-----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, DjPWHVpDss1dj80WB0Xly933YwidKN6Qu/SBWHNPTv29Uckjz+5eBEXnrv82xZ73 jjxAiVJXXleRPjZqnpH2lQ== 0001036050-98-000905.txt : 19980518 0001036050-98-000905.hdr.sgml : 19980518 ACCESSION NUMBER: 0001036050-98-000905 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CEPHALON INC CENTRAL INDEX KEY: 0000873364 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 232484489 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19119 FILM NUMBER: 98625219 BUSINESS ADDRESS: STREET 1: 145 BRANDYWINE PKWY CITY: WEST CHESTER STATE: PA ZIP: 19380 BUSINESS PHONE: 6103440200 MAIL ADDRESS: STREET 1: 145 BRANDYWINE PARKWAY CITY: WEST CHESTER STATE: PA ZIP: 19380 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 1998 -------------- [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period from ______________ to _______________ Commission File Number 0-19119 ---------------------- CEPHALON, INC. ---------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Delaware 23-2484489 ------------------------------------------ ------------------------------- (State Other Jurisdiction of Incorporation (I.R.S. Employer Identification or Organization) Number) 145 Brandywine Parkway, West Chester, PA 19380 - ------------------------------------------ ------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code (610) 344-0200 ------------------------------- Not Applicable ------------------------------------------------------------------------- Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report 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 _______ ------- Applicable only to corporate issuers: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of May 8, 1998 ---------------------------- ----------------------------- Common Stock, par value $.01 28,443,273 Shares This Report Includes a Total of 19 Pages CEPHALON, INC. AND SUBSIDIARIES ------------------------------- INDEX ----- Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - 3 March 31, 1998 and December 31, 1997 Consolidated Statements of Operations - 4 Three months ended March 31, 1998 and 1997 Consolidated Statements of Cash Flows - 5 Three months ended March 31, 1998 and 1997 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of 9 Financial Condition and Results of Operations PART II - OTHER INFORMATION Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19 CEPHALON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS --------------------------- (Unaudited)
MARCH 31, DECEMBER 31, 1998 1997 ------------ --------------- ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 12,580,000 $ 10,271,000 Reverse repurchase agreements 18,990,000 27,414,000 Short-term investments 71,825,000 81,786,000 Other 7,535,000 7,680,000 ------------- -------------- Total current assets 110,930,000 127,151,000 PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $11,620,000 and $11,099,000 21,757,000 21,853,000 OTHER 2,073,000 2,204,000 ------------- -------------- $ 134,760,000 $ 151,208,000 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable $ 2,978,000 $ 2,724,000 Accrued expenses 13,628,000 16,075,000 Current portion of long-term debt 1,448,000 1,734,000 ------------- -------------- Total current liabilities 18,054,000 20,533,000 LONG-TERM DEBT (Note 2) 17,972,000 27,587,000 OTHER 2,972,000 2,750,000 ------------- -------------- Total liabilities 38,998,000 50,870,000 ------------- -------------- COMMITMENTS AND CONTINGENCIES (Note 3) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued -- -- Common stock, $.01 par value, 100,000,000 shares authorized, 28,424,743 and 27,395,254 shares issued and outstanding 284,000 274,000 Additional paid-in capital 328,523,000 318,450,000 Accumulated deficit (233,045,000) (218,386,000) Total stockholders' equity 95,762,000 100,338,000 -------------- -------------- $ 134,760,000 $ 151,208,000 ============== ==============
The accompanying notes are an integral part of these financial statements. 3 CEPHALON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS ------------------------------------- (Unaudited)
THREE MONTHS ENDED, MARCH 31, --------------------------------------- 1998 1997 ----------------- ----------------- REVENUES: $3,568,000 $5,628,000 OPERATING EXPENSES: Research and development 11,974,000 13,177,000 Selling, general and administrative 7,169,000 8,697,000 ----------------- ----------------- 19,143,000 21,874,000 ----------------- ----------------- LOSS FROM OPERATIONS (15,575,000) (16,246,000) ----------------- ----------------- INTEREST: Income 1,471,000 1,617,000 Expense (555,000) (501,000) ----------------- ----------------- 916,000 1,116,000 ----------------- ----------------- LOSS $(14,659,000) $(15,130,000) ================= ================= BASIC AND DILUTED LOSS PER SHARE (Note 1) $(0.53) $(0.61) ================= ================= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 27,870,715 24,691,153 ================= =================
The accompanying notes are an integral part of these financial statements. 4 CEPHALON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (Unaudited)
Three Months Ended March 31, ----------------------------- 1998 1997 -------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Loss $ (14,659,000) $ (15,130,000) Adjustments to reconcile loss to net cash used for operating activities: Depreciation and amortization 521,000 641,000 Non-cash compensation expense 403,000 773,000 Other 45,000 -- (Increase) decrease in operating assets: Accounts receivable - contract (267,000) (2,906,000) Other current assets 238,000 (970,000) Other long-term assets 131,000 (147,000) Increase(decrease) in operating liabilities: Accounts payable 294,000 1,230,000 Accrued expenses (2,557,000) (370,000) Other long-term liabilities 222,000 217,000 ------------- ------------- Net cash used for operating activities (15,629,000) (16,662,000) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (425,000) (599,000) Sale leaseback of property and equipment -- 333,000 Sales and maturities of investments, net 18,385,000 16,648,000 ------------- ------------- Net cash provided by investing activities 17,960,000 16,382,000 ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercises of common stock options and warrants 304,000 1,736,000 Principal payments on long-term debt (326,000) (4,111,000) ------------- ------------- Net cash used for financing activities (22,000) (2,375,000) ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,309,000 (2,655,000) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,271,000 5,671,000 ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,580,000 $ 3,016,000 ============= =============
The accompanying notes are an integral part of these financial statements. 5 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ---------------------------------------------------------- BUSINESS Cephalon, Inc. ("Cephalon" or the "Company") seeks to discover, develop and market pharmaceutical products to treat neurological disorders such as narcolepsy, amyotrophic lateral sclerosis ("ALS"), multiple sclerosis, peripheral neuropathies, Alzheimer's disease and stroke. The Company has funded its operations primarily from the proceeds of public and private placements of its equity securities and the receipt of payments under research and development agreements. The Company's business of developing and marketing pharmaceutical products is subject to a number of significant risks, including risks inherent in research and development activities and in conducting business in a highly regulated environment. The success of the Company depends upon obtaining the U.S. Food and Drug Administration ("FDA") and foreign regulatory approval to market products under development, including MYOTROPHIN(R) (rhIGF-I) and PROVIGIL(R) (modafinil). There can be no assurance that regulatory authorities will review the Company's marketing applications in a timely manner or that the applications will be approved. BASIS OF PRESENTATION These consolidated financial statements are unaudited and include all adjustments which, in the opinion of management, are necessary to present fairly the financial condition and results of operations of the Company as of and for the periods set forth in the Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows. All such adjustments are of a normal, recurring nature. The consolidated financial statements do not include all of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K, filed with the Securities and Exchange Commission, which includes financial statements as of and for each of the three years in the period ended December 31, 1997. The results of the Company's operations for any interim period are not necessarily indicative of the results of the Company's operations for any other interim period or for a full year. BASIC AND DILUTED LOSS PER SHARE The Company has adopted Statement of Financial Standards ("SFAS") No. 128, "Earnings per Share," which requires dual presentation of basic and diluted earnings per share ("EPS") for complex capital structures on the face of the statement of operations. Basic EPS is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period. Diluted EPS is similar to basic EPS except that the effect of converting or exercising all potential dilutive securities also is generally included in the denominator. The Company's calculation of diluted EPS for each of the periods presented does not differ from its calculation of basic EPS since the calculation of diluted EPS excludes the effect of converting or exercising stock options, restricted stock awards, warrants and convertible notes since, due to the loss presented in each period, the effect would be antidilutive. At March 31, 1998, the pro forma conversion or exercise of outstanding options, warrants and convertible notes with conversion or exercise prices at or below $14.00, the closing market price of the Company's common stock at March 31, 1998, would increase the number of shares of common stock outstanding by approximately 8%, or approximately 2,271,000 shares. The pro forma conversions or exercises of all other outstanding options, warrants and convertible notes would increase the number of shares outstanding by an additional 15%, or approximately 4,373,000 shares. 6 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED) (Unaudited) COMPREHENSIVE INCOME On January 1, 1998, the Company adopted Statement of Financial Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income or loss and its components in financial statements. For the period presented, comprehensive loss approximated the loss as presented in the accompanying Statements of Operations. SEGMENT INFORMATION On January 1, 1998, the Company adopted SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information." This statement establishes standards for reporting financial and descriptive information about an enterprise's operating segments in its financial statements. Although this statement need not be applied to interim financial statements in the initial year of application, comparative information will be required for interim periods subsequent to fiscal year ending December 31, 1998. 2. LONG-TERM DEBT -------------- In April 1997, the Company completed a $30,000,000 private placement of senior convertible notes (the "Notes"), which mature in October 1998 and bear interest, payable quarterly in cash or common stock, at a rate of seven percent per annum. During the quarter ended March 31, 1998, $9,575,000 in principal of the Notes was converted into 1,005,000 shares of common stock, resulting in a $1,751,000 outstanding principal balance as of March 31, 1998. 3. COMMITMENTS AND CONTINGENCIES ----------------------------- RELATED PARTY Late in 1995, Cephalon Clinical Partners, L.P. (the "Partnership") depleted all of its available funding and will not provide further funding of MYOTROPHIN development costs to the Company. The amount of additional funding required for further development will be determined by the Partnership's general partner in advance of each quarter, and each quarter, the Company will have the right, but not the obligation, to contribute such funds. The Partnership has granted the Company an exclusive license (the "Interim License") to manufacture and market MYOTROPHIN for human therapeutic use within the United States, Canada and Europe (the "Territory") in return for certain royalty payments and a payment of approximately $16,000,000 (the "Milestone Payment") that is to be made if MYOTROPHIN receives regulatory approval in the United States or certain other countries within the Territory. The Company has the option to pay the Milestone Payment in cash, common stock, or a combination thereof. The Company has a contractual option to purchase all of the limited partnership interests in the Partnership (the "Purchase Option") in specified circumstances following the initiation of commercial sales, if any, of MYOTROPHIN. To exercise the Purchase Option, Cephalon is required to make an advance payment of $40,275,000 in cash or, at Cephalon's election, $42,369,000 in shares of the Company's common stock, valued at the market price at the time the Purchase Option is exercised. In addition to the advance payment, the exercise of the Purchase Option requires the Company to make future payments to the former limited partners for a period of eleven years after exercise at a royalty rate of 10.1% (subject to reduction under certain circumstances) of MYOTROPHIN sales in the Territory. If the Company does not exercise the Purchase Option prior to its expiration, the Interim License will terminate and all development and marketing rights to MYOTROPHIN in the 7 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED) (Unaudited) Territory would revert to the Partnership, which may commercialize MYOTROPHIN itself or license or assign its rights to a third party. The Company would not receive any benefits from such commercialization. The January 1994 collaboration between the Company and Chiron Corporation ("Chiron") is subject to the rights of the Partnership. The Company is solely responsible for making any royalty and milestone payments owed to the Partnership and for funding the Purchase Option, if it elects to exercise the option. LEGAL PROCEEDINGS The Company and certain of its officers have been named as defendants in a number of civil actions filed in the U.S. District Court for the Eastern District of Pennsylvania, which have been consolidated. Several of the plaintiffs have been designated by the Court, collectively, as the "lead plaintiff" for purposes of the Private Securities Litigation Reform Act of 1995. The consolidated complaint, filed in October 1996 by the lead plaintiffs, extended and expanded the class period to include purchasers of the Company's securities as well as options to purchase or sell those securities during the period between June 12, 1995 and June 7, 1996. The plaintiffs allege, based in part on statements and opinions expressed at a June 1996 meeting of an FDA advisory committee, that earlier statements by the Company about the results of North American and European clinical studies of MYOTROPHIN were misleading. The plaintiffs seek unspecified damages and other relief. A judgement adverse to the Company could, under some theories of damages, result in an assessment which materially exceeds the coverage obtained under the Company's directors' and officers' liability insurance policy. The Company's motion to dismiss the case was denied, and discovery has commenced and is expected to continue through 1998. Plaintiffs have moved for certification of the class alleged in the consolidated complaint, and initial briefs have been filed by the parties. Based on presently available information, management believes that it has meritorious defenses to the claims and intends to vigorously defend the action. Management believes that it is too early in the proceedings to determine with any certainty the outcome of this action or the potential liability of the Company, if any. 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN RISKS RELATED TO CEPHALON'S BUSINESS The statements under this caption are intended to serve as cautionary statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be read in conjunction with the forward-looking statements in this Report as well as statements presented elsewhere by management of the Company. The following information is not intended to limit in any way the characterization of other statements or information in this Report as cautionary statements for such purpose. Need for Product Approvals The success of Cephalon, Inc. ("Cephalon" or the "Company") depends upon obtaining U.S. Food and Drug Administration ("FDA") and foreign regulatory approval to market products under development, including MYOTROPHIN(R) (rhIGF-I) and PROVIGIL(R) (modafinil). There can be no assurance that regulatory authorities will review the Company's marketing applications in a timely manner or that the applications will be approved. An adverse decision by a regulatory authority could adversely influence the decision of another regulatory authority. Regulatory Uncertainties Related to MYOTROPHIN On May 12, 1998, Cephalon and Chiron Corporation ("Chiron") announced that the FDA had issued a letter stating that the companies' new drug application ("NDA") to market MYOTROPHIN in the United States for the treatment of amyotrophic lateral sclerosis ("ALS") was "potentially approvable." Before the NDA can be approved, the FDA has requested the submission of additional information from ongoing clinical studies which demonstrates that MYOTROPHIN is effective in the treatment of ALS. There can be no assurance that any ongoing studies contain information sufficient to demonstrate MYOTROPHIN's efficacy to the satisfaction of the FDA, or that any such information can be obtained in a reasonable timeframe. If the ongoing studies do not contain sufficient additional efficacy data to satisfy the FDA's conditions, a new study would be necessary, which would be expensive and would take several years to complete. There is no assurance that an additional study would be cost-effective to conduct. Even if the Company and Chiron would be willing to conduct an additional study as a pre- approval activity, there can be no assurance that the results of a new study would be sufficient to obtain regulatory approval. A marketing authorization application ("MAA") is pending before the European Medicines Evaluation Agency ("EMEA") for approval to market MYOTROPHIN in Europe for the treatment of ALS. Cephalon and Chiron have filed a response to questions from member states, some of which were similar to questions about efficacy and safety previously raised by the FDA. There can be no assurance that the EMEA will approve the application on the basis of the data contained in the MAA. An EMEA decision is binding on all 15 member states of the European Union. If the EMEA requires additional efficacy information, there can be no assurance that satisfactory information can be obtained from ongoing studies or any additional study. A new study would be expensive and take several years to complete. The Company presently believes that it is unlikely that the conduct of an additional study would be cost-effective solely for purposes of regulatory approval in Europe. Even if the Company and Chiron would be willing to conduct an additional study as a pre-approval activity, there can be no assurance that the results of a new study would be sufficient to obtain regulatory approval. Regulatory Uncertainties Related to PROVIGIL The FDA has indicated that the Company's NDA seeking approval to market PROVIGIL for the treatment of excessive daytime sleepiness associated with narcolepsy, is approvable. In the "approvable letter," the FDA requested clarification and/or confirmation of certain information. The Company is preparing to submit a response to this request, and there is no assurance that the information to be included in the response will result in approval of the NDA. The FDA is not under any obligation to review the information in a timely manner, and the Company cannot predict the timing of their decision; however, the Company does not expect that a decision will be made by the FDA any earlier than the end of 1998, and it could be later. 9 On April 14, 1998, the Drug Enforcement Administration ("DEA") published a Notice of Proposed Rulemaking to classify modafinil as a controlled substance in Schedule IV under the Controlled Substances Act (the "CSA"). The public comment period expired on May 14, 1998. In the proposed rule, the DEA has indicated that the final rule will not be completed unless and until the FDA approves the PROVIGIL NDA. Even if the FDA grants marketing authorization, the Company can not launch PROVIGIL until the DEA's classification of modafinil is completed. Status as a controlled substance and the restrictions imposed by the CSA may limit physicians' willingness to prescribe the drug. The commercial impact, if any, resulting from marketing PROVIGIL as a controlled substance can not be predicted. Classification of modafinil as a controlled substance in the United States may cause other regulatory authorities to impose similar controls in other territories licensed by the Company from Lafon. Volatility of Stock Price The market price and trading volume of shares of the Company's common stock is highly volatile, and is expected to continue to be volatile for the foreseeable future. Any future negative announcements (such as adverse regulatory decisions or decisions to delay the MYOTROPHIN or PROVIGIL marketing applications, disputes concerning patent or proprietary rights, or operating results which fall below the market's expectations) could produce significant declines in the price of the Company's common stock. External events, such as favorable news about the Company's competitors, also could negatively affect the price of the Company's common stock. No Assurance of Profitability from any Product Even if MYOTROPHIN and PROVIGIL are approved for commercialization, there can be no assurance that profitable operations can be achieved solely on sales of those products, either individually or in combination, if at all. The Company's profits on sales of MYOTROPHIN, if any, will be limited by the relatively small size of the ALS market (approximately 15,000-20,000 people in the United States) and the Company's royalty and profit-sharing arrangements, respectively, with Cephalon Clinical Partners, L.P. (the "Partnership") and Chiron, which reduce the Company's share of profits. Competition from Rilutek(R) (riluzole), which is being marketed in the United States and Europe by Rhone-Poulenc Rorer, Inc. for use in treating ALS, also could reduce the market for MYOTROPHIN. Patients with ALS, given the constraints of drug reimbursement programs, may not be able to support both Rilutek and MYOTROPHIN (as well as any other drugs which may be approved in the future for use in treating ALS), especially if MYOTROPHIN has a higher price than competitive drugs Similarly, the market for use of PROVIGIL in narcolepsy patients is relatively small (approximately 125,000 people in the United States, of which 30,000-40,000 are believed to currently seek treatment from a physician). Competition for PROVIGIL is expected in all of the Company's licensed territories, because narcolepsy is currently treated with several drugs, all of which have been available for a number of years and are available in inexpensive generic forms. Manufacturing Uncertainties Cephalon relies on Chiron's U.S. manufacturing facility (the "Chiron Facility") as the sole source of supply for MYOTROPHIN. Chiron has only limited experience in producing rhIGF-I on a commercial scale, and there can be no assurance that the transition to ongoing commercial production would be successful. Lafon is the sole supplier of bulk modafinil compound for the Company. Furthermore, the Company has only one supplier who is qualified to make finished PROVIGIL for commercial or clinical use, and one of the raw materials used as an excipient in the finished product is obtained through a company which is believed to be the only available source of the material. There can be no assurance that Cephalon would be able to establish or locate alternative, cost-effective sources of supply for materials if any of the sole suppliers could not produce sufficient quantities of materials. Failure to 10 locate alternative supplies of materials could result in significant costs and delays to the program, damage the commercial prospects for products under development, including MYOTROPHIN and PROVIGIL, and have a material adverse effect on the Company. Cephalon and its various suppliers must comply with all applicable regulatory requirements of the FDA and foreign authorities, including current Good Manufacturing Practice ("cGMP") regulations. The manufacturing facilities used by the Company and its suppliers are subject to inspection by the FDA and other regulatory authorities at any time during the conduct of clinical studies or commercial operations, to determine compliance with cGMP requirements. The cGMP regulations are complex, and failure to be in compliance could lead to remedial action, civil and criminal penalties and delays in production of material. Need for Additional Funds The majority of the Company's current revenue is derived from collaborative research and development agreements and co-promotion agreements that are subject to termination by the respective third parties. There can be no assurance that any of the Company's collaborations will continue in the future. To meet its capital requirements, the Company will need to obtain additional funding through debt and/or equity financings. The Company also may seek additional funding through financing vehicles, such as "off-balance sheet" financing with limited partnerships or corporations. There can be no assurance that such additional funds can be obtained through these sources on terms acceptable to the Company, if at all. Any financings using either common stock or securities convertible into common stock would result in the issuance of additional shares and therefore would be dilutive to existing shareholders (i.e., the percentage ownership of the Company by existing shareholders would be reduced). At March 31, 1998, the pro forma conversion or exercise of outstanding options, warrants and convertible notes with conversion or exercise prices at or below $14.00, the closing market price of the Company's common stock at March 31, 1998, would increase the number of shares of common stock outstanding by approximately 8%, or approximately 2,271,000 shares. The pro forma conversions or exercises of all other outstanding options, warrants and convertible notes would increase the number of shares outstanding by an additional 15%, or approximately 4,373,000 shares. Legal Proceedings The Company and certain of its officers have been named as defendants in a number of civil actions filed in the U.S. District Court for the Eastern District of Pennsylvania, which have been consolidated. Several of the plaintiffs have been designated by the Court, collectively, as the "lead plaintiff" for purposes of the Private Securities Litigation Reform Act of 1995. The consolidated complaint, filed in October 1996 by the lead plaintiffs, extended and expanded the class period to include purchasers of the Company's securities as well as options to purchase or sell those securities during the period between June 12, 1995 and June 7, 1996. The plaintiffs allege, based in part on statements and opinions expressed at a June 1996 meeting of an FDA advisory committee, that earlier statements by the Company about the results of North American and European clinical studies of MYOTROPHIN were misleading. The plaintiffs seek unspecified damages and other relief. A judgment adverse to the Company could, under some theories of damages, result in an assessment which materially exceeds the coverage obtained under the Company's directors' and officers' liability insurance policy. The Company's motion to dismiss the case was denied, and discovery has commenced and is expected to continue through 1998. Plaintiffs have moved for certification of the class alleged in the consolidated complaint, and initial briefs have been filed by the parties. Based on presently available information, management believes that it has meritorious defenses to the claims and intends to vigorously defend the action. Management believes that it is too early in the proceedings to determine with any certainty the outcome of this action or the potential liability of the Company, if any. Product Liability Risks The administration of drugs to humans, whether in clinical trials or after marketing clearance is obtained, can result in product liability claims even if the Company's drugs are not actually at fault for causing an injury. 11 Product liability claims can be expensive to defend and may result in large judgments or settlements against the Company, which could have a material adverse effect on the Company. Although the Company maintains product liability insurance, claims could exceed the coverage obtained. Even if a claim is not successful, the time and expense of defending such a claim may adversely interfere with the Company's business. No Assurance of Other Indications The Company is evaluating the use of MYOTROPHIN and PROVIGIL for indications other than ALS and narcolepsy, respectively. The Company is currently conducting two studies evaluating MYOTROPHIN for other neurological indications other than ALS. There can be no assurance that the results of any studies in other indications will be positive or sufficient to receive regulatory approval for such indications. The initiation of clinical studies in other indications for MYOTROPHIN and PROVIGIL could be delayed if additional preclinical studies are needed. Impact of Other Studies The results of clinical studies by third parties related to product candidates under development by the Company, including studies of rhIGF-I being conducted by the Company's licensee in Japan and clinical studies of modafinil being conducted by Lafon and its licensees in other countries, are required to be reported by the Company to the FDA and other regulatory authorities. The reporting of the results of these other studies, if negative, could adversely affect the regulatory review of the Company's marketing applications for the same product candidates. Negative results from trials by third parties or negative assessments from regulatory authorities would materially adversely affect the Company's business and the price of its common stock. Limited Distribution Capabilities The Company has established a small staff to oversee product manufacturing and distribution, marketing support service, customer service, order entry, shipping and billing, reimbursement assistance, managed care sales support, medical information and sales tracking related to potential commercial activities. Most of these activities are being performed by third parties under contract with the Company. The Company has only limited experience in managing and coordinating the performance of these activities by the third parties. Year 2000 Compliance Cephalon has conducted a review of its computer systems to identify the systems that could be affected by the year 2000 issue and is currently implementing a plan, which includes a review of all hardware/software vendors, as well as other Cephalon suppliers, vendors and partners. Cephalon believes that, with minor modifications to its computer systems, the year 2000 issue will not pose a significant operational problem. The Company is still assessing the possible effects on its operations of the year 2000 readiness of third party vendors; however, the potential impact and related costs, if any, are not known at this time. Other Risks The Company's business is subject to additional significant risks including, but not limited to, the Company's relative inexperience in marketing commercial products, uncertainties associated with obtaining and enforcing its patents, uncertainties associated with the patent rights of others, uncertainties regarding government reforms, product pricing and reimbursement levels, technological change and competition from companies and institutions developing products for the same indications as the Company's product candidates, and reliance by the Company on key personnel. 12 LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents, reverse repurchase agreements and investments at March 31, 1998 and December 31, 1997 were $103,395,000 and $119,471,000, respectively, representing 77% and 79%, respectively, of total assets. Cash equivalents, reverse repurchase agreements and investments consisted primarily of short- to intermediate-term obligations of the United States government, overnight reverse repurchase agreements that are collateralized 102% by such government obligations, and short to intermediate-term corporate obligations. Certain of the Company's lease agreements contain covenants that obligate the Company to maintain certain minimum cash and investment balances. The following is a summary of selected cash flow information for the three months ended March 31:
1998 1997 ---- ---- Net cash used for operating activities................. $(15,629,000) $(16,662,000) Net cash provided by investing activities.............. 17,960,000 16,382,000 Net cash used for financing activities................. (22,000) (2,375,000)
Net cash used for operating activities --Operating cash inflows A summary of the major sources of cash receipts reflected in net cash used for operating activities for the three months ended March 31 is as follows:
1998 1997 ---- ---- TAP Holdings...................... $2,465,000 $1,548,000 Chiron............................ 630,000 -- Medtronic......................... 453,000 -- Kyowa Hakko....................... 427,000 587,000 Bristol-Myers Squibb.............. -- 453,000 Other collaborations.............. -- 829,000 Interest.......................... 1,740,000 1,617,000
The Company and TAP are parties to a licensing and research and development collaboration (the "TAP Agreement") to develop and commercialize certain compounds for the treatment of human cancers and prostate disorders in the United States. Under the terms of the TAP Agreement, the Company performs research and preclinical development of these compounds for which it is compensated quarterly by TAP, based on a contract rate per individual assigned to the program for that quarter and reimbursement of certain external costs, all subject to annual budgetary maximums. The Company and Chiron are jointly developing MYOTROPHIN for the treatment of ALS and other neurological disorders. Under the collaboration, the costs of the program are shared equally by the two companies with the exception of the ongoing study of MYOTROPHIN in the treatment of multiple sclerosis, which is currently being funded solely by the Company. The amounts received by the Company generally represent reimbursement from Chiron for MYOTROPHIN costs incurred by the Company in excess of the fifty percent share of program costs. Under an April 1997 agreement with Medtronic, Inc. ("Medtronic"), the Company is co-promoting Intrathecal Baclofen Therapy (ITB) to neurologists and physiatrists in the United States for the treatment of intractable spasticity. The Company receives quarterly compensation based primarily upon sales activity and the attainment of performance targets. 13 In July 1993, the Company entered into an agreement (the "Kyowa Hakko Myotrophin Agreement") with Kyowa Hakko Kogyo Co., Ltd. ("Kyowa Hakko") to develop and market MYOTROPHIN (rhIGF-I) in Japan. The payments received from Kyowa Hakko primarily represent reimbursement of MYOTROPHIN (rhIGF-I) supplies for the clinical trials conducted in Japan by Kyowa Hakko. Under the agreements with Bristol Myers Squibb Company ("BMS"), Cephalon markets two proprietary products, Stadol NS(R) (butorphanol tartrate) Nasal Spray and Serzone(R) (nefazodone hydrochoride) to neurologists in the United States. Pursuant to the agreements, BMS makes quarterly payments to the Company if the percentage of certain prescriptions written by neurologists exceeds a predetermined base amount. There was no payment recorded from BMS in the first quarter of 1998 since all payments earned for 1997 co-promotion activity were received in 1997. Payments from other collaborations received by the Company in 1997 represent research funding under agreements with SmithKline Beecham ("SB") and Schering- Plough Corporation ("SP"), both of which concluded in 1997. --Operating cash outflows The funding of research and development decreased for the three months ended March 31, 1998 as compared to the same 1997 period, primarily due to costs in the first quarter of 1997 associated with certain license fees and a 17% decrease in staffing levels from the 1997 period to 1998. The decrease was partially offset by a purchase of bulk modafinil compound in the first quarter of 1998. The funding of selling, general and administrative activities decreased for the three months ended March 31, 1998 as compared to the same 1997 period, primarily due to cost reductions associated with the Company's sales and marketing activities and decreases in administrative costs. --Operating cash outlook The Company expects its cash flow from operating activities to continue to be negative until such time as product approvals, if any, are obtained and revenue received from product sales exceeds funding of operating costs. The Company does not expect sales of PROVIGIL in the United Kingdom to provide a significant source of cash in 1998. The major source of the Company's current cash inflows is derived from collaborative research and development agreements and co-promotion agreements. The continuation of the research funding under the agreement with TAP is subject to periodic review by TAP and may be terminated without cause with prior notice. The level of potential payments to be received under the Company's co-promotion agreements is subject to a number of uncertainties related to product sales, including competition from new and existing products and the introduction of controlled substance classification of one of the products being co-promoted by the Company. Potential receipts in 1998 from the Company's co-promotion agreement with BMS is expected to decrease from 1997 levels, and there can be no assurance that the agreement will be renewed when it expires at the end of 1998. In future periods, receipt of payments from Chiron or payments by the Company to Chiron will depend on the relative costs incurred in the MYOTROPHIN program by the two companies. Future receipts from Kyowa Hakko are dependent upon shipment of MYOTROPHIN to supply Kyowa Hakko's clinical trials in Japan. The Company expects to continue to expend significant funds on PROVIGIL to prepare for possible U.S. commercialization of this product, including to build inventories, and to investigate the utility of PROVIGIL in other indications. The Company intends to continue to provide funding for its other research and development programs. If the FDA or EMEA were to require an additional study to demonstrate MYOTROPHIN's efficacy, and if the Company were to decide to conduct an additional study, a significant outlay of funds would be required. The amount of capital needed to fund operations will depend upon many factors, including the success of the Company's research and development programs, the availability of capital funding, the extent of any collaborative research arrangements, the costs and timing of seeking regulatory approvals of its products, technological changes, competition and the success of the Company's sales and marketing activities. 14 Net cash provided by investing activities A summary of net cash provided by investing activities for the three months ended March 31 is as follows:
1998 1997 ---- ---- Purchases of property and equipment........................ $ (425,000) $ (599,000) Sale leaseback of property and equipment................... -- 333,000 Sales and maturities of investments, net................... 18,385,000 16,648,000 ----------- ----------- Net cash provided by investing activities................ $17,960,000 $16,382,000 =========== ===========
Sales and maturities of investments, net, represent the liquidation of investments, the proceeds of which are used primarily to fund operations. Net cash used for financing activities A summary of cash used for financing activities for the three months ended March 31 is as follows:
1998 1997 ---- ---- Proceeds from exercises of common stock options and warrants............ $ 304,000 $ 1,736,000 Principal payments on long-term debt.................................... (326,000) (4,111,000) --------- ----------- Net cash used for financing activities................................ $ (22,000) $(2,375,000) ========= ===========
The extent and timing of future warrant and option exercises, if any, are primarily dependent upon the market price of the Company's common stock and general financial market conditions, as well as the exercise prices and expiration dates of the warrants and options. In March 1997, the Company repaid in full the $3,750,000 balance due on an unsecured bank loan. Commitments and contingencies --Related Party Cephalon Clinical Partners, L.P. (the "Partnership") granted the Company an exclusive license (the "Interim License") to manufacture and market MYOTROPHIN within the United States, Canada and Europe (the "Territory") in return for certain royalty payments and a payment of approximately $16,000,000 (the "Milestone Payment") that is to be made if MYOTROPHIN receives regulatory approval in the United States or certain other countries within the Territory. The Company has the option to pay the Milestone Payment in cash, common stock, or a combination thereof. The Company has a contractual option to purchase all of the limited partnership interests in the Partnership (the "Purchase Option") in specified circumstances following the initiation of commercial sales, if any, of MYOTROPHIN. To exercise the Purchase Option, Cephalon is required to make an advance payment of $40,275,000 in cash or, at Cephalon's election, $42,369,000 in shares of the Company's common stock, valued at the market price at the time the Purchase Option is exercised. In addition to the advance payment, the exercise of the Purchase Option requires the Company to make future payments to the former limited partners for a period of eleven years after exercise at a royalty rate of 10.1% (subject to reduction under certain circumstances) of MYOTROPHIN sales in the Territory. If the Company does not exercise the Purchase Option prior to its expiration date, the Interim License will terminate and all development and marketing rights to MYOTROPHIN in the Territory would revert to the Partnership, which may commercialize MYOTROPHIN itself or license or assign its rights to a third party. The Company would not receive any benefits from any such commercialization. 15 The January 1994 collaboration between the Company and Chiron Corporation ("Chiron") is subject to the rights of the Partnership. The Company is solely responsible for making any royalty and milestone payments owed to the Partnership and for funding the Purchase Option, if it elects to exercise the option. --Legal Proceedings The Company and certain of its officers have been named as defendants in a number of civil actions, which have been consolidated, alleging that various statements by the Company about the North American and European trial results of MYOTROPHIN (rhIGF-I) were misleading. See "Certain Risks Related to the Company's Business." Funding Requirements Outlook As described above, the Company expects to continue to use cash to fund operations. Although the Company has the option to pay the Milestone Payment and the Purchase Option in common stock, a significant use of funds would be required if the Company were to decide to fund these payments in cash. The Company may seek to acquire the assets or additional partnership interests in the Partnership other than through exercise of the Purchase Option. If the Company were to elect to purchase the assets or partnership interests in cash, significant funds could be required. The Company also requires cash for the funding of purchases of property and equipment and to service its long-term debt. The Company expects to continue to fund operations using its current cash balance and through the sale of investments. The Company believes that its cash and investment balance is adequate to fund its present level of operations for a period in excess of one year. To finance its continuing operations and other potential significant cash outflows, the Company will need to obtain additional funding through debt or equity financings. The Company also may seek additional funding through other financing vehicles, such as "off-balance sheet" financing with limited partnerships or corporations. There can be no assurance that such additional funds can be obtained through these sources on terms acceptable to the Company, if at all. RESULTS OF OPERATIONS This section should be read in conjunction with the more detailed discussion under "Liquidity and Capital Resources." A summary of revenues and expenses for the three months ended March 31 is as follows:
% CHANGE 1998 1997 1998 VS. 1997 ---- ---- ----------------- Revenues........................................ $ 3,568,000 $ 5,628,000 (37)% Research and development expenses............... 11,974,000 13,177,000 (9) Selling, general and administrative expenses.... 7,169,000 8,697,000 (18) Interest income, net............................ 916,000 1,116,000 (18)
The decrease in revenues for the three months ended March 31, 1998 as compared to the corresponding 1997 period resulted primarily from decreases in revenue recognized in the first quarter of 1998 under the Chiron collaboration and the termination of funding under the research and development agreements with SB and SP. Additionally, revenues in the first quarter of 1997 include the recording of a milestone payment from Kyowa Hakko for the filing of the MYOTROPHIN NDA in the United States. The decrease in revenues was partially offset by an increase in revenue recognized under the co-promotion agreements with Medtronic and Aguettant which were initiated in 1997, and an increase in revenue recognized under the TAP Agreement. 16 Research and development expenses decreased for the three months ended March 31, 1998 as compared to the corresponding 1997 period, primarily due to a reduction in expenditures related to clinical trials and a reduction in expenses due to a 17% decrease in staffing levels from the 1997 period to 1998. Additionally, research and development expenses in the first quarter of 1997 include expenditures associated with certain license fees. The decrease was partially offset by a purchase of bulk modafinil compound in the first quarter of 1998. The decrease in the selling, general and administrative area for the three months ended March 31, 1998 as compared to the corresponding 1997 period, was primarily due to decreases in expenses associated with Company's sales and marketing activities and decreases in administrative expenses. Results of Operations Outlook The Company expects to continue to incur operating losses unless and until such time as product approvals, if any, are obtained and product sales exceed operating expenses. The Company does not expect sales of PROVIGIL in the United Kingdom to provide a significant source of revenue in 1998. The major source of the Company's current revenue is derived from collaborative research and development agreements and co-promotion agreements. The continuation of the research funding under the agreement with TAP is subject to periodic review by TAP and may be terminated without cause with prior notice. The level of potential revenue to be recognized under the Company's co-promotion agreements is subject to a number of uncertainties related to product sales, including competition from new and existing products and the introduction of controlled substance classification of one of the products being co-promoted by the Company. Potential revenue to be recognized in 1998 from the Company's co- promotion agreement with BMS is expected to decrease from 1997 levels, and there can be no assurance that the agreement will be renewed when it expires at the end of 1998. In future periods, revenue or expense to be recognized by the Company under the collaboration with Chiron will depend on the relative costs incurred in the MYOTROPHIN program by the two companies. Revenue recognized under the supply agreement with Kyowa Hakko are dependent upon shipment of MYOTROPHIN to supply Kyowa Hakko's clinical trials in Japan. The Company expects that it will continue to incur significant research, development, clinical trial, regulatory filing and other costs. In addition, selling, general and administrative activities in the United States and Europe may be expanded as the Company evaluates the potential for obtaining regulatory approvals of MYOTROPHIN and PROVIGIL. The Company may also continue to incur substantial expenses to purchase supplies of MYOTROPHIN and PROVIGIL. The Company expects to have significant fluctuations in quarterly results based on the level and timing of recognition of contract and co-promotion revenues and the incurrence of expenses, and may incur quarterly operating losses in excess of the loss recorded for the three months ended March 31, 1998. Additionally, if the Company were to make the Milestone Payment, exercise the Purchase Option, or purchase the assets or additional interests in the Partnership outside of the Partnership Option, a material charge to earnings could result, depending upon the development status of the underlying technology. The Company does not believe that inflation has had a material impact on the results of its operations since inception. 17 PART II - OTHER INFORMATION - ---------------------------- Item 5. Other Information Cephalon, Inc. announced that its UK subsidiary, Cephalon UK Ltd., had received authorization from the Irish Medicines Board ("IMB") to market PROVIGIL (R) (modafinil) tablets in the Republic of Ireland for the treatment of narcolepsy. Cephalon intends to manufacture PROVIGIL tablets in the United States and launch the drug in the Republic of Ireland upon IMB approval of the U.S. manufacturing arrangements. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: EXHIBIT NO. DESCRIPTION OF EXHIBIT --- ---------------------- 27.1 Financial Data Schedule 99.1 Press Release Dated May 15, 1998 (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended March 31, 1998. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CEPHALON, INC. (Registrant) May 15, 1998 By /s/ Frank Baldino, Jr., Ph.D. --------------------------------- Frank Baldino, Jr., Ph.D. President, Chief Executive Officer and Director (Principal executive officer) By /s/ J. Kevin Buchi ----------------------- J. Kevin Buchi Senior Vice President, Finance and Chief Financial Officer (Principal financial and accounting officer) 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CEPHALON, INC.'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000873364 CEPHALON, INC. 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 12,580,000 90,815,000 0 0 0 110,930,000 33,337,000 11,620,000 134,760,000 18,054,000 17,972,000 0 0 284,000 95,478,000 134,760,000 0 3,568,000 0 19,143,000 0 0 (916,000) (14,659,000) 0 0 0 0 0 (14,659,000) (.53) (.53)
EX-99.1 3 PRESS RELEASE EXHIBIT 99.1 Contact: Sandra Menta (US) Anne Marie Rodriguez (Europe) Cephalon, Inc. Sante Communications 610-738-6302 011-44-171-379-7377 FOR IMMEDIATE RELEASE - --------------------- Cephalon Receives Authorization to Market PROVIGIL(R) (modafinil) in the Republic of Ireland WEST CHESTER, PA -- May 15, 1998 -- Cephalon, Inc. (NASDAQ: CEPH) announced today that its UK subsidiary, Cephalon UK Ltd., has received authorization from the Irish Medicines Board (IMB) to market PROVIGIL(R) (modafinil) tablets in the Republic of Ireland for the treatment of narcolepsy. Narcolepsy is a chronic, neurological, lifelong sleep disorder that generally begins in young adulthood. The most common symptom is excessive daytime sleepiness, which is characterized by uncontrollable sleep attacks. These attacks hamper a person's ability to perform basic daily activities. As a result, narcolepsy significantly impacts a person's quality of life. Cephalon intends to manufacture PROVIGIL tablets in the United States and launch the drug in the Republic of Ireland upon IMB approval of the U.S. manufacturing arrangements. "This is the first non-amphetamine agent licensed for the treatment of narcolepsy in Ireland," said Frank Baldino, Jr., Ph.D., Cephalon's president and chief executive officer. "Our European sales and marketing organization look forward to making PROVIGIL available to the neurology community in Ireland for patients suffering from this disabling disease." Cephalon licensed modafinil from Laboratoire L. Lafon, the French pharmaceutical company which discovered and markets the drug in France. Cephalon has exclusive rights to market modafinil in the United States, Japan, the United Kingdom, Ireland, Mexico and Italy. In March 1998, Cephalon commenced marketing of PROVIGIL in the United Kingdom. Cephalon has a marketing application currently pending in the United States to market PROVIGIL for the treatment of excessive daytime sleepiness associated with narcolepsy. - continued - Cephalon Receives Authorization to Market PROVIGIL(R) (modafinil) in the Republic of Ireland Page 2 Cephalon, Inc., headquartered in West Chester, PA, is an international biopharmaceutical company that discovers, develops and markets products to treat neurological disorders. This news release may contain forward-looking statements that involve risks and uncertainties. A full discussion of Cephalon's operations and financial condition, including factors that may affect the company's business and future prospects, is contained in documents the company files with the SEC, such as form 10-Q and 10-K reports. These documents identify important factors that could cause the company's actual performance to differ from current expectations. NOTE: Cephalon's press releases are posted on the Internet at the company's Web site at http://www.cephalon.com. They are also available by fax ----------------------- 24 hours a day at no charge by calling PR Newswire's Company News On-Call at 800-758-5804, extension 134563. * * * * -----END PRIVACY-ENHANCED MESSAGE-----