall terminate upon expiration of all payment obligations under Article 4, whereupon Celgene shall have a royalty-free license to practice the Analog Patents, and to make, use, offer for sale, sell and import Licensed Products. 6.2. Termination By Celgene. With the exception of the Sponsored Research Funding of Section 4.1.2, which is non-terminable, this Agreement and all of Celgene's rights and obligations hereunder shall be terminable by Celgene, if Celgene or its Affiliates or Sublicensee(s) ceases to develop at least one Licensed Product, including either an Amino Thalidomide Product or a Revimid Product, upon ninety (90) days written notice to CMCC, and upon payment of all accounts due CMCC through the effective date of termination. In such event, the provisions of Section 3 shall apply. 6.3. Termination Bv CMCC. ------------------- 6.3.1. Non-payment of milestone payments or royalties. Should Celgene fail to pay CMCC milestone payments or royalties due and payable hereunder with respect to a Licensed Product, CMCC shall have the right to terminate this Agreement on ninety 15 (90) days notice with respect to such Licensed Product, unless Celgene shall pay CMCC within the ninety (90) day period, all such royalties and interest due and payable on such Licensed Product. Upon the expiration of the ninety (90) day period, if Celgene shall not have paid all such royalties and interest due and payable for such Licensed Product, the rights, privileges and license granted hereunder with respect to such Licensed Product only shall terminate. 6.3.2. Termination for Lack of Due Diligence. CMCC shall have the right to terminate this Agreement if Celgene or its Affiliates or Sublicensee(s) fails to meet its diligence under Article 3 with respect to at least one Licensed Product. CMCC shall notify Celgene thereof in writing, and Celgene shall have ninety days (90) days following such notification to establish to the reasonable satisfaction of CMCC that (i) Celgene, or its Affiliates or Sublicensee(s), has met such objective or (ii) a revised due diligence plan is necessary and appropriate. In the event Celgene fails to establish the same to CMCC's reasonable satisfaction within the appropriate time, CMCC shall have the right to terminate in whole or in part the license granted to Celgene under this Agreement. 6.4. Accrued Obligations. Any termination of this Agreement for any reason does not relieve either party of any obligation or liability accrued prior to the termination or rescind anything done by either party and the termination does not affect in any manner any rights of either party arising under this Agreement prior to the termination. 6.5. Non-Termination of Sublicensee Agreement. CMCC agrees that if Celgene has provided to CMCC notice that Celgene has granted a sublicense to a Sublicensee under this Agreement, then in the event CMCC terminates this Agreement for any reason, CMCC shall provide to such Sublicensee not less than thirty (30) days prior to the effective date of said termination, written notice of said termination at the address specified by Celgene to CMCC in Celgene's notice to CNCC under Section 11.1. CMCC agrees that upon the Sublicensee's notice as described below and provided the Sublicensee is not in breach of its sublicense, CMCC shall grant to such Sublicensee license rights and terms equivalent to the sublicense rights and terms which the sublicense shall have granted to said Sublicensee; provided that the Sublicensee shall remain a Sublicensee under this Agreement for a period of at least sixty (60) days following receipt of notice from CMCC. Sublicensees shall during said sixty (60) day period provide to CMCC notice wherein the Sublicensee: (i) reaffirms the terms and condition of this Agreement as it relates to the rights the Sublicensee has been granted under the sublicense; (ii) agrees to abide by all of the terms and conditions of this Agreement applicable to Sublicensees and to discharge directly all pertinent obligations of Celgene which Celgene is obligated hereunder to discharge; and (iii) acknowledges that CMCC shall have no obligations to the Sublicensee other that its obligations set forth in this Agreement with regard to Celgene. 16 6.6. Survival. The terms and conditions of Sections 1,2.5,2.6,6.4,6.5, 10, 11 and 13 through 16, inclusive, shall survive termination or expiration of this Agreement for as long as necessary to permit their full discharge. 7. WARRANTIES AND DISCLAIMERS -------------------------- 7.1. By CMCC. CMCC represents and warrants to Celgene that (a) to the best of its knowledge and with the exception of certain applications which are co-owned with EntreMed, CMCC owns the entire right, title and interest in and to the Analog Patents, (b) CMCC has the lawful right to enter into the Agreement and to grant the licenses hereunder without the consent or approval of another person or entity; (c) the patents and application set forth on Appendix A hereto constitute all of the Analog Patents in which CMCC has an interest on the Effective Date hereof; and (d) other than the named co-inventors on certain of the applications co-owned with EntreMed, CMCC is not aware of any person other than Dr. Robert D'Amato who CMCC believes is, or should be named as, an inventor of any of the Analog Patents. 7.2. By Celgene. Celgene warrants to CMCC that it has the lawful right and authority to enter into this Agreement without the consent or approval of another person or entity. 7.3. Limitation on Damages. IN NO EVENT WILL EITHER PARTY BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE USE OF LICENSED PRODUCTS OR LICENSED METHODS. 17 8. PATENT PROSECUTION ------------------ 8.1. By Celgene. Celgene shall have the sole right, but not the obligation, to apply for, prosecute, maintain, renew, extend, abandon, disclaim in whole or in part, or otherwise dispose of, including without limitation the right to prosecute, defend, settle, resolve or otherwise dispose of any interference with any third party's patent rights, including without limitation any patent rights of Celgene, whether before the United States Patent and Trademark Office ("PTO") or any United States court (all of the foregoing, to "Prosecute") any and all Analog Patents, using counsel selected by Celgene. All reasonable costs and expenses of the Prosecution of the Analog Patents (including all governmental filing fees)' shall be paid by Celgene. Celgene shall provide CMCC with copies of all substantive documents received from, or filed with, the PTO and all analogous foreign patent offices in connection with the Prosecution of the Analog Patents. 8.2. Cooperation by CMCC and EntreMed. CMCC and EntreMed shall render reasonable assistance to Celgene in the Prosecution of the Analog Patents in such countries whenever requested to do so upon reasonable notice, including without limitation to cooperate, and to require each past or present employee, consultant, representative, contractor, agent or other individual under the custody or control of CMCC or EntreMed (including without limitation any such individual that is, or is identified as, an inventor of any of the Analog Patents) to cooperate, with Celgene, its attorneys, agents, successors and assigns, to Prosecute, assert, enforce and defend, and to otherwise protect any and all of the Analog Patents and Celgene's rights therein, including, without limitation, to (a) execute such documents, sign all lawful papers, and make all rightful oaths as Celgene deems reasonably necessary or appropriate in connection with same; (b) communicate any facts known or reasonably available respecting any of the Analog Patents; and (c) provide all documents, samples and other tangible materials necessary or useful testimony to Prosecute, assert, enforce and/or defend any of the Analog Patents. Celgene shall reimburse EntreMed and CMCC for all reasonable costs and expenses incurred in connection with rendering such assistance. 9. PATENT INFRINGEMENT ------------------- 9.1. Notice. In the event that either Celgene or CMCC becomes aware of any potential infringement of any of the Analog Patents, such party shall notify the other party(ies) of the potential infringement in writing and provide a summary of the relevant facts and circumstances known to such party relating to such infringement. CMCC shall not notify a third person of the potential infringement of any of the Analog Patents without first obtaining the express written consent of Celgene. 9.2. By Celgene. CMCC hereby grants to Celgene all rights to sue and recover damages or obtain injunctive relief for past and future infringement, misappropriation, violation or 18 breach of any of the Analog Patents. Celgene shall have the sole right, but shall not be obligated, to prosecute, at its own expense, any infringements of the Analog Patents, to defend the Analog Patents and to recover, for its own account, any damages, awards or settlements resulting therefrom. If Celgene recovers any damages, the damages shall first be used to reimburse Celgene for the prosecution or defense of such action, then to reimburse CMCC for any loss of royalties payable hereunder, and the remaining damages shall be for Celgene's own account. CMCC agrees that Celgene may join it as a party plaintiff in any such suit, without expense to CMCC. Celgene shall have sole control of any such suit and all negotiations for its settlement or compromise, and shall have the sole right to sublicense any alleged infringer for future use of the Analog Patents. 9.3. Joinder of CMCC. In the event that any action, suit or proceeding is brought against, or written notice or threat thereof is provided to, Celgene alleging infringement of any patent or unauthorized use or misappropriation of technology arising out of or in connection with Celgene's practice of Analog Patents, Celgene shall have the right to defend at its own expense such action, suit or proceeding and, in furtherance of such rights, CMCC hereby agrees that Celgene may join it as a party in such suit, without expense to CMCC. Celgene shall hold harmless and indemnify CMCC from and against any order for costs arising without fault of CMCC that may be made against CMCC in such proceedings, unless such order arises out of or relates to facts and circumstances involving a breach of any representations or warranty by any one or more of CMCC. 9.4. Cooperation of CMCC and EntreMed. In the event that Celgene shall undertake the enforcement and/or defense of the Analog Patents by legal or patent office proceedings pursuant to this Agreement, CMCC and EntreMed shall, at the request and expense of Celgene, cooperate in all reasonable respects and, to the extent possible, have its employees testify when requested and make available relevant records, papers, information, samples and the like. 19 10. UNIFORM INDEMNIFICATION AND INSURANCE PROVISIONS ------------------------------------------------ 10.1. Celgene shall indemnify, defend and hold harmless CMCC, its corporate affiliates, current or future directors, trustees, officers, faculty, medical and professional staff, employees, students and agents and their respective successors, heirs and assigns (the "Indemnitees"), against any claim, liability, cost, damage, deficiency, loss, expense & obligation of any kind or nature (including without limitation reasonable attorneys' fees and other costs and expenses of litigation) incurred by or imposed upon the Indemnitees or any one of them in connection with any claims, suits, actions, demands or judgments arising out of any theory of product liability (including, but not limited to, actions in the form of tort, warranty, or strict liability) concerning any product, process or service made, used or sold pursuant to any right or license granted under this Agreement. 10.2. Celgene agrees, at its own expense, to assume the defense of any actions brought or filed against any Indemnitee with respect to the subject of indemnity contained herein, whether or not such actions are rightfully brought, using counsel reasonably acceptable to CMCC, and Celgene shall have the exclusive right to control any such defense and to settle any such action. 10.3. Each Indemnitee intending to claim indemnification under this Article 10 shall promptly notify Celgene of any loss, claim, damage, liability or action in respect of such claim. The failure to deliver notice to Celgene within a reasonable time after commencement of any such loss, claim, damage, liability or action shall relieve Celgene of any liability to any Indemnitee under this Article 10 to the extent that such failure prejudices Celgene's ability to defend same, but the omission to so deliver notice to Celgene will not relieve it of any liability that it may otherwise have to any Indemnitee under this Article 10. 10.4. Each Indemnitee shall cooperate fully with Celgene and its legal representatives in the investigation and defense of any loss, claim, damage, liability or action covered by the indemnification provisions of this Article 10. 10.5. Beginning at the time as any such product, process or service is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by Celgene or by a sublicensee, Affiliate or agent of Celgene, Celgene shall, at its sole cost and expense, procure and maintain commercial general liability insurance in amounts not less than $2,000,000 per incident and $2,000,000 annual aggregate and naming the Indemnitees as additional insureds. Such commercial general liability insurance shall provide (i) product liability coverage and (ii) contractual liability coverage for Celgene's indemnification under Article 10, Sections 10.1 through 10.3 of this Agreement. If Celgene elects to self-insure all or part of the limits described above (including deductibles or retentions which are in excess of $250,000 annual aggregate), such self-insurance program must be acceptable to CMCC and the Risk Management Foundation of the Harvard Medical Institutions, Inc. The 20 minimum amount of insurance coverage required under this Article 10, Section 10.3, shall not be construed to create a limit of Celgene's liability with respect to its indemnification under Article 10, Paragraphs 10.1 through 10.3 of this Agreement. 10.6. Celgene shall provide CMCC with written evidence of such insurance upon request of CMCC. Celgene shall provide CMCC with written notice at least fifteen (15) days prior to the cancellation, non-renewal or material change in such insurance. Notwithstanding any other term of this Agreement, if Celgene does not obtain replacement insurance providing comparable coverage within such fifteen (15) day period, CMCC shall have the right to terminate this Agreement effective at the end of such fifteen (15) day period without notice of any additional waiting periods. 10.7. Celgene shall maintain such commercial general liability insurance during (i) the period that any such product, process or service is being commercially distributed or sold (other than for the purpose of obtaining regulatory approvals) by Celgene or by a sublicensee, Affiliate or agent of Celgene and (ii) a reasonable period after the period referred to above, which in no event shall be less than fifteen (15) years. 10.8. The provisions of this Article 10 shall survive expiration or termination of this Agreement. 10.9. CMCC MAKES NO WARRANTY, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR ANY EXPRESS OR IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, OR WARRANTY OF NON-INFRINGEMENT, WITH RESPECT TO ANY MATTER WITHIN THE SCOPE OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION ANY WARRANTY WITH RESPECT TO THE PATENT RIGHTS, LICENSED PRODUCTS, OR ANY PATENT, TRADEMARK, SOFTWARE, TRADE SECRET, TANGIBLE RESEARCH PROPERTY; INFORMATION OR DATA LICENSED OR OTHERWISE PROVIDED TO CELGENE HEREUNDER, AND HEREBY DISCLAIMS THE SAME. 21 11. NOTICES ------- 11.1. Any notice or payment required to be given to either party will the deemed to have been properly given and to be effective (a) on the date of delivery if delivered in person, by telefax, or overnight courier, or (b) five (5) days after mailing if mailed by first-class certified mail, postage paid, to the respective addresses given below, or to another address as it shall designate by written notice given to the other party. 22 In the case of Celgene: In the case of CMCC: Celgene Corporation Children's Hospital Attn: Chief Financial Officer Chief Intellectual Property Officer 7 Powder Horn Drive 300 Longwood Avenue Warren, NJ 07059 Boston, MA 02115 Fax: (732) 805-3931 Fax: (617) 232-7485 With a copy to: Children's Medical Center Corporation Attn: General Counsel Pennie & Edmonds LLP 300 Longwood Avenue Attn: Anthony M. Insogna, Esq. Boston, MA 02115 1155 Avenue of the Americas Fax: (617) 739-5928 New York, NY 10036 Fax: (212) 869-9741 With a copy to: Hale and Door LLP Attn: Steven Singer, Esq. 60 State Street Boston, MA 02109 Fax: (617) 526-5000 In the case of EntreMed: EntreMed Corporation Attn: President 9640 Medical Center Drive Rockville, MD 20850 Fax: (301) 217-0132 With a copy to: 23 12. ASSIGNMENT ---------- 12.1. Subject to the restrictions set forth herein, this Agreement, and every provision hereof, shall be binding upon and shall inure to the benefit of the parties, their respective successors, successors-in-title, heirs and assignees, and each and every successor-in-interest to any party, whether such successor acquires such interest by way of gift, inheritance, purchase, foreclosure, or by any other methods, shall hold such interest subject to all the terms and provisions of this Agreement; provided however that Celgene shall not assign or transfer the whole or any part of this Agreement or its rights hereunder without the agreement of CMCC which agreement shall not be unreasonably withheld except that Celgene may assign this Agreement in connection with the transfer or sale of all or substantially all of its assets or business or its merger or consolidation with another organization or other change'of control transaction without CMCC's consent. EntreMed may not assign any of its rights or obligations under this Agreement without the prior written consent of Celgene. 13. WAIVER ------ 13.1. No waiver by either party of any breach or default of any of the covenants or agreements set forth will be deemed a waiver of any subsequent or similar breach or default. 14. GOVERNING LAWS -------------- 14.1. This Agreement shall be interpreted and construed in accordance with the laws of the Commonwealth of Massachusetts without reference to choice of law doctrine, but the scope and validity of any patent or patent application shall be governed by the applicable laws of the country of such patent or patent application. Each party hereby submits itself for the sole purpose of this Agreement and any controversy arising hereunder to the jurisdiction of the state and federal courts located in the Commonwealth of Massachusetts and any courts of appeal therefrom, and waives any objection on the grounds of lack of jurisdiction (venue or otherwise) to the exercise of such jurisdiction over it by any such courts 15. CONFIDENTIALITY --------------- 15.1. Restrictions on Disclosure and Use. With regard to Confidential Information, the receiving party agrees: 15.1.1. not to use the Confidential Information except for the sole purpose of performing under the terms of this Agreement; 24 15.1.2. to safeguard Confidential Information against disclosure to others with the same degree of care as it exercises with its own Confidential Information of a similar nature; 15.1.3. not to disclose Confidential Information to others (except to its employees, agents or consultants who are bound by a like obligation of confidentiality) without the express prior written permission of the disclosing party, except that the receiving party shall not be prevented from using or disclosing any of the Confidential Information: (a) which the receiving party can demonstrate by written records was previously known to it; or (b) which is now, or becomes in the future, public knowledge other than through acts or omissions of the receiving party; or (c) which is lawfully obtained by the receiving party from sources independent of the disclosing party; and (d) which are required by law to be disclosed, only to the extent so required. 15.2. Term and Scope of Obligation. For purposes of this Agreement, and subject to the exclusions set forth in Section 15.1(a) through (d) hereof, all information pertaining to the prosecution; enforcement or defense of the Analog Patents shall be treated by all parties as the Confidential Information of the other party. The secrecy obligations of the parties with respect to ConfidentLal Information shall continue for a period ending five (5) years from the termination or expiration of this Agreement. 15.3. Permitted Disclosures and Use. Notwithstanding Section 15.1, Celgene shall have the right to disclose Confidential Information (i) as necessary in the course of seeking or enforcing patent rights, or obtaining regulatory approval to manufacture or market Licensed Products, Licensed Methods, or other products or methods and (ii) as reasonably required in the course of any actual or potential financing or sublicensing arrangement; provided, however, that any disclosure under (ii) shall be pursuant to a confidentiality agreement between Celgene and such third party which preserves the rights of CMCC hereunder. 15.4. Public Announcements. Any press release, public announcement or similar publicity by the parties with respect to this Agreement shall be subject to the prior consent of the other parties, which consent shall not be unreasonably withheld, unless such communication is required to be made by law or pursuant to the rules and regulations of the Securities and 25 Exchange Commission or the New York Stock Exchange listing requirements or an equivalent agency and after consultation and coordination among the parties. 16. MISCELLANEOUS ------------- 16.1. Headings. The headings of the several sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 16.2. Amendments. No amendment or modification of this Agreement is valid or binding upon the parties unless made in writing and signed on behalf of each party. 16.3. Entire Understanding. This Agreement, and any appendices hereto (each of which is hereby incorporated herein in their entirety), embody the entire understanding of the parties and supersedes all previous communications, representations, or understandings, either oral or written, between the parties relating to the Analog Patents, including without limitation the EntreMed Analog Agreements, which are hereby terminated in their entirety. 16.4. Severability. In case any of the provisions contained in this Agreement are held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability must not affect any other provisions, but this Agreement must be construed as if such invalid or illegal or unenforceable provisions had never been contained in this Agreement. 16.5. Counterparts. This Agreement may be signed in duplicate counterparts, each of which shall be deemed an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. [SIGNATURE PAGE FOLLOWS] 26 IN WITNESS WHEREOF, Celgene, CMCC and EntreMed have executed this Agreement, by their respective officers duly authorized, on the day and year written below. CELGENE CORPORATION By: /s/ Robert J. Hugin ------------------------------ Name: Robert J. Hugin ------------------------------ Title: SVP & CFO ------------------------------ Date: 12/31/02 ------------------------------ CHILDREN'S MEDICAL CENTER CORPORATION By: /s/ Stuart J. Novick ------------------------------ Name: Stuart J. Novick ------------------------------ Title: Sr. V.P. and General Counsel ------------------------------ Date: December 31, 2002 ------------------------------ ENTREMED, INC. (Solely for purposes of Sections 1, 2.4,2.5,2.6,4.2,4.5,8.2,9.4, 11, 12, 13, and 16) By: /s/ Neil Campbell ------------------------------ Name: Neil Campbell ------------------------------ Title: President and COO ------------------------------ Date: December 31, 2002 ------------------------------ APPENDIX A
- -------------------------------------------------------------------------------------------------------- TITLE COUNTRY STATUS PATENT NO. SERIAL NO. FILING DATE - -------------------------------------------------------------------------------------------------------- Teratogenic Compounds as US Abandoned 08/025,046 3/1/1993 Angiogenesis Inhibitors (Thalidomide) - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Issued 5,629,327 08/168,817 12/15/1993 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Australia Issued 676,722 62486/94 2/24/1994 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Canada Pending 2,157,288 2/24/1994 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Canada Pending 2,342,974 2/24/1994 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for EPO Pending 94 909773.7 2/24/1994 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for PCT Nat'l Phase PCT/US94/01971 2/24/1994 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Chile Issued 40,533 289-94 2/28/1994 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Argentina Abandoned 327,541 3/1/1994 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Brazil Abandoned PI9400764 3/1/1994 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Colombia Abandoned 94008093 3/1/1994 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Mexico Published 94 01547 3/1/1994 Inhibition of Angiogenesis - --------------------------------------------------------------------------------------------------------
1
- -------------------------------------------------------------------------------------------------------- TITLE COUNTRY STATUS PATENT NO. SERIAL NO. FILING DATE - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Peru Pending 237,564 3/1/1994 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Venezuela Pending 0296-94 3/4/1994 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Issued 5,593,990 08/371,987 1/13/1995 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Issued 5,712,291 08/468,792 6/6/1995 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Japan Pending 520046/94 9/1/1995 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for South Korea Pending 703700/1995 9/1/1995 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for New Zealand Issued 262676 262676 9/22/1995 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Abandoned 60/028,708 11/5/1996 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Brazil Pending PI1101014-2 5/14/1997 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Issued 6,235,756 08/918,610 8/22/1997 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Issued 6,071,948 08/950,673 10/16/1997 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Abandoned 08/955,638 10/23/1997 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Abandoned 08/963,058 11/3/1997 Inhibition of Angiogenesis - --------------------------------------------------------------------------------------------------------
2
- -------------------------------------------------------------------------------------------------------- TITLE COUNTRY STATUS PATENT NO. SERIAL NO. FILING DATE - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Australia Pending 51973/98 11/4/1997 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Canada Pending 2,270,887 11/4/1997 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for EPO Pending 97946884.0 11/4/1997 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Japan Pending 10-521728 11/4/1997 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for New Zealand Pending 336035 11/4/1997 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for PCT Nat'l Phase PCT/US97/20116 11/4/1997 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Teratogenic Compounds as US Pending 09/107,578 2/24/1998 Angiogenesis Inhibitors - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Abandoned 60/079,422 3/26/1998 Inhibition of Angiogenesis (EM138 as Inhibitor of - -------------------------------------------------------------------------------------------------------- Enantiomers of 2-Methyl-2- US Abandoned 60/085,037 5/11/1998 Phthalimidinoglutaric Acid - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Issued 6,114,355 09/126,542 7/30/1998 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Analogs of 2- US Abandoned 60/097,384 8/21/1998 Phthalimidinoglutaric Acid - -------------------------------------------------------------------------------------------------------- Synthesis, Enantiomeric US Abandoned 60/108,037 11/12/1998 Separation, and QSAR of 2- Phthalimidino-Glutaric Acid Analogs - -------------------------------------------------------------------------------------------------------- Methods and Composition for Hong Kong Pending 98115898.4 12/28/1998 Inhibition of Angiogenesis - --------------------------------------------------------------------------------------------------------
3
- -------------------------------------------------------------------------------------------------------- TITLE COUNTRY STATUS PATENT NO. SERIAL NO. FILING DATE - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Issued 6,228,879 09/277,402 3/26/1999 Inhibition of Angiogenesis (EM138 as Inhibitor of - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Pending 09/287,377 4/7/1999 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Composition for US Abandoned 09/300,202 4/27/1999 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Analogs of 2- Australia Pending 41837/99 5/11/1999 Phthalimidinoglutaric Acid - -------------------------------------------------------------------------------------------------------- Analogs of 2- Canada Pending 2,331,461 5/11/1999 Phthalimidinoglutaric Acid and Their Use as Inhibitors of Angiogenesis - -------------------------------------------------------------------------------------------------------- Analogs of 2- EPO Published 1091726 99 925585.4 5/11/1999 Phthalimidinoglutaric Acid and Their Use as Inhibitors of Angiogenesis - -------------------------------------------------------------------------------------------------------- Analogs of 2- PCT Nat'l Phase PCT/US99/10287 5/11/1999 Phthalimidinoglutaric Acid - -------------------------------------------------------------------------------------------------------- Analogs of 2- US Pending 09/309,464 5/11/1999 Phthalimidinoglutaric Acid - -------------------------------------------------------------------------------------------------------- Methods and Compositions for New Zealand Pending 336527 6/30/1999 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Issued 6,469,045 09/545,139 4/7/2000 Inhibition of Angiogenesis with EM-138 - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Pending 09/545,654 4/10/2000 Inhibition of Angiogenesis with EM-138 - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Pending 09/547,087 4/11/2000 Inhibition of angiogenesis with EM-138 - --------------------------------------------------------------------------------------------------------
4
- -------------------------------------------------------------------------------------------------------- TITLE COUNTRY STATUS PATENT NO. SERIAL NO. FILING DATE - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Pending 09/578,845 5/25/2000 Inhibition of Angiogenesis with EM-138 - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Hong Kong Pending 00103555.1 6/13/2000 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Pending 09/704,054 11/1/2000 Inhibition of Angiogenesis with EM-138 - -------------------------------------------------------------------------------------------------------- Analogs of 2- South Korea Pending 7012550/2000 11/9/2000 Phthalimidinoglutaric Acid - -------------------------------------------------------------------------------------------------------- Amino Derivatives of EM-138 US Issued 6,420,414 09/710,533 11/9/2000 and Methods of Treating Angiogenesis With Same - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Pending 09/710,534 11/9/2000 Inhibition of Angiogenesis with EM-12 Derivatives - -------------------------------------------------------------------------------------------------------- Analogs of 2- Japan Pending 2000-547948 11/13/2000 Phthalimidinoglutaric Acid - -------------------------------------------------------------------------------------------------------- Synthesis of 3-aminothalidomide US Pending 60/250,219 11/30/2000 and its Enantiomers - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Pending 09/788,872 2/20/2001 Inhibition of Angiogenesis with EM-138 - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Japan Pending 50214/01 2/26/2001 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods and Compositions for Canada Pending 4/10/2001 Inhibition of Angiogenesis - -------------------------------------------------------------------------------------------------------- Methods for Inhibition of US Pending 09/899,344 7/5/2001 Angiogenesis with 3-amino Thalidomide - --------------------------------------------------------------------------------------------------------
5
- -------------------------------------------------------------------------------------------------------- TITLE COUNTRY STATUS PATENT NO. SERIAL NO. FILING DATE - -------------------------------------------------------------------------------------------------------- Methods for Inhibition of US Pending 09/899,318 7/5/2001 Angiogenesis with 6-Amino EM-12 - -------------------------------------------------------------------------------------------------------- Synthesis and Anti-Tumor US Pending 60/310,261 8/6/2001 Activity of Nitrogen Substituted Thalidomide Analogs - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Pending 09/966,895 9/28/2001 Inhibitions of Angiogenesis with S(-)-3-Amino Thalidomide - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Pending 10/001,183 10/24/2001 Inhibition of Angiogenesis with Phthaloyl Glutamic Acid Derivatives - -------------------------------------------------------------------------------------------------------- Synthesis of 3-Amino- US Pending 10/003,461 11/30/2001 Thalidomide and Its Enantiomers - -------------------------------------------------------------------------------------------------------- Synthesis of 3-Amino- PCT Pending PCT/US01/45229 11/30/2001 Thalidomide and Its Enantiomers - -------------------------------------------------------------------------------------------------------- Pharmaceutical Composition of US Pending 10/015,252 12/12/2001 6-Amino EM-12 - -------------------------------------------------------------------------------------------------------- Pharmaceutical Composition of US Issue Fee 10/020,391 12/12/2001 3-Amino Thalidomide Paid - -------------------------------------------------------------------------------------------------------- Methods and Compositions for US Pending 10/026,037 12/19/2001 Inhibition of Angiogenesis with EM-138 - -------------------------------------------------------------------------------------------------------- Enantiomers of 6-Amino EM-12 US Pending 10/026,291 12/20/2001 and Method of Use - -------------------------------------------------------------------------------------------------------- Method of Treating Diseases US Pending 10/166,539 6/10/2002 Using 3-Amino Thalidomide - -------------------------------------------------------------------------------------------------------- Method of Treating Diseases US Pending 10/167,531 6/11/2002 Using 6-Amino EM-12 - --------------------------------------------------------------------------------------------------------
6
- -------------------------------------------------------------------------------------------------------- TITLE COUNTRY STATUS PATENT NO. SERIAL NO. FILING DATE - -------------------------------------------------------------------------------------------------------- Synthesis and Anti-Tumor US Pending 10/213,294 8/6/2002 Activity of Nitrogen Substituted Thalidomide Analogs - -------------------------------------------------------------------------------------------------------- Synthesis and Anti-Tumor PCT Pending PCT/US02/25112 8/6/2002 Activity of Nitrogen Substituted Thalidomide Analogs - -------------------------------------------------------------------------------------------------------- Method and Compositions for US Pending 10/272,436 10/15/2002 Inhibition of Angiogenesis - --------------------------------------------------------------------------------------------------------
7 EX-10.33 4 ex10-33.txt EXHIBIT 10.33 EXHIBIT 10.33 SUPPLY AGREEMENT SIFAVITOR S.P.A. AND CELGENE CORPORATION FOR BULK THALIDOMIDE SEPTEMBER 28, 1999 SUPPLY AGREEMENT Article 1. DEFINITIONS......................................................1 Article 2. TERM.............................................................3 Article 3. SUPPLY...........................................................3 Article 4. PURCHASE ORDERS, FORECASTS AND SAFETY STOCK......................6 Article 5. SHIPPING AND DELIVERY............................................6 Article 6. PRICE FOR BULK THALIDOMIDE.......................................7 Article 7. PAYMENT..........................................................7 Article 8. TERMINATION......................................................7 Article 9. REPRESENTATIONS, WARRANTIES AND COVENANTS........................9 Article 10. SAMPLES AND TESTING.............................................11 Article 11. INDEMNIFICATION.................................................12 Article 12. GOVERNMENT INSPECTION...........................................13 Article 13. RIGHT TO INSPECT................................................13 Article 14. ASSIGNMENT......................................................14 Article 15. COURT PROCEEDING................................................14 Article 16. FORCE MAJEURE...................................................14 Article 17. SEVERABILITY....................................................15 Article 18. HEADINGS........................................................15 Article 19. USE OF NAMES....................................................15 Article 20. INDEPENDENT CONTRACTOR..........................................15 Article 21. WAIVER..........................................................16 Article 22. PUBLIC DISCLOSURE...............................................16 Article 23. NOTICES.........................................................16 Article 24. ENTIRE AGREEMENT................................................17 SUPPLY AGREEMENT This Agreement entered into this 28th day of September 1999, by and between SIFAVITOR s.p.a. with offices at 26652 Cassaletto Lodigiano Fraz. Malrano Via Livelli, 1 Italy ("SIFAVITOR") and Celgene Corporation, its Affiliates and subsidiary companies with offices at 7 Powder Horn Drive, Warren, New Jersey 07059 U.S.A. ("CELGENE"). WHEREAS, SIFAVITOR is a known manufacturer of bulk active ingredients with expertise in cGMP manufacturing. WHEREAS, SIFAVITOR and CELGENE desire to establish mutually agreeable terms for the commercial supply of Bulk Thalidomide by SIFAVITOR to CELGENE. NOW, THEREFORE, in consideration of (i) SIFAVITOR'S agreement to supply Thalidomide to CELGENE for the monetary amounts set forth in this agreement, (ii) the promises, covenants, agreements and other valuable consideration hereinafter set forth, the parties hereby agree as follows: ARTICLE 1. DEFINITIONS As used in this agreement, the following words and phrases shall have the following meanings: (A) "Affiliate" of a party hereto shall mean any entity which controls, is controlled by, or is under common control with such party. For purposes of this definition, a party shall be deemed to control an entity if it owns or controls, directly or indirectly, more than fifty percent (50%) of the voting equity of the other entity (or other comparable ownership interest for an entity other than a corporation) or if it possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other entity. (B) "cGMP" shall mean current Good Manufacturing Practices as promulgated by the United States Food and Drug Administration. (C) "FDA" shall mean the United States Food and Drug Administration, or any successor entity thereto. (D) "Act" shall mean the United States Food, Drug and Cosmetics Act, as amended, and rules and regulations promulgated thereunder. (E) "NDA" shall mean CELGENE'S New Drug Application for Thalidomide filed by CELGENE with the FDA pursuant to section 505 of the Act. (F) "Thalidomide" shall mean a compound with the chemical structure described as 2-(2-6-Dioxo-3-Piperidinyl)-1H-Isoindole-1,3(2H)-Dione manufactured according to the specifications provided under this Agreement for the delivery to CELGENE to make or have made the finished pharmaceutical Drug Product. (G) "Bulk Thalidomide" shall mean bulk quantities of Thalidomide manufactured according to the specifications provided under this Agreement for the delivery to CELGENE to make or have made the finished pharmaceutical Drug Product. (H) "DMF" shall mean a Drug Master File, substantially as outlined on Schedule 1(H) hereto, for the manufacture of Bulk Thalidomide filed by SIFAVITOR (DMF #4823) and to be maintained by SIFAVITOR with the FDA or comparable registration documents for other regulatory authorities. (I) "C of A" shall mean the certificate of analysis for each Batch of Bulk Thalidomide delivered hereunder in the form contemplated by Article 3 of this Agreement. (J) "kg" shall mean kilograms "as is". 2 (K) "Specifications" shall mean the specifications for Thalidomide set forth in Schedule 1(K) hereof which Schedule is incorporated in and made a part of this Agreement. (L) "Drug Product" shall mean any and all pharmaceutical preparations suitable for human use which contain Thalidomide. (M) "Sourcing Date" shall mean the date of FDA approval for the use, by CELGENE, of SIFAVITOR Thalidomide drug substance in CELGENE Drug Products. (N) "Batch" shall mean a specific quantity of Thalidomide or other material that is intended to have uniform character and quality, within specified limits, and is produced according to a single manufacturing order during the same cycle of manufacture. ARTICLE 2. TERM 2.01 This Agreement shall be in effect on the execution by signing of the last party and shall remain in effect for the initial term of five (5) years (the "Initial Term"), if not earlier terminated according to Article 8 of this Agreement. The term of this Agreement shall automatically renew for successive one-year periods unless either party to this Agreement gives the other notice of non-renewal hereof at least six months prior to the expiration of the Initial Term or any one-year renewal period, as the case may be. ARTICLE 3. SUPPLY 3.01 During the term of this Agreement SIFAVITOR shall supply Thalidomide to CELGENE on an exclusive basis. 3.02 SIFAVITOR will develop a Thalidomide process by which commercial quantities will be produced (Schedule 3.02 hereto) and a related process validation protocol. Prior to implementation of such process validation protocol, SIFAVITOR shall give Celgene the opportunity to review such protocol and to confer with SIFAVITOR concerning such protocol. Therefore, SIFAVITOR will deliver to CELGENE three (3) 3 Batches of Thalidomide produced in conformity with such process validation protocol. The total quantity validation material delivered to CELGENE from SIFAVITOR shall be approximately 150 kg. 3.03 SIFAVITOR agrees to supply CELGENE only from its facilities located at 26652 Cassaletto Lodigiano Fraz. Malrano Via Livelli, 1 Italy and, subject to SIFAVITOR's capacity to supply Thalidomide and agreement as to price pursuant to Section 6.03 hereof, CELGENE agrees to purchase from SIFAVITOR, after the Sourcing Date, at least 50% of CELGENE'S actual annual requirements of Thalidomide with a minimum purchase of 50 kg per year, beginning with the year commencing on the first anniversary of the Sourcing Date. Any validation material delivered to CELGENE from SIFAVITOR pursuant to Section 3.02 hereof after the first anniversary of the Sourcing Date shall be counted towards satisfaction of the minimum purchase requirement of the preceding sentence. CELGENE shall purchase not less than 50 kg of Thalidomide at any one time. 3.04 In the event that the annual quantity shall exceed 1,000 kg, SIFAVITOR shall use its best efforts to supply such an increase in quantity. 3.05 Nothing in this Agreement shall preclude CELGENE from taking whatever steps necessary to qualify alternative suppliers including, but not limited to, selling any Batches reasonably required to be manufactured for purposes of the qualification of such alternative suppliers and maintaining such qualifications. 3.06 SIFAVITOR shall supply Thalidomide in accordance with the assurances, representations, warranties and covenants set forth in this Agreement. 3.07 Each shipment of Bulk Thalidomide hereunder will be delivered to a facility of CELGENE as designated on the CELGENE Purchase Order or by subsequent written instruction given by CELGENE and in accordance with the instructions for shipping and packaging included in such CELGENE Purchase Order. Delivery will be made either directly from SIFAVITOR or through its designated agent, Forum Products Inc. SIFAVITOR will include the current Material Safety Data Sheet (MSDS) and C of A, as required with each shipment, for Bulk Thalidomide. CELGENE will prepare such MSDS with the cooperation and assistance of SIFAVITOR. 4 3.08 CELGENE shall notify SIFAVITOR in writing of any loss or damage of Bulk Thalidomide in transit within the following time limits: (a) Notification by CELGENE to SIFAVITOR of partial loss, damage, defects or nondelivery of any separate part of a consignment shall be made promptly by CELGENE after delivery to CELGENE, and if loss, damage, defects or partial nondelivery are not evident to CELGENE at the time of delivery, such notification by CELGENE to SIFAVITOR shall be made no later than (60) days after delivery to CELGENE. (b) Notification by CELGENE to SIFAVITOR of an entire nondelivery to CELGENE or a whole consignment shall be made within thirty (30) days from the date CELGENE should have received notice of dispatch of such consignment, or within such longer period as may be agreed upon in writing between the parties. 3.09 In the event of such partial or full loss of such consignment, the parties will cooperate to insure that notification and follow-up with the involved ground and air carriers and customs or other warehouses is made in order to determine if such missing delivery can be located. The responsibility for such partial or full loss of such consignment rests with SIFAVITOR. CELGENE may assist SIFAVITOR in tracing such shipment and SIFAVITOR will reimburse CELGENE for its out-of-pocket expenses. For such a consignment which is not recovered or which is damaged or defective, the parties shall agree to a schedule for the replacement of the same by supplier at no additional cost to CELGENE. 3.10 SIFAVITOR shall package, label and otherwise prepare for bulk delivery Thalidomide in accordance with international transport regulations and guidelines shall deliver Thalidomide shipped under CIP (as such term is defined in the ICC Incoterms 1990, International Rules for the Interpretation of Trade Terms, ICC Publication NO.460) (INCOTERMS) port of destination, as will be specified by CELGENE. 3.11 Risk of loss with respect to Thalidomide shall pass to CELGENE in accordance with CIF as defined in the INCOTERMS and title shall pass to CELGENE at the same time risk of loss passes. 5 ARTICLE 4. PURCHASE ORDERS, FORECASTS AND SAFETY STOCK 4.01 (a) CELGENE will provide SIFAVITOR with a forecast showing CELGENE'S estimated requirements for Bulk Thalidomide, by month, covering a twelve (12) month period commencing with the sourcing date. CELGENE will issue on the first (1st) month of every calendar quarter a forecast update for the twelve (12) month period commencing on the first day of the immediately following calendar month (rolling forecast). (b) Firm orders for Thalidomide shall be placed by CELGENE in writing in conjunction with forecast updates (as described in Article 4.01 above) at a minimum of ninety (90) days prior to desired delivery date. (c) SIFAVITOR agrees to accept orders and ship an amount of Thalidomide up to 1,000 kg in any calendar year. Notwithstanding the foregoing, SIFAVITOR will make best efforts to meet CELGENE'S demand for Thalidomide in amounts exceeding such limits. (d) SIFAVITOR will keep a safety stock of Thalidomide which shall, starting from the sixth month after the Sourcing Date, not be less than one-sixth (1/6) of CELGENE'S twelve month requirements from SIFAVITOR for Thalidomide as set forth in the then current twelve month forecast. Three (3) years after the sourcing date, CELGENE and SIFAVITOR shall meet and determine if safety stock requirements need to be revised. ARTICLE 5. SHIPPING AND DELIVERY 5.01 Unless otherwise agreed upon in writing, shipping and delivery dates will be provided by CELGENE at the time firm orders are placed. 5.02 A bill of lading will be furnished to CELGENE with respect to each shipment. At delivery, Thalidomide will be free and clear of any liens or encumbrances placed thereon. 6 ARTICLE 6. PRICE FOR BULK THALIDOMIDE 6.01 CELGENE shall purchase the initial approximate 150 kg of Thalidomide described in Article 3.02 for five hundred US Dollars ($USD 500) per kg. This material shall consist of at least three (3) validation Batches. All other material purchases under this Agreement shall be purchased under the terms described in Articles 6.02-6.04 below. 6.02 The price for Thalidomide as set forth in Article 6.01 above shall be firm and fixed for an initial two (2) year period commencing on the Sourcing Date. 6.03 At least ninety (90) days prior to the end of the initial two (2) year period as set forth in Article 6.02 above and thereafter once annually, at least ninety (90) days prior to the end of every subsequent twelve (12) month period, either SIFAVITOR or CELGENE may come forward and request the price to be reviewed. If a price review is requested, the parties agree to meet and negotiate in good faith a revised price, if there is an increase or decrease in the direct actual costs. These will include raw materials, industry labor rates, waste disposal cost and other such direct costs incurred by SIFAVITOR consistent with its industrial sector which relate directly to the manufacture of Thalidomide. 6.04 All prices described in this Article 6 have been calculated on a duty-free basis. If at any time in the future an import or export duty is applied to Bulk Thalidomide, such a cost shall be borne by CELGENE. ARTICLE 7. PAYMENT 7.01 Payment shall be made to SIFAVITOR or its designated agent as the invoicing party net sixty (60) days from the date of invoice from SIFAVITOR to CELGENE. ARTICLE 8. TERMINATION 8.01 Upon the occurrence of the following events, either party may terminate this Agreement by giving the other party sixty (60) days prior written notice: 7 (a) If the other party is unable to pay its debts, becomes bankrupt or insolvent or enters into liquidation whether compulsory or voluntary, or compounds with or convenes a meeting of its creditors, or has a receiver appointed overall or part of its assets, or takes or suffers any similar action in consequence of a debt, or ceases for any reason to carry on business; or (b) Upon the breach of any material provision of this Agreement by the other party if the breach is not cured within sixty (60) days after written notice thereof to the party in default and the material breach continues to exist at the time of notice of termination. 8.02 (a) CELGENE may terminate this Agreement at any time if, by the first anniversary of the date hereof, SIFAVITOR fails to supply to Celgene all necessary chemistry, manufacturing and controls data for purposes of Celgene's preparation of a submission to the FDA, or if Celgene's submission is rejected by the FDA, or if SIFAVITOR cannot successfully validate its manufacturing process within two years after the date hereof. (b) CELGENE may terminate this Agreement at any time by giving sixty (60) days written notice to SIFAVITOR, if CELGENE, in its sole discretion, determines that it will no longer develop or market Thalidomide, or if the FDA puts a clinical hold on Thalidomide or withdraws approval of the manufacture or marketing of Thalidomide. CELGENE may terminate this agreement if the FDA or any other regulatory agency that regulates Thalidomide or the finished dosage form derived from Thalidomide takes any action the result of which is to prohibit the manufacture, sale or use or any similar action of the Drug Product or any raw material contained therein or to impose significant restriction. (c) Should CELGENE terminate this Agreement due to the reasons contained in Article 8.02(a) or (b), SIFAVITOR shall take reasonable measures to cease any ongoing production and limit further expenses associated with such ongoing production. CELGENE shall pay SIFAVITOR for the amount of any lot produced pursuant to a Purchase Order and for reasonable expenses incurred by SIFAVITOR with respect to the remainder of said Purchase Order prior to the effective date of the termination. (d) Any undelivered Bulk Thalidomide produced by SIFAVITOR, as a direct result of a CELGENE purchase order shall be held by SIFAVITOR free of charge for up to two (2) months, and SIFAVITOR shall cooperate with CELGENE in the return, resale, disposal, or delivery to CELGENE, at 8 CELGENE'S expense, of such materials as requested by CELGENE, if no other customers exist for such quantities. 8.03 The Agreement may be terminated Pursuant to Article 2.01, which provides for termination, by notice from either party, upon expiration of the Initial Term or any one-year renewal period. 8.04 Termination, expiration, or cancellation of this Agreement through any means and for any reason shall not relieve the parties of any obligation accruing prior thereto, including but not limited to the confidentiality provisions herein and the obligation to pay money, and shall be without prejudice to the rights and remedies of either party with respect to the antecedent breach of any of the provisions of this Agreement. During the term of this Agreement and for a period of five years thereafter, both parties hereto, subject to applicable laws, shall maintain in confidence all information received from the other party resulting from or related to the matters contemplated by this Agreement. ARTICLE 9. REPRESENTATIONS, WARRANTIES AND COVENANTS SIFAVITOR makes the following assurances, representations, warranties and covenants: 9.01 Thalidomide shall be merchantable, free from defects and meet the Specifications and shall not be adulterated within the meaning of the Act. 9.02 SIFAVITOR is cognizant of cGMP as prescribed in 21 CFR, Parts 210 and 211. SIFAVITOR is able to, and shall, manufacture Thalidomide in conformity with the Specifications and in a manner which fully complies with cGMP guidelines and practices. 9.03 SIFAVITOR shall not change the manufacturing process, the Specifications, the raw materials used, or the analytical testing method in a manner which may or may not require FDA or other U.S. or international regulatory approval by SIFAVITOR or CELGENE without the prior written consent of CELGENE, which consent shall not be unreasonably withheld or delayed. SIFAVITOR shall provide CELGENE with a detailed written report of all changes to the manufacturing process, the Specifications, the raw materials, or the analytical method: 9 (i) that require FDA or other U.S. or international regulatory approval, prior to the implementation thereof and (ii) that do not require FDA or other U.S. or international regulatory approval, unless agreed to by CELGENE. 9.04 If CELGENE is required by the FDA or some other U.S. or international regulatory agency to change the Specifications, the raw materials, sources of raw material or analytical testing method with respect to Thalidomide, SIFAVITOR shall use best efforts to accommodate such request. 9.05 (a) If CELGENE requests in writing a change in the manufacturing process, the Specifications, the raw materials, source of raw material or analytical testing method with respect to the Thalidomide that is not the result of a requirement of FDA or some other U.S. or international regulatory agency, SIFAVITOR shall use best efforts to accommodate such request. In such case, SIFAVITOR will inform CELGENE of the resultant effect the requested changes may have on the price of subsequent Thalidomide supplies. (b) If SIFAVITOR requests in writing a change in the manufacturing process, the Specifications, the raw materials, source of raw material or analytical testing method with respect to Thalidomide that is not the result of a requirement of FDA or some other U.S. or international regulatory agency, CELGENE shall use best efforts to accommodate such request. 9.06 Each party agrees to promptly forward to the other copies of any written communication received by such party from the FDA or other U.S. or international regulatory agency which will affect the manufacture of Thalidomide as contemplated herein. 9.07 SIFAVITOR shall conduct its Thalidomide manufacturing operations hereunder in compliance with all applicable laws and regulations as the country of manufacture (Italy), including, but not limited to, those dealing with occupational safety and health, those dealing with public safety and health, those dealing with protecting the environment, and those dealing with disposal of wastes. 9.08 SIFAVITOR shall be responsible for all process, analytical method and equipment validation and shall take all reasonable steps necessary to pass government inspection by the FDA. SIFAVITOR shall also reasonably assist CELGENE in preparing and updating any required regulatory submissions and all other documents required by the FDA or other U.S. 10 or international regulatory agencies from CELGENE for approval of the Thalidomide. 9.9 SIFAVITOR warrants that it did not and will not use in any capacity the services of any person debarred under the Generic Drug Enforcement Act 21 USC ss. 335a(k)(1) and further did not use any person who has been convicted of a crime as defined under the Generic Drug Enforcement Act in connection with the services rendered to Celgene. 9.10 All assurances, representations, warranties and covenants contained in Sections 9.01, 9.02, 9.06, and 9.07 shall survive termination of this Agreement. ARTICLE 10. SAMPLES AND TESTING 10.01 SIFAVITOR'S laboratory personnel shall obtain a representative sample from each Batch of Thalidomide produced by SIFAVITOR at Malrano, Italy. SIFAVITOR shall assay and analyze such samples in strict accordance with the procedures previously agreed to by the parties and shall promptly prepare a Certificate of Analysis. Such Certificate of Analysis shall identify the Batch of Thalidomide to which it relates. SIFAVITOR shall provide CELGENE with a copy of the Certificate of Analysis containing the address of the manufacture for each Batch upon delivery of such Batch in the format required by CELGENE. 10.02 In testing Thalidomide, SIFAVITOR and CELGENE shall use the analytical testing and sampling methods set forth in Schedule 10.02. CELGENE shall analyze the Thalidomide (for purposes of determining whether the same meets Specifications) within sixty (60) days from the date of receipt of the affected Thalidomide and shall report any adverse findings to SIFAVITOR within sixty (60) days from such date of receipt. 10.03 All non-specification Thalidomide not capable of being salvaged through validated reworking processes described in Schedule 10.03 shall be disposed of by SIFAVITOR. SIFAVITOR shall not ship any Thalidomide hereunder which, as indicated by a sample assay or analysis as set forth above, does not conform to Specifications. 11 10.04 SIFAVITOR shall replace at CELGENE locations any Thalidomide which is mutually determined not to meet Specifications (provided it is mutually agreed that the sample was handled and stored properly by CELGENE) and shall supply CELGENE with Thalidomide which does meet Specifications, at no additional cost to CELGENE. 10.05 If the analysis or assay of a sample of the Thalidomide performed by or for CELGENE indicates that the Batch of Thalidomide does not meet Specifications and SIFAVITOR'S analysis or assay of its sample from the same Batch indicates that the Batch does meet Specifications, CELGENE will so advise SIFAVITOR and a joint investigation will be conducted to determine the cause of the failure. ARTICLE 11. INDEMNIFICATION 11.01 CELGENE shall indemnify and hold SIFAVITOR, its officers, directors, agents, servants, and employees harmless against all claims, losses, damages and liabilities, including reasonable legal expenses, arising out of CELGENE'S duties under this agreement, and which is not attributable to: (i) the negligence of SIFAVITOR or its agents or employees, (ii) the failure of SIFAVITOR to follow the written instructions and specifications of CELGENE (iii) SIFAVITOR'S breach of this agreement. SIFAVITOR shall not settle any such claim without the prior written approval of CELGENE and that CELGENE shall have the right, if it so wishes, to conduct negotiations to settle, settle or to conduct any litigation arising out of; any such claim. SIFAVITOR shall provide prompt notice of any claim to CELGENE and shall cooperate in the defense of the claim. 11.02 SIFAVITOR shall indemnify and hold CELGENE, its officers, directors, agents, servants, and employees harmless against all claims, losses, damages, and liabilities including reasonable legal expenses, arising out of SIFAVITOR'S duties under this agreement and which is not attributable to: (i) any act or negligence of CELGENE or its agents or employees or 12 (ii) the failure of CELGENE or its employees to comply with applicable law or regulations. CELGENE shall not settle any such claim without the prior written approval of SIFAVITOR, and that SIFAVITOR shall have the right, if it so wishes, to conduct negotiations to settle, settle or to conduct any litigation arising out of, any such claim CELGENE shall provide prompt and written notice of any such claim to SIFAVITOR and shall cooperate in the defense of the claim. 11.03 The indemnification obligations set forth in this Article 11 shall survive the termination of this Agreement. ARTICLE 12. GOVERNMENT INSPECTION 12.01 SIFAVITOR will notify CELGENE within twenty-four (24) hours of notification of any pending or ongoing FDA or government inspection related to Thalidomide for the facilities used to produce, test, or warehouse Thalidomide. SIFAVITOR shall immediately provide copies of any Form 483 warning letter observations, or associated correspondence to and received from the FDA within seven (7) days of receipt and in addition shall provide a facsimile copy within seventy-two (72) hours to CELGENE SIFAVITOR shall allow CELGENE to assist in any response to the FDA, including review of any written response made to the FDA by SIFAVITOR at CELGENE'S discretion. ARTICLE 13. RIGHT TO INSPECT 13.01 In performing manufacturing of Thalidomide hereunder, SIFAVITOR shall permit CELGENE or its designated representative to inspect on a regular basis or as needed, but not less than once per year that portion of SIFAVITOR'S facilities where Thalidomide is manufactured, tested or stored to evaluate SIFAVITOR'S work practices, supporting systems, documents and records associated with Thalidomide and make such copies of the documents as reasonably necessary for the purpose of assessing the SIFAVITOR'S compliance with applicable regulations and good manufacturing practices ("cGMP") as described and provided in the Act. Such review shall be conducted upon reasonable prior notice by CELGENE, but not less than thirty (30) days prior to the inspection. 13 13.02 SIFAVITOR shall keep CELGENE fully informed of the steps taken by SIFAVITOR to resolve any outstanding issues with the FDA and the anticipated timetable of resolution of such issues as it applies to Thalidomide. 13.03 Any failure by SIFAVITOR to comply with the requirements of this Article 13 shall be subject to the remedy rights set forth in Article 8 of this Agreement. 13.04 CELGENE shall allow SIFAVITOR the right to audit CELGENE'S yearly requirements of Bulk Thalidomide to confirm that SIFAVITOR supplied not less than 50% of the actual demand as described in Article 3.03. ARTICLE 14. ASSIGNMENT 14.01 This Agreement may not be assigned or transferred by SIFAVITOR without the prior written consent of CELGENE. In the event there is a change of control of SIFAVITOR or its business, this Agreement will remain in effect and bind the acquirer. ARTICLE 15. COURT PROCEEDING 15.01 Any court proceeding initiated by one party against the other with respect to any dispute under this Agreement shall be commenced in the United States District Court for the Eastern District of New Jersey. The law of the jurisdiction of such action would apply. ARTICLE 16. FORCE MAJEURE 16.01 Any delay in the performance of any of the duties or obligations of either party (except the payment of money due hereunder) shall not be considered a breach of this Agreement and the time required for performance shall be extended for a period equal to the period of such delay; provided that such delay has been caused by or is the result of any acts of God, acts of the public enemy, insurrections, riots, embargoes, labor disputes, including strikes, lockouts, job actions, or boycotts, equipment failure, fires, explosions, floods, shortages of material or energy or other unforeseeable causes beyond the reasonable control and without the fault or negligence of the party so affected. The party so affected shall give prompt notice to the other party of 14 such cause, and shall take whatever reasonable steps are necessary to relieve the effect of such cause as rapidly as reasonably possible. Not withstanding the forgoing, if SIFAVITOR is unable to perform for any of the above enumerated reasons, CELGENE shall be relieved of its obligations under Section 3.03 hereof during the pendency thereof, and if such inability of SIFAVITOR to perform continues for a period longer than twelve (12) months, CELGENE shall have a right to terminate this Agreement. ARTICLE 17. SEVERABILITY 17.01 In the event that any provision of this Agreement is judicially determined to be void or unenforceable, such provision shall be construed to be separable from the other provisions of this Agreement which shall retain full force and effect. ARTICLE 18. HEADINGS 18.01 All titles and captions in this Agreement are for convenience purposes only and shall not be of any force or substance. ARTICLE 19. USE OF NAMES 19.01 Except as expressly required pursuant to the Act, neither party will without the prior written consent of the other: (a) use in advertising, publicity, promotional premiums or otherwise, any trade name, trademark, trade device, service mark, symbol, or any abbreviation, contraction or simulation thereof owned by either party, or (b) represent, either directly or indirectly, that any product or service of one party is a product or service of the other. ARTICLE 20. INDEPENDENT CONTRACTOR 20.01 Each party is acting under this Agreement as an independent contractor and not as the agent or employee of the other. Each party understands and agrees that it has no authority to assume any obligation on behalf of the other party and that it shall not hold out to third parties that it has any authority to act on the other party's behalf except as expressly permitted herein. Unless otherwise expressly stated herein, each party shall be responsible for its own expenses relating to its 15 performance under this Agreement and shall not incur expenses for the other party's account unless expressly authorized herein or by subsequent written agreements. ARTICLE 21. WAIVER 21.01 No waiver or modification of any of the terms of this Agreement shall be valid unless in writing and signed by an authorized representative of both parties hereto. Failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of such rights nor shall a waiver by either party in one or more instances be construed as constituting a continuing waiver or as a waiver in other instances. ARTICLE 22. PUBLIC DISCLOSURE 22.01 Neither party shall disclose to any third party or originate any publicity, news release or public announcement, written or oral, whether to the public or the press, or otherwise, referring to the terms of this Agreement, including its existence, the subject matter to which it relates, the performance under it or any of its specific terms and conditions, except by such announcements as are (i) mutually agreed upon by the parties in writing, or (ii) in the opinion of counsel for the party making such announcement are required by law. If a party believes a public announcement to be required by law with respect to this Agreement, it will give the other party such notice as is reasonably practicable and an opportunity to comment upon the announcement. ARTICLE 23. NOTICES 23.01 Unless otherwise specified herein, all notices required or permitted to be given under this Agreement shall be in writing and shall be delivered either personally and promptly confirmed by such registered or certified mail or overnight courier service or sent by registered or certified mail, return receipt requested, or by overnight courier service, postage prepaid in each case, or by facsimile and promptly confirmed by such registered certified mail or overnight courier service to the receiving party at such party's address set forth below, or at such other address as may from time to time be furnished by similar notice by either party. Any notice sent by registered or certified mail as aforesaid shall be deemed to have been given when mailed, and shall be effective upon receipt. 16 IF TO SIFAVITOR: Managing Director Sifavitor s.p.a. 26652 Cassaletto Lodigiano Fraz. Malrano Via Livelli, 1 Italy IF TO CELGENE: Senior Vice-President, Planning and Business Development Celgene Corporation 7 Powder Horn Drive Warren, New Jersey 07059 U.S.A. or to such other address as the addressee shall have last furnished in writing to the addresser. ARTICLE 24. ENTIRE AGREEMENT 24.01 This Agreement constitutes the entire agreement between the parties concerning the supply of Thalidomide by SIFAVITOR to CELGENE, and supersedes all written or oral agreements or understandings with respect thereto. 24.02 Neither party shall claim any amendment, modification, or release from any provision, hereof, unless such an amendment is in writing signed by an authorized representative of each party. SIFAVITOR S.P.A. CELGENE CORPORATION By: By: Name: Name: Joseph J. Day, Jr. Title: Title: Sr. Vice President Planning & Business Development Date: Date: 17 SCHEDULE 1(H) TO SUPPLY AGREEMENT ---------------- (Sifavitor DMF Table of Contents) SCHEDULE 1(K) TO SUPPLY AGREEMENT ---------------- (Specifications) SCHEDULE 3.02 TO SUPPLY AGREEMENT ---------------- (Outline of SIFAVITOR Manufacturing Process) SCHEDULE 10.02 TO SUPPLY AGREEMENT ---------------- (Analytical Testing and Sampling Methods) SCHEDULE 10.03 TO SUPPLY AGREEMENT ---------------- (Reworking Processes) EX-10.34 5 ex10-34.txt EXHIBIT 10.34 EXHIBIT 10.34 SIEGFRIED SUPPLY AGREEMENT THIS AGREEMENT (the "Agreement"), entered into as of this first (1st) day of January, 2003 (the "Effective Date"), by and between SIEGFRIED (USA), Inc. ("SIEGFRIED"), a corporation organized under the laws of Delaware with a place of business at 33 Industrial Park Road, Pennsville, NJ, 08070 and Celgene Corporation ("CELGENE"), a corporation organized under the laws of Delaware with a place of business at 7 Powder Horn Drive, Warren, NJ 07059. W I T N E S S E T H: WHEREAS, SIEGFRIED desires to manufacture and supply to CELGENE a certain pharmaceutical Product, as further described in Exhibit "A"; and WHEREAS, SIEGFRIED is willing to sell to CELGENE, and CELGENE is willing to purchase from SIEGFRIED, Product manufactured by SIEGFRIED in accordance with the terms set forth herein, NOW, THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows: ARTICLE I DEFINITIONS ----------- 1.01 As used in this Agreement, the following terms shall have the meanings set forth below: (a) "Product" shall mean the pharmaceutical active ingredient known as d-threo-Methylphenidate Hydrochloride, having the molecular formula C14H19NO2o HCl. (b) "Specifications" shall mean the specifications and quality control procedures for the Product as set forth in Exhibit A. (c) "cGMP" shall mean current Good Manufacturing Practices for the methods to be used in, and the facilities and controls to be used for, the manufacture, processing, packing and holding of drug active ingredients, as promulgated by the FDA (e.g., 21 C.F.R. ss.ss.210 and 211), including all amendments and supplements thereto during the term of this Agreement. (d) "Certificate of Analysis" shall mean the certificate for each batch of bulk Product manufactured by SIEGFRIED and delivered to CELGENE hereunder. (e) "FDA" shall mean the United States Food and Drug Administration, or any successor entity having jurisdiction over the transactions contemplated by this Agreement. (f) "Act" shall mean the United States Food, Drug, and Cosmetic Act, 21 U.S.C. ss.ss.301-397, as amended, and rules and regulations promulgated there under. (g) "Confidential Information" shall mean any scientific, clinical, regulatory, marketing, financial or commercial information or data relating to the Product or its use, and which is not generally known to the public, disclosed by one party to the other party, or developed by or on behalf of a party in performance of its obligations under this Agreement. Confidential Information shall include, without limitation, information relating to the Product, the Specifications, manufacturing processes for the Product and associated documentation such as Batch Records, analytical methods, formulations, marketing and sales plans, forecasts, financial information, costs and pricing information. (h) "Manufacturing Batch Record" shall mean documentation of the manufacturing, process, packing, and holding of specific lot of drug active ingredient. (i) "Affiliate" of any person shall mean any person in control of, controlled by, or under common control with, such person, and "person" shall mean any individual or entity of any nature whatsoever. ARTICLE II MANUFACTURE AND SALE -------------------- 2.01 Supply. During the term of this Agreement and subject to the terms and conditions set forth herein, SIEGFRIED shall exclusively manufacture and supply to CELGENE and CELGENE shall purchase a minimum of Fifty Percent (50%) of its annual requirements of the Product from SIEGFRIED. 2.02 Quality of Product. SIEGFRIED shall manufacture the Product in accordance with the Specifications, and in compliance with cGMPs and all applicable material laws, rules and regulations relating to the manufacture of the Product and the terms and conditions of the Quality Agreement (see Exhibit C). The Product shall not be adulterated or misbranded when SIEGFRIED delivers the Product to the carrier pursuant to Section 5.01, and shall be sold to CELGENE free and clear of any liens, claims or encumbrances created by SIEGFRIED. 2.03 Certificate of Analysis. SIEGFRIED shall provide with each shipment of Product delivered to CELGENE hereunder a Certificate of Analysis (COA) that includes the results of quality control testing in accordance with the Specifications and which indicates that the Product contained in the shipment meets all of the Specifications. SIEGFRIED shall also provide to CELGENE the current Material Safety Data Sheet (MSDS) for the Product provided to CELGENE hereunder. 2.04 Compliance. (a) SIEGFRIED shall at all times during the term of this Agreement maintain its facilities used for the manufacture of Product in compliance with all applicable material laws, rules and regulations, including, without limitation, cGMPs and any applicable environmental, health and/or safety laws. SIEGFRIED shall be responsible for all costs and expenses related to the compliance of such facilities with such laws, rules and regulations. (b) Except as otherwise expressly set forth herein, SIEGFRIED shall be responsible for obtaining and maintaining any permits or approvals from regulatory authorities and any other government authorities which are required in connection with the performance of its obligations hereunder. SIEGFRIED shall be responsible for all process, analytical method and equipment validation and shall take all necessary steps for its facilities used for the manufacture of Product to pass government inspection by the FDA. (c) SIEGFRIED shall permit representatives of CELGENE and/or its licensees and/or its contract manufacturers to visit the facilities where the Product is manufactured for the purpose of observing the manufacturing, testing and storage of Product and for conducting compliance audits associated with cGMPs and other regulatory requirements. CELGENE agrees to give SIEGFRIED reasonable notice of any proposed visit to a Product facility by such representatives. CELGENE's representatives will adhere to SIEGFRIED's policies and procedures while on site. Any such visits shall be during normal business hours on workdays and be subject to the Confidential Disclosure Agreement. In addition, SIEGFRIED shall permit governmental inspectors acting pursuant to statutory authority to inspect the facilities where the Product is being manufactured, and to review required documentation. (d) CELGENE may conduct a cGMP audit of SIEGFRIED's manufacturing operations, storage facilities for the Product, and any SIEGFRIED Quality Control laboratory at which Product testing is to be performed, including SIEGFRIED's relevant records (or the corresponding facilities and records of any of SIEGFRIED's sub-contractors). SIEGFRIED will make best efforts to discuss, understand and incorporate CELGENE and/or its collaborators' comments into its cGMP operating protocol. Any of SIEGFRIED's confidential information to which CELGENE, and/or its collaborator's, is provided access during any such audit process shall be maintained as confidential in accordance with the provisions of Article VIII and the Confidential Disclosure Agreement referred to in paragraph 2.04(c). 2.05 Specifications. CELGENE shall deliver to SIEGFRIED written notice of any required changes to the Specifications, and SIEGFRIED will make its best efforts to accommodate such Specification changes. If any Specification change requested by CELGENE materially affects SIEGFRIED's costs of producing the Product, the parties will negotiate, in good faith, an adjustment to the pricing set forth in Section 4.01. CELGENE shall have the right to revise the Specifications at any time upon thirty (30) days written notice to SIEGFRIED for the purpose of complying with cGMPs or applicable NDAs or other health registrations, or for any other reasonable business purpose. Any changes to the Specifications shall be incorporated in this Agreement as a written amendment to Exhibit A. 2.06 Product Release. SIEGFRIED and CELGENE agree to jointly establish a release procedure for Product manufactured by SIEGFRIED. Without limiting the generality of the foregoing, SIEGFRIED shall perform quality assurance and control tests on each lot of Product manufactured before delivery and shall prepare and deliver to CELGENE a written report of the results of such tests, with each report setting forth for each lot delivered the items tested, specifications and results in a Certificate of Analysis containing the types of information required by applicable regulatory standards. In addition, SIEGFRIED shall provide CELGENE for review copies of Batch Records for each lot of Product manufactured by SIEGFRIED. 2.07 Manufacturing Changes. SIEGFRIED shall notify CELGENE promptly in writing of any changes in manufacturing that may be required by cGMPs or other applicable laws, rules or regulations. No changes will be made without prior authorization from CELGENE. Such authorization will not be unreasonably withheld. 2.08 Retention of Samples. SIEGFRIED shall retain sufficient quantity of each batch of Product to perform at least two (2) full sets of quality control tests (in addition to the testing performed by SIEGFRIED prior to delivery). SIEGFRIED shall maintain such samples in a suitable storage facility for a period of two (2) years or such longer period as may be required under applicable laws, rules or regulations. ARTICLE III TERM ---- 3.01 Term. The term of this Agreement shall commence on the Effective Date and shall terminate five (5) years from the Effective Date (the "Initial Term"), and is not subject to earlier cancellation by either party except as otherwise specifically provided herein. 3.02 Renewal Term. The Agreement shall automatically renew after the Initial Term and continue in effect for one-year periods (each such period being a "Renewal Term"). 3.03 Cancellation. Should CELGENE or SIEGFRIED desire to cancel the Agreement at the end of the Initial Term or at the end of any Renewal Term, then CELGENE or SIEGFRIED must provide written notice of cancellation twelve (12) months prior to the termination date of the Initial Term or the relevant Renewal Term, as the case may be. Notwithstanding the foregoing, the Agreement shall terminate on the tenth (10) of June 2005 in the event that Celgene or its successor is no longer supplying Product to Novartis Pharmaceutical Corporation, or its affiliates, licenses, successors or assigns. ARTICLE IV PRICE, ORDERS, AND TERMS OF PAYMENT ----------------------------------- 4.01 Price. The prices of the Product will be determined in the manner set forth in Exhibit B to this Agreement. The prices will be subject to adjustment in the manner set forth in Exhibit B to this Agreement. 4.02 Projections. CELGENE shall issue at quarterly intervals a twelve (12) month forecast estimating its total requirements of Product from SIEGFRIED. SIEGFRIED will use these forecasts for planning purposes only, unless and until such time as CELGENE issues a firm purchase order for delivery of Product. If during any quarter, the quantity set forth in firm purchase orders requested by CELGENE exceeds the most recent forecast provided for such quarter by more than thirty percent (30%), SIEGFRIED shall use its commercially reasonable efforts to accommodate the excess quantity of Product which CELGENE shall request under such purchase orders. 4.03 Purchase Orders. CELGENE shall submit firm purchase orders for quantities of Product desired to SIEGFRIED at its address designated in Section 11.05 hereof. Such purchase orders shall set forth the quantities of Product to be purchased, the delivery dates and shipping instructions and place of delivery, and shall allow maximum six (6) months for delivery. SIEGFRIED shall have ten (10) business days to accept the purchase order, which shall become firm upon acceptance. In the event SIEGFRIED cannot meet the quantity or dates specified, it shall notify CELGENE, and the parties shall in good faith negotiate a mutually satisfactory schedule, at which point such negotiated schedule shall become part of the firm purchase order. Each purchase order issued hereunder shall be governed by the terms of this Agreement, and none of the terms or conditions of CELGENE's or SIEGFRIED's forms shall be applicable, except for those specifying quantity ordered, delivery dates, special supply and packing instructions, and invoice instruction. 4.04 Payment Terms. SIEGFRIED shall invoice CELGENE when analytical testing release against Specification, and satisfactory Manufacturing Batch Record review have completed, and net payment for the Product shall be due to SIEGFRIED not later than forty-five (45) days from the date of invoice of Product by SIEGFRIED. All payments and communications regarding the Product shall be delivered to SIEGFRIED at the address designated in Section 11.05 hereof. If Product is damaged or destroyed prior to delivery to a common carrier specified by CELGENE, CELGENE shall be entitled to reimbursement from SIEGFRIED for any amounts paid to SIEGFRIED in respect of such Product. 4.05 Cover. If SIEGFRIED fails to timely deliver to CELGENE the quantity of Product that CELGENE orders under any firm purchase order pursuant to Section 4.03, then after providing written notice to SIEGFRIED and the failure of SIEGFRIED to cure within ten (10) business days, such purchase order shall be deemed to be cancelled to the extent of the quantity of Product SIEGFRIED failed to deliver, CELGENE may purchase Product from another manufacturer in substitution for the quantity of Product SIEGFRIED failed to deliver and such quantity shall be deemed to have been purchased from SIEGFRIED for purposes of satisfying the requirements of Section 2.01 hereof relating to 50% of CELGENE's annual requirements. Provided such quantity that SIEGFRIED has failed to deliver does not, together with other quantities of Product ordered during such quarter, does not exceed the most recent forecast provided by CELGENE with respect to such quarter by more than thirty percent (30%), SIEGFRIED shall reimburse CELGENE upon receipt by SIEGFRIED of receipts or other suitable substantiation for the difference between the cost of obtaining such Product from another manufacturer (plus reasonable charges, expenses or commissions incurred by CELGENE in connection therewith), less the price that would have been due to SIEGFRIED for the like quantity, had it been supplied by SIEGFRIED hereunder. ARTICLE V DELIVERY, TITLE, LABEL AND PACKAGING ------------------------------------ 5.01 Terms of Delivery. The Product shall be shipped EXWORKS (Incoterms 2000) from SIEGFRIED's facility in Pennsville, New Jersey to a destination designated by CELGENE using a common carrier to be specified by CELGENE and reasonably acceptable to SIEGFRIED. Title and risk of loss shall pass to CELGENE at the time of delivery to the carrier. 5.02 Inspection. CELGENE may, at its expense, inspect and test each shipment of the Product delivered by SIEGFRIED under this Agreement. For a period of thirty (30) days after receipt of each shipment of Product and Manufacturing Batch Record hereunder, CELGENE shall have the right to return such shipment to SIEGFRIED if CELGENE determines that the Product does not conform to the Specifications, or thirty (30) business days from the receipt of the Manufacturing Batch Record for failure to comply with cGMP, whichever is later. SIEGFRIED shall provide CELGENE with accurate copies of each Manufacturing Batch Record . Product will be deemed accepted by CELGENE upon final release by CELGENE's Quality Assurance Department , no later than sixty (60) days after receipt of the Product sold hereunder; provided, however, in the case of Product having latent defects, which upon diligent examination in accordance with the quality control testing procedures set out in the Specifications upon receipt could not have been discovered. In such event CELGENE shall provide written notice to SIEGFRIED prior to the expiration of such thirty (30) day period, setting forth the details of such non-conformity. Any non-conforming product returned to SIEGFRIED shall be at SIEGFRIED's expense and shall be returned by CELGENE in the manner specified by SIEGFRIED. SIEGFRIED shall, at its expense and discretion, either replace the batch of non-conforming Product within sixty (60) days after SIEGFRIED receives the above mentioned written notice, or refund or credit the pro-rata portion of the amount due SIEGFRIED under Section 4.01 within such sixty (60) day period. Disputes between the parties as to whether all or any part of a shipment rejected by CELGENE conforms to the Specifications shall be resolved by a mutually acceptable third party testing laboratory within thirty (30) days after SIEGFRIED advises CELGENE that it disputes the asserted non-conformity. SIEGFRIED shall pay all expenses of third party testing if Product does not conform to the Product Specifications according to such third party and CELGENE shall pay all expenses of third party if Product does conform to the Product Specifications according to such third party. 5.03 Label and Packaging. SIEGFRIED shall label and package Product in accordance with the Specifications as defined in Exhibit A. The label and packaging specifications may be modified from time to time by mutual agreement of the parties. Additionally, CELGENE shall have the right to revise the label and package specifications at any time upon thirty (30) days written notice to SIEGFRIED for the purpose of complying with any FDA or other regulatory requirement at its own cost and expense. SIEGFRIED shall not have any right, title or interest in the Focalin(R) trademark, tradedress or any other trade name or trademark under which Product is resold by CELGENE. Notwithstanding the foregoing, CELGENE grants to SIEGFRIED an irrevocable license for the term of this Agreement to use all the patents, trademarks and tradedress required for SIEGFRIED to fulfill the terms of this Agreement. ARTICLE VI WARRANTIES, INDEMNITIES AND INSURANCE ------------------------------------- 6.01 Warranties by SIEGFRIED. SIEGFRIED warrants that Product when delivered to the common carrier hereunder will comply with the Specifications and will not, at the time of delivery, be adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act as a result of operations performed or omitted from performance by SIEGFRIED and that all Product will be manufactured pursuant to current good manufacturing practices required by the FDA and in accordance with all applicable laws and regulations. EXCEPT AS EXPRESSLY WARRANTED HEREIN, SIEGFRIED MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, AND SIEGFRIED EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING THE WARRANTY OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. SIEGFRIED'S LIABILITY UNDER THIS WARRANTY SHALL BE LIMITED SOLELY TO THE REMEDY PROVIDED IN ARTICLE VI HEREOF, EXCEPT AS PROVIDED FOR UNDER SECTION 6.05 REGARDING SIEGFRIED'S INDEMNIFICATION OBLIGATIONS FOR THIRD PARTY CLAIMS. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR LOSS OF PROFITS, DIRECT, INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR OTHER DAMAGES UNDER THIS AGREEMENT OR FROM ANY CAUSE WHATSOEVER, EXCEPT AS PROVIDED FOR UNDER SECTION 6.05 REGARDING SIEGFRIED'S INDEMNIFICATION OBLIGATIONS FOR THIRD PARTY CLAIMS. Any statement to the contrary made by an employee of the SIEGFRIED or CELGENE shall have no force or effect, and the terms herein shall control. 6.02 Warranties by CELGENE. CELGENE warrants that it has all the intellectual property rights necessary or appropriate to enter into this Agreement. 6.03 Warranties by Each Party. Each of CELGENE and SIEGFRIED hereby represents, warrants and covenants to the other party as follows: (a) it is a corporation duly organized and validly existing under the laws of the state or other jurisdiction in which it is incorporated; (b) the execution, delivery and performance of this Agreement by such party has been duly authorized by all requisite corporate action; (c) it has the power and authority to execute and deliver this Agreement and to perform its obligations hereunder; (d) the execution, delivery and performance by such party of this Agreement and its compliance with the terms hereof does not and will not conflict with or result in a breach of any term of, or constitute a default under (i) any agreement or instrument binding or affecting it or its property; (ii) its charter documents or bylaws; or (iii) any order, writ, injunction or decree of any court or governmental authority entered against it or by which any of its property is bound; (e) it has obtained any consent, approval or authorization of, or notice, declaration, filing or registration with, any governmental or Regulatory Authority required for the execution, delivery and performance of this Agreement by such party, and the execution, delivery and performance of this Agreement will not violate any law, rule or regulation applicable to such party; (f) this Agreement has been duly executed and delivered and constitutes such party's legal, valid and binding obligation enforceable against it in accordance with its terms subject, as to enforcement, to bankruptcy, insolvency, reorganization and other laws of general applicability relating to or affecting creditors' rights and to the availability of particular remedies under general equity principles; (g) it shall comply with all applicable material laws, rules and regulations relating to its activities under this Agreement; and, (h) it is understood and agreed that SIEGFRIED has no control over the ultimate use of the Product or use of products that include or were manufactured with the Product, and except as provided for under Section 6.05 regarding SIEGFRIED's indemnification obligations for third party claims SIEGFRIED shall have no liability in connection with any such use. 6.04 Indemnification by CELGENE. CELGENE shall defend, indemnify and hold SIEGFRIED, its Affiliates and their respective officers, directors, employees and agents harmless from and against any and all losses, demands, liabilities, costs and expenses (including reasonable attorney's fees and disbursements) incurred by or imposed upon any of them arising out of any and all governmental or private actions (or their insurers under rights of subrogation or otherwise) that are related in any way to (i) the storage (after delivery to the carrier specified by CELGENE), use, transfer or sale (including without limitation, the labeling, packaging, distribution, promotion and marketing of the Product or any product which is accepted by CELGENE under Section 5.02,; (ii) any claim of failure by CELGENE to comply with governmental requirements applicable to CELGENE relating to the Product; or (iii) any negligent or willful act or omission by CELGENE in connection with its performance of this Agreement or any breach by CELGENE of any of its representations, warranties or covenants contained herein. 6.05 Indemnification by SIEGFRIED. SIEGFRIED shall defend, indemnify and hold CELGENE, its Affiliates and their respective officers, directors, employees and agents harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees and disbursements) incurred by or imposed upon any of them arising out of any and all governmental or private actions (or their insurers under rights of subrogation or otherwise) that are related in any way to (i) failure of any Product, packaging or labeling supplied hereunder to conform to the Specifications or comply with cGMPs or other warranty of SIEGFRIED contained herein at the time of delivery of the Product to the common carrier; (ii) any claim of failure by SIEGFRIED to comply with governmental requirements applicable to SIEGFRIED relating to the Product; or (iii) any negligent or willful act or omission by SIEGFRIED, including without limitation the negligent manufacture of the Product by SIEGFRIED, or any breach by SIEGFRIED of any of its representations, warranties or covenants contained herein; provided that SIEGFRIED shall have no liability if such Product was manufactured in accordance with the Specifications. 6.06 Patent, Trademark and Tradedress Indemnification. CELGENE shall indemnify and hold SIEGFRIED and its employees, officers, directors and agents harmless from and against any and all claims, demands, actions, suits, losses, damages, costs, expenses (including reasonable attorneys' fees and disbursements), and liabilities which SIEGFRIED may incur, suffer or be required to pay by reason of any patent trademark, and tradedress infringement suit brought against SIEGFRIED because of CELGENE's marketing, distribution or sale of Product and/or any pharmaceutical compositions containing the Product. SIEGFRIED shall indemnify and hold CELGENE, its Affiliates and their respective employees, officers, directors and agents harmless from and against any and all claims, demands, actions, suits, losses, damages, costs, expenses (including reasonable attorneys' fees and disbursements), and liabilities which CELGENE or its Affiliates may incur, suffer or be required to pay by reason of any patent infringement suit brought against CELGENE or its Affiliates because of SIEGFRIED's manufacture of Product. 6.07 Conditions to Indemnification. The indemnified party shall give the indemnifying party prompt written notice of any claim or the institution of any suit against the indemnified party for which it may seek indemnification under this Article VI. The failure to give such notice shall not relieve the indemnifying party from any liability that it may have to the indemnified party under this Article VI, except to the extent that the indemnifying party's ability to defend such claim or suit is materially prejudiced by such failure to give notice. The indemnifying party shall be entitled to participate in the defense of such claim or suit and to assume the control of such defense; provided, however, that the indemnified party may elect to participate in, but not control, the defense of such claim or suit and to be represented by counsel, at its own expense, in connection therewith. The indemnifying party shall not enter into any settlement agreement, which would materially adversely affect the rights or obligations of the indemnified party under this Agreement or otherwise without the Indemnified party's prior written consent, such consent not to be unreasonably withheld or delayed. The indemnified party shall not be subject to any liability for any settlement made without its consent, unless such settlement provides for the payment by the indemnifying party of money damages only and the unconditional release of the indemnified party from all liability in connection with such claim. 6.08 Insurance. (a) SIEGFRIED represents and warrants to CELGENE that it is currently insured, including self-insurance, and covenants that at all times during the term of this Agreement it will maintain a comprehensive general liability insurance policy which (i) is sufficient to adequately protect against the risks associated with its ongoing business consistent with industry standards, including the risks which could reasonably be anticipated to arise in connection with the transactions contemplated by this Agreement and (ii) provides that it cannot be terminated or canceled without giving CELGENE thirty (30) days prior written notice. SIEGFRIED shall provide CELGENE with evidence of such insurance and self-insurance, upon request. (b) CELGENE has and during the term of this Agreement shall maintain an adequate self-insurance and/or insurance program which is sufficient to adequately protect against the risks associated with its ongoing business, including the risks which might possibly arise in connection with the transactions contemplated by this Agreement and provides that it cannot be terminated or cancelled without giving SIEGFRIED thirty (30) days prior written notice. CELGENE shall provide SIEGFRIED with evidence of such insurance and/or self-insurance program, upon request. 6.09 Limitation. Notwithstanding the foregoing, with respect to any claim by one party against the other arising out of the performance or failure of performance of the other party under this Agreement, the parties expressly agree that the liability of such party to the other party for such breach shall be limited under this Agreement or otherwise at law or equity to direct damages only and in no event shall a party be liable in respect of any such claims for punitive, exemplary, incidental, special or consequential damages. ARTICLE VII PRODUCT RETURN PROCEDURES AND RECALLS ------------------------------------- 7.01 Product Return Procedures. (a) CELGENE may return to SIEGFRIED, at SIEGFRIED's shipping expense and risk, any Product sold by SIEGFRIED to CELGENE which does not conform to the Specifications, for credit or replacement, at the election of SIEGFRIED within sixty (60) days of receipt. Credit for returned items shall be given when SIEGFRIED receives Product. (b) Subject to Section 5.02, no such return may be made unless CELGENE first receives written authorization for the return from SIEGFRIED, which such authorization shall not be unreasonably withheld, and such return is then made in accordance with such authorization. (c) Shipping costs for shipment of replacement Product by SIEGFRIED back to the location designated by Purchaser via ground transportation shall be paid by SIEGFRIED. (d) SIEGFRIED shall have no obligation to grant credit for or replace any Product sold hereunder which has been subject to misuse, mishandling, neglect, accident, or abuse by any person other than SIEGFRIED or has been subjected to alteration or modifications by any person other than SIEGFRIED. 7.02 Recalls. (a) If any government authority requires a recall, or if CELGENE reasonably determines a voluntary recall is warranted, of any product sold by CELGENE which includes the Product (the "Recalled Product") due to a failure of the Product to meet Specifications or otherwise comply with SIEGFRIED's warranties herein, CELGENE shall immediately notify SIEGFRIED of such recall by phone and confirm in writing within forty-eight (48) hours. (b) Prior to commencing any recall, described in Section 7.02 (a), CELGENE shall inform SIEGFRIED of the proposed manner in which the recall is to be carried out. (c) If the recall results from any circumstances described in clauses (i), (ii), or (iii) of Section 6.05 hereof, SIEGFRIED shall: (i) Credit to CELGENE an amount equal to the purchase price paid by CELGENE to SIEGFRIED for the Product so recalled plus CELGENE's actual cost for direct material and direct labor furnished by it or it's contracting parties in connection with the manufacture of the Recalled Product and reimburse CELGENE for the reasonable expenses of conducting its recall action (e.g. advertising, mailing, etc.); (ii) Indemnify and hold CELGENE harmless from and against any and all damages, costs or charges, lawsuits or expenses associated with or resulting from any such recall, including reasonable counsel fees and disbursements. (d) If the recall results from (i) a defect in handling of the Product after shipment by SIEGFRIED or in shipping or storing Product (after delivery to the carrier specified by CELGENE), (ii) the failure of the Product manufactured in accordance with the Specifications to comply with the levels of performance, quality, fitness or durability warranted or represented by CELGENE, (iii) a defect arising out of any Specifications mandated by CELGENE, (iv) the inadequate or misleading nature of any text appearing on the packaging or labeling of the Product in compliance with the Specifications, and (v) any other reason not set forth in clauses (i), (ii) or (iii) of Section 6.05 hereof including CELGENE's failure to recall any product containing Product after notice from SIEGFRIED that a recall is warranted (in which case SIEGFRIED shall have no liability whatsoever, notwithstanding anything herein to the contrary), CELGENE hereby indemnifies and holds SIEGFRIED harmless from any damages, costs, charges, lawsuits, or reasonable expenses (including legal fees and disbursements) incurred by or imposed upon SIEGFRIED associated with or resulting from any such recall. ARTICLE VIII CONFIDENTIALITY --------------- 8.01 Confidential Information. Each of SIEGFRIED and CELGENE shall use any Confidential Information disclosed to it by or on behalf of the other party only for the purposes contemplated by this Agreement and shall not disclose such Confidential Information to any third party without the prior written consent of the other party. The foregoing obligations shall survive the expiration or termination of this Agreement for a period of ten (10) years. These obligations shall not apply to Confidential Information that: (i) is known by the receiving party at the time of its receipt, and not through a prior disclosure by the disclosing party, as documented by business records that pre-date disclosure by the disclosing party; (ii) is at the time of disclosure, or thereafter becomes, published or otherwise part of the public domain without breach of this Agreement by the receiving party; (iii) is subsequently disclosed to the receiving party by a third party that has the right to make such disclosure; (iv) is independently developed by the receiving party or its Affiliates without the aid, application or use of the disclosing party's Confidential Information, and such independent development can be documented by the receiving party; (v) is disclosed to any institutional review board of any entity conducting clinical trials involving the Product or to any governmental or other regulatory agencies in order to obtain patents or to gain approval to conduct clinical trials or to market the Product, provided that such disclosure may be made only to the extent reasonably necessary for such purposes; or (vi) is required to be disclosed by law, regulation, rule, act or order of any governmental authority or agency or by judicial process, provided that notice is promptly delivered to the other party in order to provide an opportunity to seek a protective order or other similar order with respect to such Confidential Information and thereafter the receiving party discloses to the requesting person only the minimum information required to be disclosed in order to comply with the request, whether or not a protective order or other similar order is obtained by the other party. ARTICLE IX INTELLECTUAL PROPERTY RIGHTS ---------------------------- 9.01 Rights to Product and Material. Each Party shall continue to have sole ownership of and the right to exploit its own know-how, trade secrets and other intellectual property rights. This Article VIII survives the termination or expiration of this Agreement ARTICLE X TERMINATION ----------- 10.01 Early Termination. Either party may terminate this Agreement as follows: (a) By one party immediately upon written notice to the other, if the other party files a petition in bankruptcy, or enters into an arrangement with or makes an assignment for the benefit of its creditors, or applies for or consents to the appointment of a receiver or trustee for it or any of its assets, or suffers or permits the entry of an order adjudicating it to be bankrupt or insolvent (each an "Insolvency Event"). (b) By one party if the other party fails to perform or otherwise breaches any of its representations, warranties and covenants or any material obligations hereunder, by giving the breaching party written notice of its intent to terminate and stating the grounds therefor. The party receiving such notice shall have sixty (60) days from the receipt thereof if such breach or failure involves a non-monetary obligation, and thirty (30) days if the breach or failure is regarding a monetary obligation relating to conforming Product, to cure the failure or breach, at which time this agreement shall terminate if such failure or breach has not been cured. In no event, however, shall such termination notice be deemed to waive any rights to damages or any other remedy, which the party giving notice of breach may have as a consequence of such failure or breach. 10.02 Effect of Termination. The expiration or early termination of this Agreement shall not relieve the parties of any obligation accruing prior to such expiration or termination, and the provisions of Sections 2.02, 2.03, 2.05, 2.08, and 5.03 and Articles VI, VII, VIII and IX hereof shall survive the expiration or early termination of this Agreement. ARTICLE XI GENERAL PROVISIONS ------------------ 11.01 Force Majeure. Failure of any party to perform its obligations under this Agreement shall not subject such party to any liability or place them in breach of any term or condition of this Agreement to the other party if such failure is due to any cause beyond the reasonable control of such non-performing party ("force majeure"), unless conclusive evidence to the contrary is provided. Causes of non-performance constituting force majeure shall include, without limitation, acts of God, fire, explosion, flood, drought, war, riot, sabotage, embargo, strikes or other labor trouble, failure in whole or in part of suppliers to deliver on schedule materials, interruption of or delay in transportation, a national health emergency or compliance with any order or regulation of any government entity acting with color of right. The party affected shall promptly notify the other party of the condition constituting force majeure as defined herein and shall exert commercially reasonable efforts to eliminate, cure and overcome any such causes and to resume performance of its obligations with all possible speed; provided that nothing herein shall obligate a party to settle on terms unsatisfactory to such party any strike, lockout or other labor difficulty, any investigation or other proceeding by any public authority or any litigation by any third party. If a condition constituting force majeure as defined herein exists for more than ninety (90) consecutive days, the parties shall meet to negotiate a mutually satisfactory resolution to the problem, if practicable. 11.02 Assignment. Neither party shall, without the prior written consent (not to be unreasonably withheld or delayed) of the other party having been obtained, assign or transfer this Agreement to any person or entity, in whole or in part, provided that, each party may assign or transfer this Agreement to any Affiliate or to any successor by merger of such party or its pharmaceutical business to which this Agreement relates, or upon a sale of all or substantially all of such parties assets, or the assets of its pharmaceutical business to which this Agreement relates, and provided further that Celgene may assign this Agreement to Novartis Pharmaceutical Corporation, in each case, without the prior written consent of the other party hereto. All of the terms and provisions of this Agreement shall be binding upon and inure the benefit of and be enforceable by the parties hereto and their respective successors and assigns. 11.03 Entire Agreement. This Agreement, together with the Quality Agreement (Exhibit C hereto), shall constitute the entire Agreement between the parties hereto and shall supersede any other agreements, whether oral or written, express or implied, as they pertain to the Product. This Agreement may not be changed or modified except by written instrument signed by both parties. 11.04 Independent Relationship. Nothing herein contained shall be deemed to create an employment, agency, joint venture or partnership relationship between the parties hereto or any of their agents or employees, or any other legal arrangement that would impose liability upon one party for the act or failure to act of the other party. Neither party shall have any power to enter into any contracts or commitments or to incur any liabilities in the name of, or on behalf of, the other party, or to bind the other party in any respect whatsoever. 11.05 Notice. Any notice required hereunder may be served by either party on the other by personal delivery, or sent by facsimile (with confirmation copy by registered or certified first-class mail), or by registered or by certified first-class mail, or by overnight delivery service to the respective party's address set forth below: If to SIEGFRIED: SIEGFRIED (USA), Inc. 33 Industrial Park Road Pennsville, NJ 08070 Attention: Donald B. Bell President Siegfried (USA) (fax 856-678-4008) with a copy to: Siegfried Ltd. Untere Bruhlstrasse 4 4800 Zofingen Switzerland Attention: General Counsel (fax 41 62 746 15 05) and Jeanne Barnum, Esquire Schnader Harrison Segal & Lewis LLP 1600 Market Street, Suite 3600 Philadelphia, PA 19130 (fax 215-751-2205) If to CELGENE: CELGENE Company 7 Powder Horn Drive Warren, NJ 07059 Attention: Joseph J. Day, Jr. Sr. Vice President - Business Development and Technical Operations (fax 732-805-3931) with a copy to: Proskauer Rose LLP 1585 Broadway New York, NY 10036 Attention: Robert A. Cantone (fax 212-969-2900) or to such other address as one party may notify the other as provided herein. 11.06 Waiver. Any delay or failure in enforcing a party's rights under this Agreement or any waiver as to a particular default or other matter shall not constitute a waiver of such party's rights to the future enforcement of its rights under this Agreement, nor operate to bar the exercise or enforcement thereof at any time or times thereafter, excepting only as to an express written and signed waiver as to a particular matter for a particular period of time. 11.07 Hardship. If during the term of this Agreement, performance of the Agreement should lead to unreasonable hardship for the one or the other Party, taking the interests of both Parties into account, both Parties shall undertake reasonable endeavors to agree amicably to amend this Agreement in the light of the change in circumstances. 11.08 Heading. Section headings contained in this Agreement are included for convenience only and form no part of the agreement between the parties. 11.09 Severability. If any provision of this Agreement or the application of any such provision to any person or circumstance shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provisions hereof. The parties shall consult and use good faith efforts to agree upon a valid and enforceable provision, which shall be a reasonable substitute for such invalid provision in light of the intent of this Agreement. 11.10 Resolution of Dispute. Any claim or controversy arising hereunder shall first be submitted to mediation and, if not settled during mediation, shall thereafter be submitted to binding arbitration as provided by the Federal Arbitration Act (9 U.S.C. ss.ss. 1 et seq.) or, if applicable, by similar state statute, and not by or in a court of law. The arbitrator shall decide all decisions respecting the arbitrability of any dispute. The mediation shall be conducted in accordance with the CPR Rules for Non-Administrated Arbitration, as appropriate. If the dispute is not fully resolved by mediation, the dispute shall be submitted to binding arbitration in accordance with the CPR Rules for Non-Administrated Arbitration Rules, as appropriate, and judgment upon the award rendered by the arbitrator can be entered in and enforced by any court having jurisdiction over the matter. 11.11 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which shall be deemed to be an original, but which together shall constitute one and the same instrument. Facsimile or telecopy versions of manual signatures of this Agreement shall be considered original manual signatures 11.12 Governing Law. This Agreement is to governed by and construed in accordance with the laws of the State of New Jersey, without giving effect to conflict of law principles. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. AGREED AND ACCEPTED BY SIEGFRIED (USA), INC. WITNESSETH: BY: ----------------------------- BY: ----------------------------- NAME: ----------------------------- NAME: ----------------------------- TITLE: ----------------------------- TITLE: ----------------------------- DATE: ----------------------------- DATE: ----------------------------- AGREED AND ACCEPTED BY CELGENE CORPORATION WITNESSETH: BY: ----------------------------- BY: ----------------------------- NAME: ----------------------------- NAME: ----------------------------- TITLE: ----------------------------- TITLE: ----------------------------- DATE: ----------------------------- DATE: ----------------------------- EXHIBIT A --------- PRODUCT SPECIFICATIONS / LOT SIZE 1. All d-threo-methylphenidate USP produced for CELGENE shall meet current USP requirements and specifications (see below). 2. All containers shall have an airtight seal with tamper evident seal applied. 3. All shipments must be accompanied with a Certificate of Analysis. An MSDS sheet shall be sent each time the MSDS is updated by SIEGFRIED. 4. All shipments must be in 50 kg containers of consistent nature. 5. All containers will have a mechanically produced label with the statement of gross weight, tare weight and product weight of each container. - -------------------------------------------------------------------------------------------------------------------------------- Document no: QA-001 Revision no: 4 Page 1 of 2 ------------------------------------------------------------------------------------------------ Department: Quality Assurance/Quality Control ------------------------------------------------------------------------------------------------ Title: DEXMETHYLPHENIDATE HYDROCHLORIDE DRUG SUBSTANCE SPECIFICATION SHEET ------------------------------------------------------------------------------------------------ Supersedes: QA-001.3 Supersedes effective date: October 5, 2001 ================================================================================================================================
ALL TESTS WILL BE PERFORMED USING THE METHOD REVISION IN FORCE AT THE TIME OF ANALYSIS - -------------------------------------------------------------------------------------------------------------------------------- TEST METHOD ACCEPTANCE CRITERION - -------------------------------------------------------------------------------------------------------------------------------- Appearance (visual test) SOP-111 White to off-white powder - -------------------------------------------------------------------------------------------------------------------------------- Identification USP (angle bracket)197M(angle bracket) Consistent with in-house reference material (FT-IR spectrum) - -------------------------------------------------------------------------------------------------------------------------------- Identification Celgene MAM-008 NLT +75(degree) (Specific Rotation) - -------------------------------------------------------------------------------------------------------------------------------- Assay (HPLC) Celgene MAM-014 98.0 - 102.0% (w/w, calculated on a dried basis) - -------------------------------------------------------------------------------------------------------------------------------- Enantiomeric purity assay Celgene MAM-016 NLT 96% (w/w) - -------------------------------------------------------------------------------------------------------------------------------- Related Impurities Celgene MAM-015 RI1: NMT 0.10% (w/w) (HPLC)(1) RI2: NMT 0.10% (w/w) RI3: NMT 0.30% (w/w) RI4: NMT 0.10% (w/w) RI5: NMT 0.50% (w/w) Each unspecified(2): NMT 0.10% (by peak area) Total impurities(3): NMT 1.20% - -------------------------------------------------------------------------------------------------------------------------------- Loss on drying USPZ(angle bracket)731(angle bracket) NMT 0.5% (w/w) - -------------------------------------------------------------------------------------------------------------------------------- Residue on ignition USP(angle bracket)281(angle bracket) NMT 0.1% (w/w) - -------------------------------------------------------------------------------------------------------------------------------- Heavy metals USP(angle bracket)231(angle bracket) Method II NMT 0.001% (w/w) - -------------------------------------------------------------------------------------------------------------------------------- Residual solvents (GC) Celgene MAM-013 Methanol: NMT 0.10% (w/w) USP(angle bracket)467(angle bracket 2-Propanol: NMT 0.10% (w/w) - --------------------------------------------------------------------------------------------------------------------------------
(1) Abbreviations for related impurities: RI1: erythro-(alpha)-phenyl-(alpha)-piperidyl-(2)-acetic acid hydrochloride RI2: erythro-(alpha)-phenyl-(alpha)-piperidyl-(2)-acetamide RI3: threo-a-phenyl-a-piperidyl-(2)-acetic acid hydrochloride (or ritalinic acid HCl) RI4: threo-a-phenyl-a-piperidyl-(2)-acetamide RI5: erythro [(R*, S*)] isomer of methylphenidate hydrochloride (2) The percentage of unspecified impurities is calculated by comparison to the peak area of the d-threo-methylphenidate HCl standard peak, assuming that the relative response factor of the unspecified impurity with respect to d-threo-methylphenidate HCl is equal to one. (3) The value of total related impurities is calculated as the sum of the specified impurities (w/w) plus the sum of the unspecified impurities (by peak area). - -------------------------------------------------------------------------------------------------------------------------------- Prepared by: Reviewed by: Approved by: QA Approved by: Date: Date: Date: Effective Date: - --------------------------------------------------------------------------------------------------------------------------------
1 - -------------------------------------------------------------------------------------------------------------------------------- Document no: QA-001 Revision no: 4 Page 2 of 2 --------------------------------------------------------------------- -------------------------- Department: Quality Assurance/Quality Control ------------------------------------------------------------------------------------------------ Title: DEXMETHYLPHENIDATE HYDROCHLORIDE DRUG SUBSTANCE SPECIFICATION SHEET ------------------------------------------------------------------------------------------------ Supersedes: QA-001.3 Supersedes effective date: October 5, 2001 =============================== ================================================================================================
ADDITIONAL TEST - -------------------------------------------------------------------------------------------------------------------------------- TEST METHOD ACCEPTANCE CRITERION - -------------------------------------------------------------------------------------------------------------------------------- Identification (Chloride) USP (angle bracket)191(angle bracket) A white curdy precipitate is formed - -------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------
EXHIBIT B --------- PRODUCT PRICES The initial prices of the Product are as follows: The price for the initial order of 1,000 kilogram of Product is Four Thousand Seven Hundred Eighty Dollars ($4,780.00 USD) per kilogram. Thereafter, the price for purchase orders quantities of less than 1,000 kilogram shall be Four Thousand Four Hundred Eighty Dollars ($4,480.00 USD) per kilogram. The price for purchase order quantities of more than 1,000 kilogram shall be Four Thousand One Hundred Twenty Dollars ($4,120.00 USD) per kilogram. The foregoing shall serve as Base Prices for adjustment purposes. PRICE REVISION: The Base Price will be subject to an annual adjustment, commencing on January 1, 2004. The Base Price will be adjusted upward or downward each year based upon the change in the Producer Price Index for Chemical and Allied Products (PPI - WPU06) base value, as published by the Bureau of Labor Statistics of the U.S. Department of Labor. The parties agree that the PPI factor adjustment will begin at the average for July 1, 2001 to June 30, 2002 at 149.3. The calculation of the adjusted Product price is as follows: Price200(alpha) = Base Price + PPI Escalation PPI Escalation = Base Price X (PPI200(alpha) /149.3) EXHIBIT C --------- QUALITY AGREEMENT CELGENE CORPORATION AND SIEGFRIED (USA), INC. This Agreement is made and entered into as of the first (1st) day of January, 2003, by and between Celgene Corporation, a New Jersey corporation, having its principal place of business at 7 Powder Horn Drive, Warren, New Jersey 07059 ("CELGENE"), and Siegfried (USA), Inc., a Delaware corporation, having its principal place of business at 33 Industrial Park Road, Pennsville, New Jersey 08070 ("SIEGFRIED"). 1. GENERAL A. In connection with CELGENE entrusting SIEGFRIED with the manufacture and quality control of the Active Pharmaceutical Ingredient d-threo-methylphenidate hydrochloride identified in the Supply Agreement (hereinafter referred to as the "Product"), the relations concerning quality between CELGENE and SIEGFRIED are laid down in this Agreement. B. All manufacturing shall be performed in accordance with the New Drug Application (NDA), Drug Master File (DMF) and any agreed Specifications (see Exhibit A) and in compliance with standard industry practice, Regulatory Agency guidelines, USP, ICH, and all applicable federal, state and local laws and regulations including, without limitation, current Good Manufacturing Practice (cGMP). Master manufacturing Batch Records will be approved by CELGENE prior to their use. 2. AUDITS A. Quality Audits. SIEGFRIED shall permit CELGENE and its representatives to conduct audits of the facility at which the Product is manufactured ("Facility") at least annually, in accordance with the CELGENE procedures and Quality Guideline. SIEGFRIED shall provide CELGENE with access to its representatives involved in the manufacture of Product. The timing of the audit will be mutually agreed and arranged as soon as practical and shall not reasonably interfere with the business or operations of SIEGFRIED. For each audit, a Lead Auditor will be appointed. A "for cause" audit will be conducted with the procedure presented above, and has no frequency restriction and shall be conducted promptly. B. Access to Premises. CELGENE and its representatives may upon prior notice to SIEGFRIED have access to and the right to conduct audits of those portions of the Facility in which the manufacture of the Product is conducted and of applicable SIEGFRIED procedures during normal hours of operation in accordance with the terms and conditions of this Agreement. C. Audit Findings. At either party's request, an exit meeting shall be held to discuss CELGENE's audit findings at a mutually convenient time and at SIEGFRIED's premises. Within thirty (30) days of the conclusion of an audit, CELGENE shall provide SIEGFRIED with a written report summarizing its findings. SIEGFRIED shall provide CELGENE with a written response to such report within thirty (30) days of its receipt thereof. Such response shall include a plan for corrective action designed to address reasonable concerns and shortcomings documented in CELGENE's audit report. D. Inspection. In order to ascertain compliance by SIEGFRIED with the quality requirements contained in this Agreement, CELGENE and its representatives shall have the right, during normal hours of operation and on reasonable prior notice to SIEGFRIED, to inspect and request samples from the Facility in accordance with the terms of the Agreement. SIEGFRIED shall use its best efforts to enable CELGENE and its representatives to inspect and sample Product. Such inspections and sampling shall be conducted in a manner, which does not interrupt or impair in any significant manner the manufacturing operations of such facility. E. FDA Inspections and other Regulatory Investigations. SIEGFRIED will notify CELGENE promptly upon its actual knowledge of any scheduled inspection of the Facility by the FDA or any other Regulatory Agency relating to the manufacture of Product. SIEGFRIED will provide to CELGENE all material citations, observations (including FDA 483 forms, Warning Letters and establishment inspection reports and SIEGFRIED responses) resulting from any FDA or other Regulatory Agency inspection of the Facility relating directly to the manufacture of Product. 3. CHANGE CONTROL A. General. Any changes including manufacturing scale to be made by SIEGFRIED with respect to Product shall be in compliance with the applicable Regulatory Agency's guidelines. All such changes must be approved, in writing, in advance by CELGENE prior to implementation and not withstanding that some changes may only require a statement in CELGENE's annual report to the applicable Regulatory Agency under that Regulatory Agency's applicable guidelines. Such approval will not be unreasonably withheld. Validation protocols and reports, and modified master manufacturing Batch Records for any such changes will be approved by CELGENE and SIEGFRIED. B. Facility. All manufacturing shall be performed at SIEGFRIED's manufacturing facilities located at 33 Industrial Park Road, Pennsville, New Jersey 08070 and/or Untere Bruhlstrasse 4, 4800 Zofingen, Switzerland. 4. DOCUMENTS / STANDARD OPERATING PROCEDURES A. SIEGFRIED shall provide CELGENE with certified exact copies of all executed Batch Records and associated release documentation within thirty (30) days of the completion of manufacturing of each Product lot, when requested. CELGENE shall have the right to have access to review standard operating procedures, Batch Records, validation documentation, and any other documentation relating to the manufacture of PRODUCT. Upon CELGENE's request, SIEGFRIED will provide any additional documentation as reasonably requested by CELGENE. B. FDA Investigations and Other Investigations. SIEGFRIED shall provide CELGENE with any documents required due to regulatory inspections within five (5) working days of CELGENE's request for such documents. 5. RETENTION A. Records. SIEGFRIED shall maintain records relating to the Product in accordance with cGMPS and other applicable regulatory requirements. CELGENE shall be entitled to inspect such records at its own expense and during normal business hours as CELGENE shall reasonably request upon prior written notice to SIEGFRIED and shall not unreasonably disrupt the normal operation of the business. B. Product Retain. SIEGFRIED shall maintain sufficient Product to conduct at least three sets of analyses. The retention duration for the samples is five (5) years. At the conclusion of this period, CELGENE may request transfer of the samples to CELGENE. 6. PRODUCT COMPLAINTS A. CELGENE will provide SIEGFRIED written details of any Product complaint. Within thirty (30) calendar days of SIEGFRIED's receipt of such notification, SIEGFRIED shall provide CELGENE with a report reconciling the reported complaint. B. CELGENE and SIEGFRIED will immediately inform each other of any recall actions concerning the Product. 7. TESTING AND INVESTIGATIONS A. Release and stability testing of the Product may be performed by CELGENE or SIEGFRIED as agreed. Release and stability testing shall only be performed by SIEGFRIED following the successful completion of transfer of regulatory methods from CELGENE to SIEGFRIED. B. SIEGFRIED shall provide CELGENE with Product samples, taken by SIEGFRIED in accordance with a sampling plan approved by SIEGFRIED and CELGENE within thirty (30) days of the completion of manufacturing of each Product lot, when requested. C. SIEGFRIED shall supply CELGENE with any manufacturing, testing or in-process control data, or applicable documentation such as investigation reports within three (3) business days, if requested as the result of a regulatory inspection, an annual audit by CELGENE, or a regulatory exposure such as recall or significant complaint as relates to Product. D. SIEGFRIED shall be responsible for supporting all Batch Record investigations associated with regulatory actions as relates to Product. The results of all investigations shall be forwarded to CELGENE within three (3) business days. E. Siegfried shall provide Product Quality Reviews, performed per ICH Q7A, to CELGENE no later that the end of November annually. 8. PERSONNEL TRAINING A. SIEGFRIED shall provide training of their respective personnel as may be necessary to manufacture Product to meet the Specifications. Training shall be documented in compliance with cGMPs. 9. BATCH REJECTION A. CELGENE may reject any Batch of Product failing to meet any of the Specifications by giving written notice of rejection to SIEGFRIED within forty-five (45) days following receipt by CELGENE of samples of such Batch. Any claim by CELGENE submitted to SIEGFRIED pursuant to this Section shall be accompanied by a report of analysis (including a Product sample from the Batch analyzed). CELGENE's failure to reject Product in the manner set forth herein shall constitute acceptance of the Batch. 10. REPROCESSING AND REWORKING A. CELGENE will work with SIEGFRIED to support any reprocessing and reworking procedures as allowed by cGMP, and to support any required filing(s), if required. Product will not be reworked without prior notification to CELGENE. 12. STANDARDS A. CELGENE shall supply any requested standards (reference, resolution, etc.) in a reasonable timeframe (generally 2-3 weeks). 13. CONFLICT A. In the event of any conflict between the provisions of this Agreement and the provisions of the Supply Agreement dated January 1, 2003, the provisions of such Supply Agreement shall control. IN WITNESS WHEREOF, the parties have executed this Agreement as of January 1, 2003. Agreed and accepted Agreed and accepted for SIEGFRIED (USA), INC. for CELGENE CORPORATION BY: ----------------------------- BY: ----------------------------- NAME: ----------------------------- NAME: ----------------------------- TITLE: ----------------------------- TITLE: ----------------------------- EX-10.35 6 ex10-35.txt EXHIBIT 10.35 EXHIBIT 10.35 ANTHROGENESIS CORPORATION QUALIFIED EMPLOYEE INCENTIVE STOCK OPTION PLAN 1. PURPOSE OF PLAN. This Stock Option Plan (the "Plan") is intended to provide to the employees of Anthrogenesis Corporation (previously known as Lifebank, Inc.) (the "Corporation") additional incentive for them to promote the success of the business, by awarding incentive stock options (intended to qualify as such under the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code")) based upon measurable goals and the Corporation's financial performance. Options granted prior to December 20, 2002, shall be governed by the terms of the Plan in effect as of the date such Option was granted. Upon the consummation of the transactions contemplated by that Purchase Option Agreement and Plan of Merger (the "Purchase Agreement") by and among Celgene Corporation ("Celgene"), Celgene Acquisition Corp. and the Corporation dated April 26, 2002 (the "Merger"), (i) the Corporation's obligations with respect to each outstanding Option to purchase Common Shares, whether vested or unvested, shall, be assumed by Celgene, (ii) all references to the Corporation herein shall be deemed to refer to Celgene and (iii) each Option so assumed by Celgene shall continue to have, and be subject to, the same terms and conditions set forth in the applicable stock option agreement as in effect at the time of the Merger, subject to the adjustments set forth in Section 7.9 of the Purchase Agreement. 2. SHARES SUBJECT TO PLAN. There will be reserved for use upon the exercise of options to be granted from time to time under the Plan ("Options"), an aggregate of 500,000 Common Shares of no par value (the "Common Shares") of the Corporation (subject to any increase or decrease pursuant to paragraph 13), which shares may be in whole or in part, as the Board of Directors of the Corporation (the "Board of Directors"), shall from time to time determine, authorized but unissued Common Shares or issued Common Shares which shall have been reacquired by the Corporation. For purposes of this Plan, the "Plan Year" shall be the 12-month period ending on each December 31. If an Option shall expire or terminate for any reason without having been exercised in full, the unpurchased shares covered thereby shall (unless the Plan shall have been terminated) be added to the shares otherwise available for Options which may be granted in accordance with the terms of the Plan. On or after the consummation of the Merger, all references to the term "Common Shares" shall be deemed to refer to shares of common stock, par value $.01 per share, of Celgene. 3. ADMINISTRATION OF PLAN. The Board of Directors hereby designates the Chairman and the Chief Executive Officer as Administrators of this Plan; provided, however, that on and after the Merger, the Management Compensation and Development Committee of the Board of Directors of Celgene Corporation ("Celgene") shall be the Administrators. The Administrators may delegate some or all of their authority under the Plan as the Administrators deems appropriate in its sole and absolute discretion; provided, however, that no such delegation shall be made (i) with regard to any eligible employee who is a "covered employee" (as defined in Section 162(m) of the Internal Revenue Code) at the time of grant or (ii) that would cause awards under the Plan to fail to be exempt under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Subject to the provisions of the Plan, the Administrators shall have plenary authority in their joint discretion to determine the employees of the Corporation to whom Options shall be granted, the number of shares to be covered by each of the Options, and the time or times at which Options shall be granted; to interpret the Plan; and to prescribe, amend, and rescind rules and regulations relating to it; provided, however, that, in the event of employees who shall also be directors of the Corporation, Options shall be granted in accordance with the provisions of paragraphs 4 and 5 hereof. The Board of Directors may from time to time appoint substitutes for, or in addition to, those previously appointed as Administrators. All actions shall be memorialized by a written instrument signed by the Administrators, and action so taken shall be fully as effective as if it had been taken by a vote of a majority of the members of the Board of Directors at a meeting duly called and held. 4. ELIGIBLE EMPLOYEES. An Option shall be granted in each Plan Year to those employees of the Corporation whose performance, in the discretion of the Administrators, has met or exceeded anticipated performance levels and has contributed to the Corporation's financial results. In no event shall an Option which is exercisable more than five years from the date of the grant thereof be granted to any person who, immediately after such Option is granted, owns (as defined in Sections 422 and 424 of the Internal Revenue Code) shares possessing more than 10 percent of the total combined voting power or value of all classes of shares of the Corporation or of its parent or any subsidiary corporation. 5. NUMBER OF SHARES COVERED BY OPTIONS TO INDIVIDUAL EMPLOYEES. Any Option granted to any employee shall cover not in excess of such number of Common Shares (rounded out, if not an even 100 shares or multiple thereof, to the next lower 100-share lot) as shall have an aggregate option price equal to such employee's current aggregate annual compensation (including fixed salary and incentive compensation) from the Corporation and all corporations controlled by it. Such current aggregate annual compensation shall, in each case, be determined by multiplying by four the aggregate compensation received by him during the calendar quarter-year next preceding the date of the granting of his Option. 6. FACTORS CONSIDERED IN GRANTING OPTIONS. In making any determination as to employees to whom Options shall be granted and as to the number of shares to be covered by such Options, the Administrators shall take into account the duties of the respective employees, their present and potential contributions to the success of the Corporation, and such other factors as the Administrators shall deem relevant in connection with accomplishing the purpose of the Plan. 7. OPTION PRICES. The exercise price of the Common Shares, which shall be covered by each Option, shall be 100 percent of the fair market value of the Common Shares at the time of granting the Option. If, at the time of the exercising of this Option, the shares are registered and traded in the open market, such fair market value shall be deemed to be the mean of the high and low prices of the Common Shares on national securities exchanges on the day on which the Option shall be exercised. If the price so determined shall not be an even multiple of one dollar, it shall be rounded out to the next higher dollar per share. Notwithstanding the foregoing, the purchase price for Common Shares under an Option or Options granted to any person then owning more than 10 percent of the total combined voting power of all classes of shares of the Corporation, or of its parent or subsidiary corporation, shall be 110 percent of the fair market value of the Common Shares at the time of grant of the Option. 8. TERMS OF OPTIONS. Each Option must be exercised within ten years from the date of the grant thereof; provided, however, that any Option granted to any person then owning more than 10 percent of the total combined voting power of all classes of shares of the Corporation, or of its parent or subsidiary corporation, must be exercised within five years from the date of the grant thereof. The option term may be subject to termination prior to the expiration of the period mentioned above as provided hereinafter. 9. EXERCISE OF OPTIONS. An Option may be exercised at any time or from time to time, as to any part of or all the shares which shall be covered thereby; provided, however, that: (a) an Option may not be exercised as to less than 1000 shares (subject to any increase or decrease pursuant to paragraph 13) at any one time (or the remaining shares then purchasable under the Option, if less than 1000 shares (subject to any increase or decrease pursuant to paragraph 13)); and (b) an Option shall not be exercisable prior to the expiration of six months following the date on which the Option was granted. The purchase price of the shares as to which an Option shall be exercised shall be paid in full in cash at the time of exercise. Except as provided in paragraphs 11 and 12 hereof, an Option may not be exercised at any time unless the holder thereof shall have been in the continuous employ of the Corporation and/or of one or more of its subsidiaries, from the date of the granting of the Option to the date of its exercise. The holder of an Option shall not have any of the rights of a shareholder with respect to the shares covered by his Option, except to the extent that one or more certificates for such shares shall be delivered to him upon the due exercise of the Option. 10. NO TRANSFERABILITY. An Option shall not be transferable otherwise than by will or the laws of descent and distribution, and an Option may be exercised, during the lifetime of the employee, only by such employee. 11. TERMINATION OF EMPLOYMENT. In the event that the employment of an employee to whom an Option shall have been granted shall be terminated (otherwise than by reason of death), such Option may be exercised (to the extent that the employee shall have been entitled to do so at the termination of his employment) at any time within three months after such termination. So long as the holder of an Option shall continue to be an employee of the Corporation or one or more of its subsidiaries, the Option shall not be affected by any change in duties or position. Nothing in the Plan or in any option agreement shall confer upon any employee any right to continue in the employ of the Corporation or of any of its subsidiaries, or interfere in any way with the right of the Corporation or any such subsidiary to terminate his employment at any time. 12. DEATH OF EMPLOYEE. If an employee to whom an Option shall have been granted shall die while he shall be employed by the Corporation or one or more of its subsidiaries or within three months after the termination of his employment, such Option may be exercised (to the extent that the employee shall have been entitled to do so at the date of his death) by a legatee or legatees of the employee under his last will, or by his personal representatives or distributees. 13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of changes in the outstanding Common Shares of the Corporation by reason of share dividends, split-ups, recapitalizations, mergers, consolidations, combination or exchange of shares, separations, reorganizations, or liquidations, the number and class of shares available under the Plan in the aggregate and in any Plan Year and the maximum number of shares as to which Options may be granted to any employee shall be correspondingly adjusted by the Administrators. Notwithstanding the foregoing, no adjustment shall be made in the minimum number of shares that may be purchased at any time. 14. EFFECTIVE DATE OF PLAN. The Plan shall become effective on such date as the Board of Directors shall determine, but only after: (a) the shareholders of the Corporation shall, by the affirmative vote or other consent of a majority in interest of the Common Shares, in addition to the affirmative vote or other consent of a majority in interest of all shares of the Corporation, have approved the Plan; (b) Article IV of the Certificate of Incorporation of the Corporation shall have been amended in accordance with the Business Corporation Act of the State of New Jersey so as to authorize the Corporation to issue the Common Shares reserved for the purposes of the Plan without offering such shares to the holders of the outstanding Common Shares for subscription; and (c) the Board of Directors shall have been advised by counsel that all applicable legal requirements have been complied with. 15. EFFECTIVE DATE OF OPTION GRANT. Nothing contained in the Plan or in any resolution adopted or to be adopted by the Board of Directors or the stockholders of the Corporation nor any action taken by the Administrators shall constitute the granting of any Option. The granting of an Option shall take place only when a written option agreement substantially in the form of the option agreement that is attached hereto and marked Exhibit A shall have been duly executed and delivered by or on behalf of the Corporation and by the employee to whom such Option was granted on the effective date contained therein. 16. LIMITATION. No employee eligible to participate herein shall be granted Options to purchase Common Shares that are exercisable during any one calendar year, to the extent that the fair market value of such shares (determined at the time of the grant of the Option) exceeds $100,000. No employee shall be given the opportunity to exercise Options granted hereunder with respect to shares valued in excess of $100,000 in any calendar year, except and to the extent that the Options shall have accumulated over a period in excess of one year. 17. TERMINATION AND AMENDMENT OF PLAN. The Plan shall terminate on December 31, 2008, and an Option shall not be granted under the Plan after that date. The Plan (including the form of option agreement which is attached hereto and marked Exhibit A) may at any time or from time to time be terminated, modified, or amended by the shareholders of the Corporation, by the affirmative vote of a majority in interest of the Common Shares, in addition to the affirmative vote of a majority in interest of all the shares of the Corporation. The Board of Directors may at any time and from time to time modify or amend the Plan (including such form of option agreement) in such respects as it shall deem advisable in order that the Options shall continue to be "incentive stock options" as defined in Section 422 of the Internal Revenue Code or to conform to any change in the law, or in any other respect which shall not change: (a) the maximum number of shares for which Options may be granted under the Plan either in the aggregate or in any Plan Year or to any individual employee; (b) the option prices other than to change the manner of determining the fair market value of the Common Shares for the purposes of paragraph 7 hereof to conform with any then applicable provisions of the Internal Revenue Code or regulations thereunder; (c) the periods during which Options may be granted or exercised; (d) the provisions relating to the determination of employee to whom Options shall be granted and the numbers of shares to be covered by such Options; or (e) the provisions relating to adjustments to be made upon changes upon capitalization. The termination or any modification or amendment of the Plan shall not, without consent of an employee, affect his rights under an Option previously granted to him. 18. OPTIONS DISCRETIONARY. The granting of Options under the Plan shall be entirely discretionary with the Administrators and nothing in the Plan shall be deemed to give any officer or managerial employee any right to participate in the Plan or to receive Options. 19. SECURITIES REGISTRATION. At the closing provided for above, the participant shall agree to hold the shares acquired by the exercise of the Option for investment and not with a view to resale or distribution thereof to the public, and he shall deliver to the Corporation a certificate to that effect. In the event that the Corporation shall nevertheless deem it necessary to register under the Securities Act of 1933 or other applicable statutes any shares with respect to which an Option shall have been exercised, or to qualify any such shares for exemption from the Securities Act of 1933 under Regulation A of the Rules and Regulations of the Securities and Exchange Commission, then the Corporation shall take such action at its own expense before delivery of its own shares. In the event the shares of the Corporation shall be listed on any national stock exchange at the time of the exercise of an Option under this Plan, then, whenever required, the Corporation shall register the shares with respect to which such Option is exercised under the Exchange Act, and shall make prompt application for the listing on such stock exchange of such shares, at the sole expense of the Corporation. 20. LIQUIDATION. Upon the complete liquidation of the Corporation, any unexercised Options previously granted under this Plan shall be deemed cancelled, except as otherwise provided in paragraph 7(b) above on the occasion of a merger or consolidation. In the event of the complete liquidation of a subsidiary corporation, or in the event that such corporation ceases to be a subsidiary corporation as that term is defined in paragraph l above, any unexercised Options previously granted to participants employed by such corporation shall be deemed cancelled unless such participants shall become employed by the Corporation or by any other subsidiary corporation on the occurrence of any such event. 21. OPTION AGREEMENTS. Notwithstanding anything herein to the contrary, subject to the terms and conditions and within the limitations of the Plan, an Option shall be evidenced by such form of agreement or grant as is approved by the Administrators which shall contain such terms and conditions, which shall not be inconsistent with the terms and conditions of the Plan, as the Administrators shall deem necessary or appropriate, including, without limitation, permitting "reloads" and the ability to exercise an unvested Option provided that the Common Shares so purchased are subject to a repurchase option in favor of the Corporation. EX-21.1 7 ex21-1.txt EXHIBIT 21.1 EXHIBIT 21.1 LIST OF SUBSIDIARIES Name of Subsidiary State of Incorporation - ------------------ ---------------------- Signal Pharmaceuticals, Inc. California Anthrogenesis Corp. New Jersey EX-23.1 8 ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Celgene Corporation: We consent to the incorporation by reference in the registration statements (Nos. 333-70083, 33-21462, 33-38296, 33-62510, 333-91977, 333-39716 and 333-65908) on Form S-8, (Nos. 333-02517, 333-32115, 333-38861, 333-52963, 333-87197, 333-93759, 333-94915 and 333-75636) on Form S-3 and (No. 333-101196) on Form S-4 of Celgene Corporation of our report dated January 29, 2003, with respect to the consolidated balance sheets of Celgene Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 2002, and the related financial statement schedule, which report appears in the December 31, 2002, annual report on Form 10-K of Celgene Corporation. Our report on the consolidated financial statements refers to the Company's adoption of Statement of Financial Accounting Standards No. 141, "Business Combinations" effective July 1, 2001. /s/ KPMG LLP Short Hills, New Jersey March XX, 2003 -----END PRIVACY-ENHANCED MESSAGE-----