UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ----------------
Commission file number 000-14879
---------
Cytogen Corporation
----------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-2322400
------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
650 College Road East, Suite 3100, Princeton, NJ 08540-5308
-----------------------------------------------------------
(Address of Principal Executive Offices and Zip Code)
Registrant's Telephone Number, Including Area Code: (609) 750-8200
--------------
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 Rule 12b-2 of the Exchange Act). Yes X No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class Outstanding at November 1, 2004
---------------------------- -------------------------------
Common Stock, $.01 par value 15,436,501
CYTOGEN CORPORATION
TABLE OF CONTENTS
-----------------
Page
----
PART I. FINANCIAL INFORMATION........................................... 1
Item 1. Consolidated Financial Statements (unaudited)................ 1
Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003........................................ 2
Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 2004 and 2003........ 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2004 and 2003 ....................... 4
Notes to Consolidated Financial Statements................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 30
Item 4. Controls and Procedures...................................... 30
PART II. OTHER INFORMATION............................................... 31
Item 1. Legal Proceedings............................................ 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.. 32
Item 5. Other Information............................................ 32
Item 6. Exhibits..................................................... 34
SIGNATURES................................................................ 35
ProstaScint(R) and OncoScint(R) are registered United States trademarks of
Cytogen Corporation. Cytogen Corporation is the owner of a pending United States
trademark application, Serial No. 78374967, relating to Quadramet. All other
trade names, trademarks or servicemarks appearing in this Quarterly Report on
Form 10-Q are the property of their respective owners, and not the property of
Cytogen Corporation or any of its subsidiaries.
-i-
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
-1-
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share and per share data)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2004 2003
---------------- --------------
ASSETS:
Current assets:
Cash and cash equivalents........................................................ $ 13,460 $ 13,630
Short-term investments........................................................... 27,058 16,585
Accounts receivable, net ........................................................ 1,384 1,445
Inventories ..................................................................... 2,029 1,887
Other current assets ............................................................ 1,462 975
------------- -----------
Total current assets ......................................................... 45,393 34,522
Property and equipment, net ......................................................... 606 595
Quadramet license fee, net........................................................... 7,198 7,720
Other assets......................................................................... 652 858
------------- -----------
$ 53,849 $ 43,695
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term liabilities......................................... $ 2,320 $ 76
Accounts payable and accrued liabilities......................................... 5,587 5,125
------------- -----------
Total current liabilities..................................................... 7,907 5,201
------------- -----------
Long-term liabilities................................................................ 150 2,454
------------- -----------
Commitments and contingencies........................................................
Stockholders' equity:
Preferred stock, $.01 par value, 5,400,000 shares authorized -
Series C Junior Participating Preferred Stock, $.01 par value,
200,000 shares authorized, none issued and outstanding......................... -- --
Common stock, $.01 par value, 25,000,000 shares authorized,
15,436,501 and 12,857,488 shares issued and outstanding
at September 30, 2004 and December 31, 2003, respectively .................... 155 129
Additional paid-in capital ...................................................... 425,637 401,649
Accumulated deficit ............................................................. (380,000) (365,738)
------------- -----------
Total stockholders' equity.................................................. 45,792 36,040
------------- -----------
$ 53,849 $ 43,695
============= ===========
The accompanying notes are an integral part of these statements.
-2-
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All amounts in thousands, except per share data)
(Unaudited)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- --------------------------
2004 2003 2004 2003
---------- --------- ---------- ----------
REVENUES:
Product related:
Quadramet................................................. $ 1,924 $ 1,159 $ 5,394 $ 1,159
ProstaScint............................................... 1,308 1,519 5,347 4,738
Others.................................................... -- 116 1 479
---------- --------- ---------- ----------
Total product revenues............................. 3,232 2,794 10,742 6,376
Quadramet royalties....................................... -- 191 -- 1,105
---------- --------- ---------- ----------
Total product related revenues..................... 3,232 2,985 10,742 7,481
License and contract......................................... 29 2,520 72 2,827
---------- --------- ---------- ----------
Total revenues..................................... 3,261 5,505 10,814 10,308
---------- --------- ---------- ----------
OPERATING EXPENSES:
Cost of product related revenues........................... 2,188 2,154 6,983 3,964
Selling, general and administrative........................ 5,343 2,780 14,148 8,146
Research and development................................... 608 753 1,953 2,283
Equity in loss of joint venture............................ 805 714 2,156 2,680
---------- --------- ---------- ----------
Total operating expenses........................... 8,944 6,401 25,240 17,073
---------- --------- ---------- ----------
Operating loss..................................... (5,683) (896) (14,426) (6,765)
INTEREST INCOME................................................ 133 32 303 91
INTEREST EXPENSE............................................... (46) (46) (139) (139)
---------- --------- ---------- ----------
Loss before income taxes........................... (5,596) (910) (14,262) (6,813)
INCOME TAX BENEFIT............................................. -- -- -- (584)
----------- --------- ---------- ----------
NET LOSS....................................................... $ (5,596) $ (910) $ (14,262) $ (6,229)
=========== ========= ========== ==========
BASIC AND DILUTED NET LOSS PER SHARE........................... $ (0.36) $ (0.08) $ (0.99) $ (0.65)
=========== ========= ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING .................... 15,435 10,866 14,386 9,570
=========== ========= ========== ==========
The accompanying notes are an integral part of these statements.
-3-
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
(Unaudited)
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2004 2003
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................... $ (14,262) $ (6,229)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................................... 804 544
Stock-based compensation expenses................................... 15 505
Amortization of deferred revenue.................................... -- (2,154)
Asset impairment.................................................... 100 115
Loss on disposition of assets....................................... 3 28
Changes in assets and liabilities:
Receivables, net.................................................. 61 70
Inventories....................................................... (142) (1,095)
Other assets...................................................... (100) (965)
Accounts payable, accrued liabilities and
other liabilities............................................... 456 1,404
---------- ----------
Net cash used in operating activities............................... (13,065) (7,777)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of product rights.................................................. -- (8,000)
Purchases of property and equipment......................................... (463) (12)
Maturities of short-term investments........................................ 12,500 --
Purchases of short-term investments......................................... (23,017) --
---------- ---------
Net cash used in investing activities............................... (10,980) (8,012)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................................... 23,999 13,976
Payment of long-term liabilities............................................ (124) (84)
---------- ---------
Net cash provided by financing activities........................... 23,875 13,892
---------- ---------
Net decrease in cash and cash equivalents................................... (170) (1,897)
Cash and cash equivalents, beginning of period.............................. 13,630 14,725
---------- ---------
Cash and cash equivalents, end of period.................................... $ 13,460 $ 12,828
========== =========
Supplemental disclosure of non-cash information:
Capital leases of equipment............................................. $ 70 $ --
========== =========
Supplemental disclosure of cash information:
Cash paid for interest.................................................. $ 99 $ 99
========== =========
The accompanying notes are an integral part of these statements.
-4-
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. THE COMPANY
BACKGROUND
Founded in 1980, Cytogen Corporation (the "Company" or "Cytogen") of
Princeton, NJ is a product-driven biopharmaceutical company that develops and
commercializes innovative molecules that can be used to build leading franchises
across multiple markets. The Company's marketed products include QuadrametTM
(samarium Sm-153 lexidronam injection) and ProstaScint(R) (capromab pendetide)
kit for the preparation of Indium In-111 capromab pendetide in the United
States. The Company has exclusive United States marketing rights to Combidex(R)
(ferumoxtran-10) for all indications. Combidex, an investigational molecular
imaging agent consisting of iron oxide nanoparticles, is currently being
developed for use in conjunction with magnetic resonance imaging to aid in the
differentiation of cancerous and non-cancerous lymph nodes, and is under review
by the U.S. Food and Drug Administration. The Company is also developing
therapeutics targeting prostate-specific membrane antigen (PSMA), a protein
highly expressed on the surface of prostate cancer cells and the neovasculature
of solid tumors.
Cytogen has had a history of operating losses since its inception. The
Company currently relies on two products, ProstaScint and Quadramet, for
substantially all of its revenues. In addition, the Company has from time to
time stopped selling certain products, such as OncoScint CR/OV and the
BrachySeed products, that the Company previously expected would generate
significant revenues for its business. The Company's products are subject to
significant regulatory review by the FDA and other federal and state agencies,
which requires significant time and expenditures in seeking, maintaining and
expanding product approvals. In addition, the Company relies on collaborative
partners to a significant degree to, among other things, manufacture its
products, secure raw materials, and provide licensing rights to their
proprietary products for the Company to sell and market to others.
BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Cytogen and its subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
BASIS OF PRESENTATION
The consolidated financial statements and notes thereto of Cytogen are
unaudited and include all adjustments which, in the opinion of management, are
necessary to present fairly the financial condition and results of operations 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 accounting 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 U.S. generally
-5-
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 the year ended December 31,
2003. 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash in banks and all
highly-liquid investments with a maturity of three months or less at the time of
purchase.
SHORT-TERM INVESTMENTS
Short-term investments at September 30, 2004 and December 31, 2003 were
$27.1 million and $16.6 million, respectively, and consisted of investments in
U.S. government agency notes. The Company has the ability and intent to hold
these investments until maturity. Held-to-maturity investments are recorded at
amortized cost, adjusted for the accretion of discounts or premiums. Discounts
or premiums are accreted into interest income over the life of the related
investment on a straight-line basis. Dividend and interest income are recognized
when earned. These investments mature at various times through June 15, 2005.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," if
indicators of impairment exist, management assesses the recoverability of the
affected long-lived assets by determining whether the carrying value of such
assets can be recovered through undiscounted future operating cash flows and
eventual disposition of the asset. If impairment is indicated, management
measures the amount of such impairment by comparing the carrying value of the
assets to the present value of the expected future cash flows associated with
the use of the asset.
During the second quarter of 2004, the Company recorded a non-cash charge
of $100,000 for equipment impairment associated with the initiation of the
closure of the facilities at the Company's AxCell BioSciences subsidiary in July
2004 (see Note 6, "Closure of AxCell BioSciences Facilities"). This charge is
included in selling, general and administrative expenses for the nine months
ended September 30, 2004 in the accompanying consolidated statement of
operations.
-6-
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In accordance with the SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," the Company is required to record a liability for
costs associated with an exit or disposal activity, measured at fair value, in
the period in which the liability is incurred. A liability related to one-time
termination benefits provided to severed employees as a result of the exit or
disposal activity will be recorded when certain criteria have been met and the
employees are notified of the details of the plan. A liability for costs to
terminate a lease or other contract before the end of its term shall be
recognized and measured at its fair value when the Company terminates the
contract in accordance with the contract terms. If the contract is an operating
lease, the fair value of the liability at the cease-use date shall be determined
based on the remaining lease rentals, reduced by estimated sublease rentals that
could be reasonably obtained for the property, even if the Company does not
intend to enter into a sublease.
In July 2004, as part of our continuing effort to reduce non-strategic
expenses, the Company initiated the closure of its AxCell BioSciences
facilities, which will be accounted for pursuant to SFAS No. 146 (see Note 6,
"Closure of AxCell BioSciences Facilities").
INVENTORIES
The Company's inventories are primarily related to ProstaScint. Inventories
are stated at the lower of cost or market using the first-in, first-out method
and consisted of the following (all amounts in thousands):
SEPTEMBER 30, 2004 DECEMBER 31, 2003
-------------------- -------------------
Raw materials...................... $ -- $ 11
Work-in-process.................... 870 1,089
Finished goods..................... 1,159 787
------------ -----------
$ 2,029 $ 1,887
============ ===========
NET LOSS PER SHARE
Basic net loss per common share is calculated by dividing the Company's net
loss by the weighted average common shares outstanding during each period.
Diluted net loss per common share is the same as basic net loss per share for
each of the three and nine month periods ended September 30, 2004 and 2003
because the inclusion of common stock equivalents, which consist of warrants and
options to purchase shares of the Company's common stock, would be antidilutive
due to the Company's losses.
VARIABLE INTEREST ENTITIES
In December 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 (revised December 2003) ("FIN 46R"), "Consolidation
of Variable Interest Entities" ("VIEs"), which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in an
entity through means other than voting rights and accordingly should consolidate
the entity. FIN 46R replaced FASB Interpretation No. 46 ("FIN 46") which
-7-
was issued in January 2003. The Company was required to apply FIN 46R to
variable interests in VIEs created after December 31, 2003. For variable
interests in VIEs created before January 1, 2004, FIN 46R applied beginning on
March 31, 2004. For any VIEs that must be consolidated under FIN 46R that were
created before January 1, 2004, the assets, liabilities and noncontrolling
interests of the VIE initially are measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE.
In June 1999, Cytogen entered into a joint venture with Progenics
Pharmaceuticals Inc. ("Progenics," and collectively with Cytogen, the
"Members"), to form the PSMA Development Company LLC (the "Joint Venture"). The
Joint Venture is currently developing antibody-based and vaccine
immunotherapeutic products utilizing Cytogen's exclusively licensed
prostate-specific membrane antigen ("PSMA") technology. The Joint Venture is
owned equally by the Members (see Note 2, "Equity Loss in the PSMA Development
Company LLC"). Cytogen accounts for the Joint Venture using the equity method of
accounting.
The Company believes it is not required to consolidate the Joint Venture
under the requirements of FIN 46R.
STOCK-BASED COMPENSATION
The Company follows the intrinsic value method of accounting for
stock-based employee compensation in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. The
Company records deferred compensation for option grants to employees for the
amount, if any, by which the market price per share exceeds the exercise price
per share at the measurement date, which is generally the grant date.
The Company follows the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." Had compensation cost for
options been recognized in the consolidated statements of operations using the
fair value method of accounting, the Company's net loss and net loss per share
would have been as follows (all amounts in thousands, except per share data):
-8-
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net loss, as reported................................. $ (5,596) $ (910) $ (14,262) $ (6,229)
Add: Stock-based employee compensation
expense included in reported net loss............. 4 2 15 3
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards............ (1,088) (382) (1,662) (1,094)
--------- --------- --------- ---------
Pro forma net loss.................................... $ (6,680) $ (1,290) $ (15,909) $ (7,320)
========= ========= ========= =========
Basic and diluted net loss per
share, as reported................................ $ (0.36) $ (0.08) $ (0.99) $ (0.65)
========= ========= ======== =========
Pro forma basic and diluted net
loss per share.................................... $ (0.43) $ (0.12) $ (1.11) $ (0.76)
========= ========= ======== =========
On September 3, 2004, H. Joseph Reiser tendered his resignation from the
Company's Board of Directors. In connection with Dr. Reiser's resignation, the
Company accelerated the vesting of options to purchase 20,000 shares of the
Company's common stock held by Dr. Reiser such that these options became
immediately exercisable as of September 3, 2004. In addition, the expiration
dates of an aggregate of 21,000 options to purchase shares of the Company's
common stock held by Dr. Reiser were amended to September 3, 2005. As a result
of the foregoing, the Company recorded a charge for the change in the intrinsic
value of these modified options in the amount of $5,000 in its consolidated
statement of operations for the third quarter of 2004.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB issued a Proposed SFAS, "Share-Based Payment - An
Amendment of SFAS Nos. 123 and 95" ("Exposure Draft"). The Exposure Draft would
eliminate the ability to account for share-based compensation transactions using
APB Opinion No. 25, and generally would require such transactions be accounted
for using a fair-value-based method and the resulting cost recognized in the
financial statements. Based on the provisions of the Exposure Draft and
subsequent FASB deliberations and tentative conclusions, the final standard
would be effective for publicly-traded companies for awards granted, modified or
settled in interim periods beginning after June 15, 2005. The Company is closely
monitoring developments related to the Exposure Draft and will adopt the final
standards, if any, in the appropriate period following issuance. The eventual
adoption of the Exposure Draft, if issued in final form by the FASB, is expected
to have a material effect on the Company's consolidated financial statements.
RECLASSIFICATION
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the current year presentation.
-9-
2. EQUITY LOSS IN THE PSMA DEVELOPMENT COMPANY LLC
In June 1999, Cytogen entered into a joint venture with Progenics to form
the PSMA Development Company LLC. The Joint Venture is owned equally by Cytogen
and Progenics. Cytogen accounts for the Joint Venture using the equity method of
accounting. Cytogen has recognized 50% of the Joint Venture's operating results
in its consolidated statements of operations. The Joint Venture is expected to
continue to incur losses in future years provided an agreement between the
Members is reached on research program goals and budgets for periods after 2004
and the Joint Venture's operations are funded. In 2004, the Members each expect
to provide $4.2 million in funding for the development of the PSMA technologies
through the Joint Venture. Cytogen has funded $2.0 million of its $4.2 million
annual commitment, as of September 30, 2004. The Members have not committed to
fund the Joint Venture beyond December 31, 2004 at this time, except for
obligations under existing contractual commitments as of that date.
For the three months ended September 30, 2004 and 2003, Cytogen recognized
$805,000 and $714,000, respectively, of the Joint Venture's losses. For the nine
months ended September 30, 2004 and 2003, Cytogen recognized $2.2 million and
$2.7 million, respectively, of the Joint Venture's losses. As of September 30,
2004 and December 31, 2003, the carrying value of Cytogen's investment in the
Joint Venture was $343,000 and $550,000, respectively, which represents
Cytogen's investment to date in the Joint Venture less its cumulative share of
losses and is recorded in other assets. Selected financial statement information
of the Joint Venture is as follows (all amounts in thousands):
BALANCE SHEET DATA:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Cash ........................................................................... $ 1,171 $ 1,173
Prepaid expenses................................................................ 22 --
Accounts receivable from Progenics, a related party............................. -- 108
------------- ----------
Total assets............................................................. $ 1,193 $ 1,281
============= ==========
Accounts payable to Progenics, a related party.................................. $ 3 $ -
Other accounts payable and accrued expenses..................................... 520 199
------------- ----------
Total liabilities........................................................ 523 199
------------- ----------
Capital contributions........................................................... 23,298 19,398
Accumulated deficit............................................................. (22,628) (18,316)
------------- ----------
Total stockholders' equity............................................... 670 1,082
------------- ----------
Total liabilities and stockholders' equity............................... $ 1,193 $ 1,281
============= ==========
-10-
INCOME STATEMENT DATA:
THREE NINE FOR THE PERIOD
MONTHS ENDED MONTHS ENDED FROM JUNE 15, 1999
SEPTEMBER 30, SEPTEMBER 30, (INCEPTION) TO
---------------------------------------------
2004 2003 2004 2003 SEPTEMBER 30, 2004
--------------------------------------------- ------------------
Interest income.............. $ 1 $ 1 $ 6 $ 2 $ 240
Total expenses............... 1,611 1,430 4,318 5,362 22,868
-------- -------- -------- -------- -----------
Net loss..................... $ (1,610) $ (1,429) $ (4,312) $ (5,360) $ (22,628)
======== ======== ======== ======== ===========
3. BRISTOL-MYERS SQUIBB MEDICAL IMAGING, INC.
As a result of the Company's reacquisition of marketing rights to Quadramet
from Berlex Laboratories Inc. ("Berlex") in August 2003, the Company assumed all
of Berlex's obligations under a manufacturing and supply agreement with
Bristol-Myers Squibb Medical Imaging, Inc. ("BMSMI"). Effective January 1, 2004,
the Company entered into a new manufacturing and supply agreement with BMSMI
whereby BMSMI manufactures, distributes and provides order processing and
customer services for Cytogen relating to Quadramet. Under the terms of the new
agreement, Cytogen is obligated to pay at least $4.2 million annually through
2008, unless terminated by BMSMI or Cytogen on two years prior written notice.
This agreement will automatically renew for five successive one-year periods
unless terminated by BMSMI or Cytogen on two years prior written notice. During
the three and nine month periods ended September 30, 2004, Cytogen incurred $1.1
million and $3.2 million, respectively, of manufacturing costs for Quadramet,
all of which is included in cost of product related revenues. The Company also
pays BMSMI a variable amount per month for each order of Quadramet placed to
cover the costs of customer service, which is included in selling, general and
administrative expenses.
4. LITIGATION AND OTHER RELATED MATTERS
In September 2004, the Company announced the settlement of a patent
infringement suit against Cytogen and C.R. Bard Inc. for an agreed-upon payment,
without any admission of fault or liability. The charge related to this
settlement is recorded in the accompanying statements of operations for the
three and nine months ended September 30, 2004. Immunomedics, Inc. filed suit on
February 17, 2000 against Cytogen and Bard, alleging that use of Cytogen's
ProstaScint product infringed U.S. Patent No. 4,460,559, which claims a method
for detecting and localizing tumors. The settlement with Immunomedics is on
behalf of Cytogen and Bard.
In connection with a recent review of certain of the Company's intellectual
property, it was determined that the Company was the recipient, beginning in
1998, of correspondence from legal counsel representing the former employer of
Dr. Julius Horoszewicz, the sole inventor on the principal United States patent
covering ProstaScint. Such correspondence alleged that the patent rights to Dr.
Horoszewicz's discoveries were the property of such former employer and that Dr.
Horoszewicz had no right to assign them to the Company. The Company vigorously
disputed those allegations, and the Company has no record of the matter having
been pursued by such former employer subsequent to August 2000. The Company
believes that in view of the
-11-
marketing of the technology covered by the patent through the sale of
ProstaScint by the Company, the Company's right to use the underlying technology
in its continuing production and sale of ProstaScint should not be at risk.
However, if such claims were reasserted, and if it were to be concluded that Dr.
Horoszewicz in fact had no right to assign the patent to the Company, a court
could determine that the Company has no right to use the technology covered by
the patent or that any royalties paid by or payable by the Company in respect of
the use of the patent should have been paid in the past, and should in the
future be payable, to Dr. Horoszewicz's former employer in lieu of Dr.
Horoszewicz. The amount of any such payments, and the Company's liability for
them, if any, is not presently determinable, and the Company cannot give any
assurance that an adverse determination could not result in a material
expenditure to the Company or have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
The Company has certain rights to indemnification against litigation and
litigation expenses from the inventor of technology used in ProstaScint, which
may be offset against royalty payments on sales of ProstaScint. The Company
cannot give any assurance that litigation expenses will not exceed any
offsetting royalty payments.
In addition, the Company is, from time to time, subject to claims and suits
arising in the ordinary course of business. In the opinion of management, the
ultimate resolution of any such matters would not have a material effect on the
Company's financial condition, results of operations or liquidity.
5. LAUREATE PHARMA, L.P.
In September 2004, the Company entered into a non-exclusive manufacturing
agreement with Laureate Pharma, L.P. pursuant to which Laureate shall
manufacture ProstaScint for the Company in its Princeton, New Jersey facility.
The agreement was effective immediately and shall terminate, unless earlier
terminated pursuant to the terms thereof, upon Laureate's completion of the
production campaign and shipment of the resulting products from Laureate's
facility. Under the terms of the agreement, Cytogen is obligated to pay at least
an aggregate of $5.1 million through 2006.
6. CLOSURE OF AXCELL BIOSCIENCES FACILITIES
In July 2004, the Company initiated the closure of the facilities at its
AxCell BioSciences subsidiary as part of the Company's continuing efforts to
reduce non-strategic expenses. In connection with such closure, in August 2004,
the Company sold certain of the assets remaining at the AxCell facility for net
proceeds of approximately $181,000, which amount approximated the net value of
such assets. The Company may record impairment charges related to future rental
payments on the leased premises in the fourth quarter of 2004, when such leased
premises will no longer be used for AxCell's operations. Research projects
through academic, governmental and corporate collaborators will continue to be
supported and additional applications for the intellectual property and
technology at AxCell are being pursued.
-12-
7. SALE OF COMMON STOCK
In April 2004, the Company sold and issued through a registered direct
offering 2,570,000 shares of its common stock at $10.10 per share, resulting in
net proceeds to the Company of approximately $24.0 million after the payment of
placement agency fees and expenses related to the offering.
8. STOCK INCENTIVE PLANS
At the Company's 2004 Annual Meeting of Stockholders held on June 15, 2004,
the stockholders of the Company approved the adoption of the Company's 2004
Stock Incentive Plan (the "2004 Plan") and the Company's 2004 Non-Employee
Director Stock Incentive Plan (the "2004 Director Plan" and together with the
2004 Plan, collectively, the "2004 Incentive Plans"). An aggregate of 1,200,000
and 375,000 shares of the Company's common stock have been reserved for issuance
upon the exercise of option grants or restricted stock awards (as applicable)
under the 2004 Plan and 2004 Director Plan, respectively. The 2004 Plan provides
for the grant of incentive stock options, non-qualified stock options or
restricted stock to the Company's employees, officers, consultants and advisors.
The 2004 Director Plan provides for the grant of non-qualified stock options and
shares of the Company's common stock, in certain circumstances, to members of
the Company's Board of Directors who are not employees of the Company. The
Company intends to file a registration statement on Form S-8 with the Securities
and Exchange Commission to register the shares of the Company's common stock
underlying option grants or other awards under the 2004 Incentive Plans.
Furthermore, upon approval of the 2004 Incentive Plans by our stockholders, no
further option grants or awards were, or will be, made under the Company's
existing 1995 Stock Option Plan or 1999 Non-Employee Director Stock Option Plan.
Any unissued and unallocated options previously reserved under these plans were
released from reserves.
-13-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements regarding future events and our future results are
based on current expectations, estimates, forecasts, and projections and the
beliefs and assumptions of our management including, without limitation, our
expectations regarding results of operations, selling, general and
administrative expenses, research and development expenses and the sufficiency
of our cash for future operations. Forward-looking statements may be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"estimate," "anticipate," "continue," or similar terms, variations of such terms
or the negative of those terms. These forward-looking statements include
statements regarding our intent to hold our investments until maturity,
additional funding of the PSMA technologies, potential charges resulting from
the closure of AxCell BioSciences, growth and market penetration for Quadramet
and ProstaScint, revenues, if any, from NMP22 BladderChek and from our joint
venture with Progenics Pharmaceuticals Inc., increased expenses resulting from
our sales force and marketing expansion, including sales and marketing expenses
for ProstaScint and Quadramet and expenses in preparation for the launch of
Combidex upon final regulatory approval, the sufficiency of our capital
resources and supply of products for sale, the continued cooperation of our
contractual and collaborative partners, our need for additional capital and
other statements included in this Quarterly Report on Form 10-Q that are not
historical facts. Such forward-looking statements involve a number of risks and
uncertainties and investors are cautioned not to put any undue reliance on any
forward-looking statement. We cannot guarantee that we will actually achieve the
plans, intentions or expectations disclosed in any such forward-looking
statements. Factors that could cause actual results to differ materially,
include, market acceptance of our products, the results of our clinical trials,
our ability to hire and retain employees, economic and market conditions
generally, our receipt of requisite regulatory approvals for our products and
product candidates, the continued cooperation of our marketing and other
collaborative and strategic partners, our ability to protect our intellectual
property, and the other risks identified in our Annual Report on Form 10-K for
the year ended December 31, 2003 under the caption "Additional Factors That May
Affect Future Results" and those under the caption "Risk Factors," as included
in certain of our other filings, from time to time, with the Securities and
Exchange Commission.
Any forward-looking statements made by us do not reflect the potential
impact of any future acquisitions, mergers, dispositions, joint ventures or
investments we may make. We do not assume, and specifically disclaim, any
obligation to update any forward-looking statements, and these statements
represent our current outlook only as of the date given.
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes thereto contained
elsewhere herein, as well as in our Annual Report on Form 10-K for the year
ended December 31, 2003 and from time to time in our other filings with the
Securities and Exchange Commission.
-14-
OVERVIEW
Founded in 1980, Cytogen Corporation of Princeton, NJ is a product-driven
biopharmaceutical company that develops and commercializes innovative molecules
that can be used to build leading franchises across multiple markets. Our
marketed products include QuadrametTM (samarium Sm-153 lexidronam injection) and
ProstaScint(R) (capromab pendetide) kit for the preparation of Indium In-111
capromab pendetide in the United States. We have exclusive United States
marketing rights to Combidex(R) (ferumoxtran-10) for all indications. Combidex,
an investigational molecular imaging agent consisting of iron oxide
nanoparticles, is currently being developed for use in conjunction with magnetic
resonance imaging to aid in the differentiation of cancerous and non-cancerous
lymph nodes, and is under review by the U.S. Food and Drug Administration. We
are also developing therapeutics targeting prostate-specific membrane antigen
(PSMA), a protein highly expressed on the surface of prostate cancer cells and
the neovasculature of solid tumors. Full prescribing information for our
products is available at www.cytogen.com or by calling 1-800-833-3533.
SIGNIFICANT EVENTS IN THE THIRD QUARTER OF 2004
MANUFACTURING AGREEMENT WITH LAUREATE PHARMA, L.P.
On September 10, 2004, we entered into a non-exclusive Manufacturing
Agreement with Laureate Pharma, L.P. for our ProstaScint product. The agreement
was effective immediately and shall terminate, unless earlier terminated
pursuant to the terms thereof, upon Laureate's completion of the production
campaign and shipment of the resulting products from Laureate's facility in
Princeton, NJ. It is intended that the agreement will provide us with a
sufficient supply of ProstaScint to satisfy our commercial requirements for
approximately the next four years based upon current sales levels.
ADVANCED MAGNETICS SUBMITS COMPLETE RESPONSE TO APPROVABLE LETTER FOR COMBIDEX
On October 19, 2004, we jointly announced with Advanced Magnetics, Inc.
that Advanced Magnetics has submitted a complete response to the approvable
letter received from the FDA for Combidex, Advanced Magnetics' investigational
molecular imaging agent, to which we have exclusive United States marketing
rights. The September 30, 2004 submission was accepted and assigned a user fee
goal date of March 30, 2005.
PATENT INFRINGEMENT LITIGATION SETTLED
On September 29, 2004, we announced the settlement of a patent infringement
suit against us and C.R. Bard Inc. for an agreed-upon payment, without any
admission of fault or liability. The charge related to this settlement is
recorded in the accompanying statements of operations for the three and nine
months ended September 30, 2004. Immunomedics filed suit on February 17, 2000
against us and Bard, alleging that use of our ProstaScint product infringed U.S.
Patent No. 4,460,559, which claims a method for detecting and localizing tumors.
The settlement with Immunomedics is on behalf of Cytogen and Bard.
-15-
CLOSURE OF AXCELL BIOSCIENCES FACILITIES
In July 2004, as part of our continuing efforts to reduce non-strategic
expenses, we initiated the closure of facilities at our AxCell BioSciences
subsidiary. Research projects through academic, governmental and corporate
collaborators will continue to be supported and additional applications for the
intellectual property and technology at AxCell are being pursued.
ADDITION TO SENIOR MANAGEMENT
On August 23, 2004, we announced that William J. Thomas, Esq. joined us as
Senior Vice President and General Counsel. Mr. Thomas was formerly a senior
partner with the law firm of Wilmer Cutler Pickering Hale and Dorr, and has
almost 19 years of experience in representing emerging growth and high
technology businesses in the areas of, among others, general corporate issues,
securities law compliance, venture capital, underwriting, strategic alliances
and mergers and acquisitions. Mr. Thomas has represented numerous public and
private companies in the software, pharmaceutical, telecommunications and
e-commerce industries. Mr. Thomas is responsible for all legal matters at
Cytogen.
RESIGNATION OF DIRECTOR
On September 3, 2004, we announced that H. Joseph Reiser, Ph.D. tendered
his resignation from our Board of Directors, effective immediately. Dr. Reiser's
resignation letter contained no disagreement with management concerning any
matter relating to our operations, policies or practices.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
REVENUES
INCREASE/(DECREASE)
--------------------
2004 2003 $ %
---- ---- ------- -------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Quadramet
Product Sales (commenced August 2003).... $ 1,924 $ 1,159 $ 765 66%
Royalties (ceased July 2003)............. -- 191 (191) (100)%
ProstaScint................................ 1,308 1,519 (211) (14)%
NMP22 BladderChek.......................... -- 116 (116) (100)%
License and Contract....................... 29 2,520 (2,491) (99)%
-------- -------- --------
$ 3,261 $ 5,505 $ (2,244) (41)%
======== ======== ========
Total revenues for the third quarter of 2004 were $3.3 million compared to
$5.5 million for the same period in 2003. Product related revenues, which
include product sales and royalties (in 2003), accounted for 99% and 54% of
total revenues for the third quarters of 2004 and 2003, respectively. License
and contract revenues accounted for the remainder of revenues. In the
-16-
third quarter of 2003, we recognized $2.0 million of previously deferred license
revenue including the remaining unamortized deferred revenue in the amount of
$1.9 million related to an up-front license payment net of associated costs,
which we received from Berlex Laboratories in 1998 for granting them the
marketing rights to Quadramet.
QUADRAMET. Cytogen recorded Quadramet sales of $1.9 million for the third
quarter of 2004 compared to $1.2 million in Quadramet sales and $191,000 of
Quadramet royalty revenue during the third quarter of 2003. Quadramet sales and
royalties accounted for 60% and 45% of product related revenues for the third
quarters of 2004 and 2003, respectively. Berlex Laboratories marketed Quadramet
in the United States through July 31, 2003. On August 1, 2003, we reacquired
marketing rights to Quadramet from Berlex and began marketing Quadramet through
our internal specialty sales force. Effective upon the reacquisition of such
marketing rights, we no longer receive royalty revenue from Berlex for Quadramet
and we pay royalties to Berlex on our sales of Quadramet. On August 1, 2003, we
began recognizing product revenue from our sales of Quadramet. Currently, we
market Quadramet only in the United States and have no rights to market
Quadramet in Europe. We believe that the future growth and market penetration of
Quadramet is dependent upon, among other things: (i) new clinical data
supporting the expanded and earlier use of Quadramet in various cancers; (ii)
novel research supporting combination uses with other therapies, such as
chemotherapeutics and bisphosphonates; and (iii) establishing the use of
Quadramet at higher doses to target and treat primary bone cancers. We cannot
provide any assurance that we will be able to successfully market Quadramet or
that Quadramet will achieve greater market penetration on a timely basis or
result in significant revenues for us.
PROSTASCINT. ProstaScint sales were $1.3 million for the third quarter of
2004, compared to $1.5 million in the third quarter of 2003. Sales of
ProstaScint accounted for 40% and 51% of product related revenues for the third
quarters of 2004 and 2003, respectively. We believe that such decrease in
ProstaScint sales is due to the effects of buying patterns relating to our
implementation of a price increase for ProstaScint in late June 2004, in which
we limited the quantities of ProstaScint that could be purchased by distributors
at the pre-increase price. This decrease was partially offset by increased
demand due to a higher ProstaScint reimbursement value established for 2004
compared to 2003 and our identification of new distribution channels to better
accommodate customer needs. We believe that demand for ProstaScint has been
consistently higher during 2004 than 2003 as evidenced by the higher
year-to-date sales in 2004, and that the quarterly fluctuations in quantities of
ProstaScint sold in 2004 have been due to the change in buying patterns
described above. ProstaScint has historically been a challenging product for
physicians and technologists to use, in part due to inherent limitations in
nuclear medicine imaging. We believe that future growth and market penetration
of ProstaScint is dependent upon, among other things, the implementation and
continued research relating to advances in imaging technology, new product
applications and the validation of PSMA as an independent prognostic indicator.
We cannot provide any assurance that we will be able to successfully market
ProstaScint, or that ProstaScint will achieve greater market penetration on a
timely basis or result in significant revenues for us.
NMP22 BLADDERCHEK. There were no sales of NMP22 BladderChek during the
third quarter of 2004 compared to $116,000 in the third quarter of 2003. We
began promoting NMP22 BladderChek to both urologists and oncologists in the
United States in November 2002
-17-
using our internal sales force. On October 30, 2003, we entered into an amended
and restated distribution agreement with Matritech whereby, effective November
8, 2003, we had the right to non-exclusively market NMP22 BladderChek to
urologists through December 31, 2003 and have the right to exclusively market
NMP22 BladderChek to oncologists through December 31, 2004. We do not expect
significant revenues from sales of NMP22 BladderChek.
LICENSE AND CONTRACT REVENUES. License and contract revenues were $29,000
and $2.5 million for the third quarters of 2004 and 2003, respectively. Under
SAB 101, which we adopted in 2000, license revenues from certain up-front,
non-refundable license fees previously recognized were deferred and were being
amortized over the estimated performance period. The deferred revenue was fully
recognized as of December 31, 2003. In the third quarter of 2003, we recognized
$2.0 million of previously deferred license revenue including the remaining
unamortized deferred revenue in the amount of $1.9 million related to an
up-front license payment net of associated costs, which we received from Berlex
Laboratories in 1998 for granting them the marketing rights to Quadramet. In
August 2003, the 1998 license agreement was terminated and we reacquired those
rights from Berlex Laboratories. In addition, during the third quarter of 2003,
we recognized as revenue a $500,000 payment from Antisoma in connection with
Antisoma's acquisition of certain royalty rights to its lead product, R1549
(formerly Pemtumomab), because we have no continuing involvement in this
arrangement. We also recognized $20,000 and $59,000 of contract revenues for
limited research and development services provided by us to the PSMA Development
Company LLC, our joint venture with Progenics Pharmaceuticals Inc. in the third
quarters of 2004 and 2003, respectively. The level of future revenues for the
remainder of 2004, if any, for contract services provided to the joint venture
may vary and will depend upon the extent of research and development services
required by the joint venture.
OPERATING EXPENSES
INCREASE/(DECREASE)
-------------------
2004 2003 $ %
---- ---- ----------- -------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Cost of product related revenues......... $ 2,188 $ 2,154 $ 34 2%
Selling, general and administrative...... 5,343 2,780 2,563 92%
Research and development................. 608 753 (145) (19)%
Equity in loss of joint venture.......... 805 714 91 13%
-------- -------- -------
$ 8,944 $ 6,401 $ 2,543 40%
======== ======== =======
Total operating expenses for the third quarter of 2004 were $8.9 million
compared to $6.4 million in the same quarter of 2003.
COST OF PRODUCT RELATED REVENUES. Cost of product related revenues for the
third quarters of both 2004 and 2003 were $2.2 million and includes our
assumption, in August 2003, of the responsibility for manufacturing costs for
Quadramet including contractual increases in 2004 related to our new agreement
with Bristol-Myers Squibb Medical Imaging, royalties to Berlex on our sales of
Quadramet and the amortization of the up-front payment to Berlex to reacquire
Quadramet.
-18-
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the third quarter of 2004 were $5.3 million compared to $2.8
million in the same period of 2003. The increase from the prior year period is
due primarily to the expansion of our sales force and the implementation of
other marketing initiatives for our existing products, including Quadramet,
which we reacquired from Berlex in August 2003. The selling, general and
administrative expenses in 2004 also include a payment related to the
settlement, in September 2004, of a patent infringement suit filed by
Immunomedics, Inc. against us and C.R. Bard Inc. in February 2000. As of
November 1, 2004, we employed 40 people in sales and marketing. The employees in
sales and marketing included 9 Clinical Oncology Specialists and 22 Professional
Oncology Representatives. By comparison, we had 31 employees in sales and
marketing as of December 31, 2003. We anticipate that expenditure levels will
continue to increase as we continue this expansion and as we continue our
efforts to prepare for the launch of Combidex pending final regulatory approval.
RESEARCH AND DEVELOPMENT. Research and development expenses for the third
quarter of 2004 were $608,000 compared to $753,000 in the same period of 2003.
The current year expenses reflect costs associated with our product development
efforts in support of new and expanded uses for Quadramet and ProstaScint and
savings from the recent closure of our AxCell BioSciences facility. During the
third quarter of 2004 and 2003, we incurred $113,000 and $382,000, respectively,
in expenses relating to AxCell's operations.
EQUITY IN LOSS OF JOINT VENTURE. Our share of the loss of the PSMA
Development Company LLC, our joint venture with Progenics, was $805,000 and
$714,000 during the third quarters of 2004 and 2003, respectively. Such amounts
represented 50% of the joint venture's operating losses. We may incur
significant and increasing costs in the future to fund our share of the
development costs from the joint venture, although we cannot provide any
assurance that any further agreements between us and Progenics will be reached
regarding the joint venture.
INTEREST INCOME/EXPENSE. Interest income for the third quarter of 2004 was
$133,000 compared to $32,000 in the same period of 2003. The increase in 2004
from the prior year period was due to higher average cash balances in 2004.
Interest expense for each of the third quarters of 2004 and 2003 was $46,000.
Interest expense includes interest on outstanding debt and finance charges
related to various equipment leases that are accounted for as capital leases.
NET LOSS. Net loss for the third quarter of 2004 was $5.6 million compared
to $910,000 reported in the third quarter of 2003. The basic and diluted net
loss per share for the third quarter of 2004 was $0.36 based on 15.4 million
weighted average common shares outstanding, compared to a basic and diluted net
loss per share of $0.08 based on 10.9 million weighted average common shares
outstanding for the same period in 2003.
-19-
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
REVENUES
INCREASE/(DECREASE)
-------------------
2004 2003 $ %
---- ---- --------- ----------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Quadramet
Product Sales (commenced August 2003)............ $ 5,394 $ 1,159 $ 4,235 365%
Royalties (ceased July 2003)..................... -- 1,105 (1,105) (100)%
ProstaScint.......................................... 5,347 4,738 609 13%
NMP22 BladderChek.................................... 1 239 (238) (100)%
BrachySeed (ceased January 2003)..................... -- 240 (240) (100)%
License and Contract................................. 72 2,827 (2,755) (97)%
--------- --------- --------
$ 10,814 $ 10,308 $ 506 5%
========= ========= ========
Total revenues for the first nine months of 2004 were $10.8 million
compared to $10.3 million for the same period in 2003. Product related revenues,
which include product sales and royalties, accounted for 99% and 73% of total
revenues for the first nine months of 2004 and 2003, respectively. License and
contract revenues accounted for the remainder of revenues. In the first nine
months of 2003, we recognized $2.2 million of previously deferred license
revenue including the remaining unamortized deferred revenue in the amount of
$1.9 million related to an up-front license payment net of associated costs,
which we received from Berlex Laboratories in 1998 for granting them the
marketing rights to Quadramet.
QUADRAMET. Cytogen recorded Quadramet sales of $5.4 million for the first
nine months of 2004 compared to $1.2 million in Quadramet sales and $1.1 million
of Quadramet royalty revenue during the first nine months of 2003. Quadramet
sales and royalties accounted for 50% and 30% of product related revenues for
such periods, respectively. Berlex Laboratories marketed Quadramet in the United
States through July 31, 2003. On August 1, 2003, we reacquired marketing rights
to Quadramet from Berlex and began marketing Quadramet through our internal
specialty sales force. Effective upon the reacquisition of such marketing
rights, we no longer receive royalty revenue from Berlex for Quadramet and we
pay royalties to Berlex on our sales of Quadramet. On August 1, 2003, we began
recognizing product revenue from our sales of Quadramet. Currently, we market
Quadramet only in the United States and have no rights to market Quadramet in
Europe. We believe that the future growth and market penetration of Quadramet is
dependent upon, among other things: (i) new clinical data supporting the
expanded and earlier use of Quadramet in various cancers; (ii) novel research
supporting combination uses with other therapies, such as chemotherapeutics and
bisphosphonates; and (iii) establishing the use of Quadramet at higher doses to
target and treat primary bone cancers. We cannot provide any assurance that we
will be able to successfully market Quadramet or that Quadramet will achieve
greater market penetration on a timely basis or result in significant revenues
for us.
PROSTASCINT. ProstaScint sales were $5.3 million for the first nine months
of 2004, an increase of $609,000 from $4.7 million in the first nine months of
2003. Sales of ProstaScint
-20-
accounted for 50% and 63% of product related revenues for such periods,
respectively. We believe that such increase in ProstaScint sales is due to
increased demand associated with our focused marketing programs, a higher
ProstaScint reimbursement value established for 2004 compared to 2003 and our
identification of new distribution channels to better accommodate customer
needs. We believe that demand for ProstaScint has been consistently higher
during 2004 than 2003 as evidenced by the higher year-to-date sales in 2004.
ProstaScint has historically been a challenging product for physicians and
technologists to use, in part due to inherent limitations in nuclear medicine
imaging. We believe that future growth and market penetration of ProstaScint is
dependent upon, among other things, the implementation and continued research
relating to advances in imaging technology, new product applications and the
validation of PSMA as an independent prognostic indicator. We cannot provide any
assurance that we will be able to successfully market ProstaScint, or that
ProstaScint will achieve greater market penetration on a timely basis or result
in significant revenues for us.
NMP22 BLADDERCHEK. NMP22 BladderChek sales during the first nine months of
2004 were $1,000 compared to $239,000 in the same period in 2003. We began
promoting NMP22 BladderChek to both urologists and oncologists in the United
States in November 2002 using our internal sales force. On October 30, 2003, we
entered into an amended and restated distribution agreement with Matritech
whereby, effective November 8, 2003, we had the right to non-exclusively market
NMP22 BladderChek to urologists through December 31, 2003 and have the right to
exclusively market NMP22 BladderChek to oncologists through December 31, 2004.
We do not expect significant revenues from sales of NMP22 BladderChek.
BRACHYSEED. There were no BrachySeed sales during the first nine months of
2004 compared to $240,000 during the first nine months of 2003, which
represented 3% of product related revenues. Effective January 24, 2003, we
stopped accepting and filling new orders for the BrachySeed products.
LICENSE AND CONTRACT REVENUES. License and contract revenues were $72,000
and $2.8 million for the first nine months of 2004 and 2003, respectively. Under
SAB 101, which we adopted in 2000, license revenues from certain up-front,
non-refundable license fees previously recognized were deferred and were being
amortized over the estimated performance period. The deferred revenue was fully
recognized as of December 31, 2003. In the first nine months of 2003, we
recognized $2.2 million of previously deferred license revenue including the
remaining unamortized deferred revenue in the amount of $1.9 million related to
an up-front license payment net of associated costs, which we received from
Berlex Laboratories in 1998 for granting them the marketing rights to Quadramet.
In August 2003, the 1998 license agreement was terminated and we reacquired
those rights from Berlex Laboratories. In addition, during the first nine months
of 2003, we recognized as revenue a $500,000 payment from Antisoma in connection
with Antisoma's acquisition of certain royalty rights to its lead product, R1549
(formerly Pemtumomab), because we have no continuing involvement in this
arrangement. We also recognized $47,000 and $158,000 of contract revenues for
limited research and development services provided by us to the PSMA Development
Company LLC, our joint venture with Progenics Pharmaceuticals Inc. in the first
nine months of 2004 and 2003, respectively. The level of future revenues for the
remainder of 2004, if any, for contract services provided to the joint venture
may vary and will depend upon the extent of research and development services
required by the joint venture.
-21-
OPERATING EXPENSES
INCREASE/(DECREASE)
--------------------------
2004 2003 $ %
---- ---- --------- ----------
(ALL AMOUNTS IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Cost of product related revenues............. $ 6,983 $ 3,964 $ 3,019 76%
Selling, general and administrative.......... 14,148 8,146 6,002 74%
Research and development..................... 1,953 2,283 (330) (14)%
Equity in loss of joint venture.............. 2,156 2,680 (524) (20)%
--------- ---------- ---------
$ 25,240 $ 17,073 $ 8,167 48%
========= ========== =========
Total operating expenses for the first nine months of 2004 were $25.2
million compared to $17.1 million in the same period of 2003.
COST OF PRODUCT RELATED REVENUES. Cost of product related revenues for the
first nine months of 2004 were $7.0 million compared to $4.0 million in the same
period of 2003. The increase from the prior year period is due primarily to our
assumption, in August 2003, of the responsibility for manufacturing costs for
Quadramet including contractual increases in 2004 related to our new agreement
with Bristol-Myers Squibb Medical Imaging, royalties to Berlex on our sales of
Quadramet and the amortization of the up-front payment to Berlex to reacquire
Quadramet.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the first nine months of 2004 were $14.1 million compared to $8.1
million in the same period of 2003. The increase from the prior year period is
due primarily to the expansion of our sales force and the implementation of
other marketing initiatives for our existing products, including Quadramet,
which we reacquired from Berlex in August 2003. The selling, general and
administrative expenses in 2004 also include a payment related to the
settlement, in September 2004, of a patent infringement suit filed by
Immunomedics, Inc. against us and C.R. Bard Inc. in February 2000. As of
November 1, 2004, we employed 40 people in sales and marketing. The employees in
sales and marketing included 9 Clinical Oncology Specialists and 22 Professional
Oncology Representatives. By comparison, we had 31 employees in sales and
marketing as of December 31, 2003. We anticipate that expenditure levels will
continue to increase as we continue this expansion and as we continue our
efforts to prepare for the launch of Combidex pending final regulatory approval.
RESEARCH AND DEVELOPMENT. Research and development expenses for the first
nine months of 2004 were $2.0 million compared to $2.3 million in the same
period of 2003. The current year expenses reflect costs associated with our
product development efforts in support of new and expanded uses for Quadramet
and ProstaScint and savings from the recent closure of our AxCell BioSciences
facility. During the first nine months of 2004 and 2003, we incurred $631,000
and $1.2 million, respectively, in expenses relating to AxCell's operations.
EQUITY IN LOSS OF JOINT VENTURE. Our share of the loss of the PSMA
Development Company LLC, our joint venture with Progenics, was $2.2 million
during the first nine months of 2004 compared to $2.7 million in the same period
of 2003 and represented 50% of the joint venture's operating losses. We may
incur significant and increasing costs in the future to fund
-22-
our share of the development costs from the joint venture, although we cannot
provide any assurance that any further agreements between us and Progenics will
be reached regarding the joint venture.
INTEREST INCOME/EXPENSE. Interest income for the first nine months of 2004
was $303,000 compared to $91,000 in the same period of 2003. The increase in
2004 from the prior year period was due to higher average cash balances in 2004.
Interest expense for each of the first nine months of 2004 and 2003 was
$139,000. Interest expense includes interest on outstanding debt and finance
charges related to various equipment leases that are accounted for as capital
leases.
INCOME TAX BENEFIT. During the first nine months of 2003, we sold a portion
of our New Jersey state net operating losses and research and development credit
carryforwards, which resulted in the recognition of $584,000 in income tax
benefit. No such sales occurred in the first nine months of 2004. Assuming the
State of New Jersey continues to fund this program, which is uncertain, the
future amount of net operating losses and research and development credit
carryforwards which we may sell will also depend upon the allocation among
qualifying companies of an annual pool established by the State of New Jersey.
NET LOSS. Net loss for the first nine months of 2004 was $14.3 million
compared to $6.2 million reported in the first nine months of 2003. The basic
and diluted net loss per share for the first nine months of 2004 was $0.99 based
on 14.4 million weighted average common shares outstanding, compared to a basic
and diluted net loss per share of $0.65 based on 9.6 million weighted average
common shares outstanding for the same period in 2003.
-23-
COMMITMENTS
We have entered into various contractual obligations and commercial
commitments. The following table summarizes our contractual obligations as of
September 30, 2004 and does not include approximately $1.9 million related to
these contractual obligations which are currently recorded in accounts payable
and accrued liabilities in the accompanying balance sheets (all amounts in
thousands):
LESS
THAN 1 TO 3 4 TO 5 MORE THAN
1 YEAR YEARS YEARS 5 YEARS TOTAL
-------- -------- --------- ----------- --------
Long-term debt(1) ................................. $ 2,280 $ - $ - $ - $ 2,280
Capital lease obligations.......................... 40 40 11 - 91
Facility leases.................................... 529 820 28 - 1,377
Research and development and
other obligations............................... 1,013 327 201 725 2,266
Manufacturing contracts(2) ........................ 7,453 5,233 44 - 12,730
Capital contribution to joint venture(3) .......... 2,250 - - - 2,250
Minimum royalty payments(4)........................ 1,000 2,000 2,000 4,083 9,083
------- -------- -------- --------- --------
Total........................................ $14,565 $ 8,420 $ 2,284 $ 4,808 $ 30,077
======= ======== ======== ========= ========
(1) In August 1998, we received $2.0 million from Elan Corporation, plc in
exchange for a convertible promissory note. The note is convertible
into shares of our common stock at $28 per share, subject to
adjustments, and matures in August 2005. The note bears annual
interest of 7%, compounded semi-annually, however, such interest was
not payable in cash but was added to the principal through August
2000; thereafter, interest is payable in cash. The note contains
certain non-financial covenants, with which we were in compliance as
of September 30, 2004.
(2) As a result of the August 2003 reacquisition of marketing rights to
Quadramet, we assumed all of Berlex's obligations under a
manufacturing and supply agreement with BMSMI, including an obligation
to pay manufacturing costs. Effective January 1, 2004, we entered into
a new manufacturing and supply agreement with BMSMI whereby BMSMI
manufactures, distributes and provides order processing and customer
services for us relating to Quadramet. Under the terms of the new
agreement, we are obligated to pay at least $4.2 million annually
through 2008, unless terminated by BMSMI or us on a two year prior
written notice. This agreement will automatically renew for five
successive one-year periods unless terminated by BMSMI or us on a
two-year prior written notice. Accordingly, we have not included
commitments beyond September 30, 2006. Additionally, in September
2004, we entered into a non-exclusive manufacturing agreement with
Laureate Pharma, L.P. pursuant to which Laureate shall manufacture
ProstaScint for us in its Princeton, New Jersey facility. The
agreement was effective immediately and shall terminate, unless
earlier terminated pursuant to the terms thereof, upon Laureate's
completion of the production campaign and shipment of the resulting
products from Laureate's facility. Under the terms of the agreement,
we are obligated to pay at least an aggregate of $5.1 million through
2006. We intend that the agreement will provide us with a sufficient
supply of ProstaScint to satisfy our commercial requirements for
approximately the next four years, based upon current sales levels.
(3) In 2004, each of Cytogen and Progenics expects to provide $4.2 million
in funding for the development of the PSMA technologies through our
joint venture with Progenics. Cytogen has funded $2.0 million of its
$4.2 million annual commitment, as of September 30, 2004. Cytogen and
Progenics have not yet committed to fund the joint venture beyond
December 31, 2004 at this time, except for obligations under existing
contractual commitments as of that date. We may incur significant and
increasing costs in the
-24-
future to fund our share of the development costs from the joint
venture, although we cannot be sure that any further agreements
between us and Progenics will be reached regarding the joint venture.
(4) We acquired an exclusive license from The Dow Chemical Company for
Quadramet for the treatment of osteoblastic bone metastases in certain
territories. The agreement requires us to pay Dow royalties based on a
percentage of net sales of Quadramet, or a guaranteed contractual
minimum payment, whichever is greater, and future payments upon
achievement of certain milestones. Future annual minimum royalties due
to Dow are $1.0 million per year in 2004 through 2012 and $833,000 in
2013.
In addition to the above, we are obligated to make certain royalty payments
based on sales of the related product and certain milestone payments if our
collaborative partners achieve specific development milestones or commercial
milestones.
LIQUIDITY AND CAPITAL RESOURCES
CONDENSED STATEMENT OF CASH FLOWS:
2004
--------------------------
(ALL AMOUNTS IN THOUSANDS)
Net loss......................................... $ (14,262)
Adjustments to reconcile net loss to net cash
used in operating activities................... 1,197
------------
Net cash used in operating activities............ (13,065)
Net cash used in investing activities............ (10,980)
Net cash provided by financing activities........ 23,875
------------
Net decrease in cash and cash equivalents........ $ (170)
============
OVERVIEW
Our cash and cash equivalents were $13.5 million as of September 30, 2004,
compared to $13.6 million as of December 31, 2003. As of September 30, 2004, our
total cash, cash equivalents and short-term investments were $40.5 million
compared to $30.2 million as of December 31, 2003. The increase in cash, cash
equivalents and short term investments from the December 31, 2003 balance was
primarily due to our receipt of net proceeds of approximately $24.0 million from
a registered direct offering of our common stock in April 2004, offset by
operating expenditures in 2004, including costs to manufacture, promote and
support our existing oncology products and to expand our internal sales force.
During the first nine months of 2004 and 2003, net cash used for operating
activities was $13.1 million and $7.8 million, respectively. In 2004, we expect
operating expenditures to increase over 2003 levels.
Historically, our primary sources of cash have been proceeds from the
issuance and sale of our stock through public offerings and private placements,
product related revenues, revenues from contract research services, fees paid
under license agreements and interest earned on cash and short-term investments.
Our financial objectives are to meet our capital and operating requirements
through revenues from existing products and licensing arrangements. To achieve
these objectives, we may enter into research and development partnerships and
acquire, in-license and develop other technologies, products or services.
Certain of these strategies may require payments by us in
-25-
either cash or stock in addition to the costs associated with developing and
marketing a product or technology. However, we believe that, if successful, such
strategies may increase long-term revenues. There can be no assurance as to the
success of such strategies or that resulting funds will be sufficient to meet
cash requirements until product revenues are sufficient to cover operating
expenses, if ever. To fund these strategic and operating activities, we may sell
equity or debt securities as market conditions permit or enter into credit
facilities.
We have incurred negative cash flows from operations since our inception,
and have expended, and expect to continue to expend in the future, substantial
funds to implement our planned product development efforts, including
acquisition of products and complementary technologies, research and
development, clinical studies and regulatory activities, and to further our
marketing and sales programs. We expect that our existing capital resources
should be adequate to fund our operations and commitments into 2007. We cannot
assure you that our business or operations will not change in a manner that
would consume available resources more rapidly than anticipated. We expect that
we will have additional requirements for debt or equity capital, irrespective of
whether and when we reach profitability, for further product development costs,
product and technology acquisition costs, and working capital.
Our future capital requirements and the adequacy of available funds will
depend on numerous factors, including: (i) the successful commercialization of
our products; (ii) the costs associated with the acquisition of complementary
products and technologies; (iii) progress in our product development efforts and
the magnitude and scope of such efforts; (iv) progress with clinical trials; (v)
progress with regulatory affairs activities; (vi) the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights; (vii) competing technological and market developments; and
(viii) the expansion of strategic alliances for the sales, marketing,
manufacturing and distribution of our products. To the extent that the currently
available funds and revenues are insufficient to meet current or planned
operating requirements, we will be required to obtain additional funds through
equity or debt financing, strategic alliances with corporate partners and
others, or through other sources. There can be no assurance that the financial
sources described above will be available when needed or at terms commercially
acceptable to us. If adequate funds are not available, we may be required to
delay, further scale back or eliminate certain aspects of our operations or
attempt to obtain funds through arrangements with collaborative partners or
others that may require us to relinquish rights to certain of our technologies,
product candidates, products or potential markets. If adequate funds are not
available, our business, financial condition and results of operations will be
materially and adversely affected.
2004 CAPITAL RAISING
In April 2004, we sold 2,570,000 shares of our common stock to certain
institutional investors for $10.10 per share through a registered direct
offering, resulting in net proceeds of approximately $24.0 million after the
payment of placement agency fees and expenses related to the offering.
-26-
OTHER LIQUIDITY EVENTS
In September 2004, we entered into a non-exclusive manufacturing agreement
with Laureate Pharma, L.P. pursuant to which Laureate shall manufacture
ProstaScint for us in its Princeton, New Jersey facility. The agreement was
effective immediately and shall terminate, unless earlier terminated pursuant to
the terms thereof, upon Laureate's completion of the production campaign and
shipment of the resulting products from Laureate's facility. Under the terms of
the agreement, we are obligated to pay at least an aggregate of $5.1 million
through 2006. We intend that the agreement will provide us with a sufficient
supply of ProstaScint to satisfy our commercial requirements for approximately
the next four years, based upon current sales levels. In October 2004, Laureate
entered into a definitive agreement with Safeguard Scientifics, Inc. pursuant to
which it is intended that Safeguard will acquire Laureate's business and assets.
Following the transaction, which is expected to be consummated in the fourth
quarter of 2004, Laureate is expected to continue to operate as a full service
contract manufacturing organization. We do not anticipate that we will
experience any disruption in Laureate's performance of its obligations to
produce ProstaScint.
In 2003, we reacquired the marketing rights to Quadramet from Berlex.
Accordingly, effective August 1, 2003, we began recording all revenue from sales
of Quadramet. Effective upon the reacquisition of such marketing rights, we no
longer receive royalty revenue from Berlex and pay Berlex royalties on our sales
of Quadramet. As a result of the reacquisition, we assumed all of Berlex's
obligations under a manufacturing and supply agreement with BMSMI. Effective
January 1, 2004, we entered into a new manufacturing and supply agreement with
BMSMI whereby BMSMI manufactures, distributes and provides order processing and
customer services for us relating to Quadramet. Under the terms of the new
agreement, we are obligated to pay at least $4.2 million annually through 2008,
unless terminated by BMSMI or us on two years prior written notice. For the
first nine months of 2004, we incurred $3.2 million of manufacturing costs for
Quadramet. This agreement will automatically renew for five successive one-year
periods unless terminated by BMSMI or us on a two year prior written notice. We
also pay BMSMI a variable amount per month for each Quadramet order placed to
cover the costs of customer service. In addition, we expect our Quadramet sales
and marketing expenses to increase in 2004.
Beginning in December 2001, we began to equally share the costs of the
joint venture with Progenics. Cytogen and Progenics each expect to provide
funding of $4.2 million in 2004. Cytogen has funded $2.0 million of its $4.2
million annual commitment, as of September 30, 2004. Cytogen and Progenics have
not committed to fund the joint venture beyond December 31, 2004 at this time,
except for obligations under existing contractual commitments as of that date.
We may incur significant and increasing costs in the future to fund our share of
the development costs from the joint venture although we cannot provide any
assurance that any further agreements between us and Progenics will be reached
regarding the joint venture. Any funding amount in subsequent periods may vary
dependent upon, among other things, the results of the clinical trials and
research and development activities, competitive and technological developments,
and market opportunities.
-27-
We acquired an exclusive license from The Dow Chemical Company for
Quadramet for the treatment of osteoblastic bone metastases in certain
territories. The agreement requires us to pay Dow royalties based on a
percentage of net sales of Quadramet, or a guaranteed contractual minimum
payment, whichever is greater, and future payments upon achievement of certain
milestones. Future annual minimum royalties due to Dow are $1.0 million per year
in 2004 through 2012 and $833,000 in 2013.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 to our Consolidated Financial Statements in our
Annual Report on Form 10-K for the year ended December 31, 2003 includes a
summary of our significant accounting policies and methods used in the
preparation of our Consolidated Financial Statements. The following is a brief
discussion of the more significant accounting policies and methods used by us.
The preparation of our Consolidated Financial Statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our actual results could differ materially from
those estimates.
REVENUE RECOGNITION
Product related revenues include product sales by Cytogen to its customers
and Quadramet royalties. Product sales are recognized when the customer takes
ownership and assumes risk of loss, and when the collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists and the
sales price is fixed and determinable. Product sales are recorded net of
discounts, rebates and estimated allowances for product returns based on our
historical experience and any specific product return issues that we may have
identified.
Prior to the reacquisition of marketing rights to Quadramet from our
marketing partner, Berlex Laboratories, in August 2003, we recognized royalty
revenue on Quadramet sales made by Berlex during each period as Berlex sold the
product. As a result of our reacquisition, effective August 1, 2003, we began
recognizing revenue from the sales of Quadramet and no longer receive Quadramet
royalty revenue.
License and contract revenues include milestone payments and fees under
collaborative agreements with third parties, revenues from research services,
and revenues from other miscellaneous sources.
In 2003, Staff Accounting Bulletin No. 104, "Revenue Recognition" replaced
Staff Accounting Bulletin No. 101, "Revenue Recognition In Financial
Statements," which the Company adopted in 2000. The provisions related to
non-refundable, up-front license fees were unchanged in SAB 104 compared to SAB
101. Accordingly, we defer non-refundable, up-front license fees and recognize
them over the estimated performance period of the related agreement, when we
have continuing involvement. Since the term of performance periods is subject to
management's estimates, future revenues to be recognized could be affected by
changes in such estimates.
-28-
ACCOUNTS RECEIVABLE
Our accounts receivable balances are net of an estimated allowance for
uncollectible accounts. We continuously monitor collections and payments from
our customers and maintain an allowance for uncollectible accounts based upon
our historical experience and any specific customer collection issues that we
have identified. While we believe our reserve estimate to be appropriate, we may
find it necessary to adjust our allowance for uncollectible accounts if the
future bad debt expense exceeds our estimated reserve. We are subject to
concentration risks as a limited number of our customers provide a high percent
of total revenues, and corresponding receivables.
INVENTORIES
Inventories are stated at the lower of cost or market, as determined using
the first-in, first-out method, which most closely reflects the physical flow of
our inventories. Our products and raw materials are subject to expiration
dating. We regularly review quantities on hand to determine the need for
reserves for excess and obsolete inventories based primarily on our estimated
forecast of product sales. Our estimate of future product demand may prove to be
inaccurate, in which case we may have understated or overstated our reserve for
excess and obsolete inventories.
CARRYING VALUE OF FIXED AND INTANGIBLE ASSETS
Our fixed assets and certain of our acquired rights to market our products
have been recorded at cost and are being amortized on a straight-line basis over
the estimated useful life of those assets. If indicators of impairment exist, we
assess the recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered through undiscounted
future operating cash flows. If impairment is indicated, we measure the amount
of such impairment by comparing the carrying value of the assets to the present
value of the expected future cash flows associated with the use of the asset.
Adverse changes regarding future cash flows to be received from long-lived
assets could indicate that an impairment exists, and would require the write
down of the carrying value of the impaired asset at that time.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB issued a Proposed SFAS, "Share-Based Payment - An
Amendment of SFAS Nos. 123 and 95" ("Exposure Draft"). The Exposure Draft would
eliminate the ability to account for share-based compensation transactions using
APB Opinion No. 25, and generally would require such transactions be accounted
for using a fair-value-based method and the resulting cost recognized in the
financial statements. Based on the provisions of the Exposure Draft and
subsequent FASB diliberations and tentative conclusions, the final standard
would be effective for publicly-traded companies for awards granted, modified or
settled in interim periods beginning after June 15, 2005. We are closely
monitoring developments related to the Exposure Draft and will adopt the final
standards, if any, in the appropriate period following issuance. The eventual
adoption of the Exposure Draft, if issued in final form by the FASB, is expected
to have a material effect on our consolidated financial statements.
-29-
COMPLIANCE WITH SARBANES-OXLEY REQUIREMENTS
Section 404 of the Sarbanes-Oxley Act of 2002 requires management to
perform an evaluation of its internal control over financial reporting and have
our independent auditors attest to such evaluation. Along with many other
companies whose fiscal year ends on December 31, we must implement these
requirements for the first time in connection with the preparation of the annual
report for the year ending December 31, 2004. We have been actively preparing
for the implementation of this requirement by, among other things, establishing
an ongoing program to document, evaluate and test the systems and processes
necessary for compliance. While we anticipate that we will be able to comply on
a timely basis with these requirements, unforeseen delays may occur which could
prevent us from achieving timely compliance. If we fail to complete our
evaluation on a timely basis and in a satisfactory manner, or if our external
auditors are unable to attest on a timely basis to the adequacy of our internal
control, we may be subject to additional scrutiny surrounding our internal
control over financial reporting.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have operations subject to risks of foreign currency
fluctuations, nor do we use derivative financial instruments in our operations
or investment portfolio. As of September 30, 2004, we had $2.3 million of debt
outstanding with a fixed interest rate of 7%. We do not have exposure to market
risks associated with changes in interest rates, as we have no variable interest
rate debt outstanding. However, downward changes in interest rates could expose
us to market risk associated with our fixed interest rate debt.
ITEM 4 - CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Our management, with
the participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September
30, 2004. In designing and evaluating our disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applied its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on this
evaluation, our chief executive officer and chief financial officer concluded
that, as of September 30, 2004, our disclosure controls and procedures were (1)
designed to ensure that material information relating to us, including our
consolidated subsidiaries, is made known to our chief executive officer and
chief financial officer by others within those entities, particularly during the
period in which this report was being prepared and (2) effective, in that they
provide reasonable assurance that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.
(b) CHANGES IN INTERNAL CONTROLS. No change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) occurred during the fiscal quarter ended September 30, 2004 that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
-30-
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Our management, including our Chief Executive Officer and Chief Financial
Officer, does not expect that our disclosure controls and procedures or our
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. The inherent limitations in all control systems include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 2004, we announced the settlement of a patent infringement
suit against us and C.R. Bard Inc. for an agreed-upon payment, without any
admission of fault or liability. Immunomedics filed suit on February 17, 2000
against us and Bard, alleging that use of our ProstaScint product infringed U.S.
Patent No. 4,460,559, which claims a method for detecting and localizing tumors.
The settlement with Immunomedics is on behalf of Cytogen and Bard.
In connection with a recent review of certain of our intellectual property,
it was determined that we were the recipient, beginning in 1998, of
correspondence from legal counsel representing the former employer of Dr. Julius
Horoszewicz, the sole inventor on the principal United States patent covering
ProstaScint. Such correspondence alleged that the patent rights to Dr.
Horoszewicz's discoveries were the property of such former employer and that Dr.
Horoszewicz had no right to assign them to us. We vigorously disputed those
allegations, and we have no record of the matter having been pursued by such
former employer subsequent to August 2000. We believe that in view of the
marketing of the technology covered by the patent through the sale of
ProstaScint by us, our right to use the underlying technology in our continuing
production and sale of ProstaScint should not be at risk. However, if such
claims were reasserted, and if it were to be concluded that Dr. Horoszewicz in
fact had no right to assign the patent to us, a court could determine that we
have no right to use the technology covered by the patent or that any royalties
paid by or payable by us in respect of the use of the patent should have been
paid in the past, and should in the future be payable, to Dr. Horoszewicz's
former employer in lieu of Dr. Horoszewicz. The amount of any such payments, and
our liability for them, if any, is not presently determinable, and we cannot
give any assurance that an adverse determination could not result in a material
expenditure to us or have a material adverse effect on our financial condition,
results of operations or liquidity.
We have certain rights to indemnification against litigation and litigation
expenses from the inventor of technology used in ProstaScint, which may be
offset against royalty payments on sales of ProstaScint. We cannot give any
assurance that litigation expenses will not exceed any offsetting royalty
payments.
-31-
In addition, we are, from time to time, subject to claims and suits arising
in the ordinary course of business. In the opinion of management, the ultimate
resolution of any such matters would not have a material effect on our financial
condition, results of operations or liquidity.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
CHANGES IN SECURITIES
The following information relates to all of the securities sold by us
during the third quarter of 2004 that were not registered under the securities
laws at the time of grant, issuance and/or sale:
OPTION GRANTS
During the third quarter of 2004, we granted stock options pursuant to our
2004 Stock Incentive Plan. Such options were not registered under the Securities
Act of 1933, as amended. We intend to file a registration statement on Form S-8
with the Securities and Exchange Commission to register the shares of our common
stock underlying option grants under the 2004 Stock Incentive Plan. All of such
option grants were granted at the then current market value of the common stock.
The following table sets forth certain information regarding such grants during
the quarter:
Number Weighted Average
Plan of Shares Exercise Price Per Share
---- --------- ------------------------
2004 Stock Incentive Plan.............. 34,000 $11.617
We did not employ an underwriter in connection with the issuance of the
securities described above. We believe that the issuance of the foregoing
securities was exempt from registration under either (i) Section 4(2) of the
Securities Act as transactions not involving any public offering and such
securities having been acquired for investment and not with a view to
distribution, or (ii) Rule 701 under the Securities Act as transactions made
pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation. All recipients had adequate access to
information about the Company.
ITEM 5. OTHER INFORMATION
CLOSURE OF AXCELL BIOSCIENCES FACILITIES
In July 2004, as part of our continuing efforts to reduce non-strategic
expenses, we initiated the closure of facilities at our AxCell BioSciences
subsidiary. Research projects through academic, governmental and corporate
collaborators will continue to be supported and additional applications for the
intellectual property and technology at AxCell are being pursued.
APPOINTMENT OF SENIOR VICE PRESIDENT AND GENERAL COUNSEL
On August 23, 2004, William J. Thomas, Esq. joined the Company as Senior
Vice President and General Counsel. In connection with Mr. Thomas' commencement
of
-32-
employment with the Company, we entered into a Change of Control Severance
Agreement, in the form we utilize with our executive officers, with Mr. Thomas.
APPOINTMENT OF TRANSFER AGENT
On September 1, 2004, American Stock Transfer & Trust Company was appointed
as the new registrar and transfer agent for the Company, replacing Mellon
Investor Services LLC. In connection with our engagement of AST, we executed an
Agreement for Substitution and Amendment of Rights Agreement with AST, dated as
of September 1, 2004, pursuant to which, among other things, AST replaces Mellon
as rights agent under our Rights Agreement, as amended to date.
RESIGNATION OF DIRECTOR
On September 3, 2004, we announced that H. Joseph Reiser, Ph.D. tendered
his resignation from our Board of Directors, effective immediately. Dr. Reiser's
resignation letter contained no disagreement with management concerning any
matter relating to our operations, policies or practices.
MANUFACTURING AGREEMENT WITH LAUREATE PHARMA, L.P.
On September 10, 2004, we entered into a non-exclusive Manufacturing
Agreement with Laureate Pharma, L.P. for our ProstaScint product. The agreement
was effective immediately and shall terminate, unless earlier terminated
pursuant to the terms thereof, upon Laureate's completion of the production
campaign and shipment of the resulting products from Laureate's facility in
Princeton, NJ. It is intended that the agreement will provide us with a
sufficient supply of ProstaScint to satisfy our commercial requirements for
approximately the next four years based upon current sales levels.
PATENT INFRINGEMENT LITIGATION SETTLED
On September 29, 2004, we announced the settlement of a patent infringement
suit against us and C.R. Bard Inc. for an agreed-upon payment, without any
admission of fault or liability. Immunomedics filed suit on February 17, 2000
against us and Bard, alleging that use of our ProstaScint product infringed U.S.
Patent No. 4,460,559, which claims a method for detecting and localizing tumors.
The settlement with Immunomedics is on behalf of Cytogen and Bard.
ADVANCED MAGNETICS SUBMITS COMPLETE RESPONSE TO APPROVABLE LETTER FOR COMBIDEX
On October 19, 2004, we jointly announced with Advanced Magnetics, Inc.
that Advanced Magnetics has submitted a complete response to the approvable
letter received from the FDA for Combidex, Advanced Magnetics' investigational
molecular imaging agent, to which we have exclusive United States marketing
rights. The September 30, 2004 submission was accepted and assigned a user fee
goal date of March 30, 2005.
-33-
ITEM 6. EXHIBITS.
Exhibit No. Description
----------- -----------
4.1 Agreement for Substitution and Amendment of
Rights Agreement by and between the Company and
American Stock Transfer & Trust Company dated
as of September 1, 2004. Filed as an exhibit to
the Company's Current Report on Form 8-K, filed
with the Commission on September 2, 2004.
10.1* Manufacturing Agreement dated September 10, 2004
by and between the Company and Laureate Pharma,
L.P. Filed as an exhibit to the Company's
Current Report on Form 8-K, filed with the
Commission on September 14, 2004.
14.1 Code of Business Conduct and Ethics of Cytogen
Corporation, as amended. Filed herewith.
31.1 Certification of President and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002. Filed herewith.
31.2 Certification of Senior Vice President and Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
32.1 Certification of President and Chief Executive
Officer pursuant to 18 U.S.C. Section 1350.
Filed herewith.
32.2 Certification of Senior Vice President and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350. Filed herewith.
* The Company has submitted an application for confidential treatment with the
Securities and Exchange Commission with respect to certain provisions contained
in this exhibit. The copy filed as an exhibit omits the information subject to
the confidentiality application.
-34-
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.
CYTOGEN CORPORATION
Date: November 9, 2004 By: /s/ Michael D. Becker
--------------------------------------------
Michael D. Becker
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 9, 2004 By: /s/ Christopher P. Schnittker
--------------------------------------------
Christopher P. Schnittker
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
-35-