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 June 30, 2002
-------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
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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)
600 College Road East, CN 5308, 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Class Outstanding at August 1, 2002
---------------------------- -----------------------------
Common Stock, $.01 par value 86,772,525
PART I - FINANCIAL INFORMATION
-------------------------------
Item 1 - Consolidated Financial Statements
CYTOGEN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share data)
(Unaudited)
June 30, December 31,
2002 2001
----------- ------------
ASSETS:
Current Assets:
Cash and cash equivalents ...................................... $ 18,902 $ 11,309
Marketable securities .......................................... 837 1,376
Receivable on income tax benefit sold .......................... - 1,103
Accounts receivable, net ....................................... 1,852 1,621
Inventories .................................................... 1,371 1,889
Other current assets ........................................... 760 508
--------- ---------
Total current assets ......................................... 23,722 17,806
Property and Equipment, net ...................................... 1,535 1,831
Other Assets ..................................................... 2,614 1,855
--------- ---------
$ 27,871 $ 21,492
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current portion of long-term debt .............................. $ 106 $ 77
Accounts payable and accrued liabilities ....................... 4,588 5,315
Accrued stock liability ........................................ 2,000 -
Deferred revenue ............................................... 260 534
--------- ---------
Total current liabilities .................................... 6,954 5,926
--------- ---------
Long-Term Debt ................................................... 2,400 2,291
--------- ---------
Deferred Revenue ................................................. 2,055 2,061
--------- ---------
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, 250,000,000 shares authorized,
86,271,000 and 78,937,000 shares issued and outstanding
at June 30, 2002 and December 31, 2001, respectively ......... 863 789
Additional paid-in capital ..................................... 364,531 350,867
Deferred compensation .......................................... (367) (621)
Accumulated other comprehensive income ......................... 321 860
Accumulated deficit ............................................ (348,886) (340,681)
--------- ---------
Total stockholders' equity ................................... 16,462 11,214
--------- ---------
$ 27,871 $ 21,492
========= =========
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 Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues:
Product related:
ProstaScint .................................. $ 1,971 $ 1,789 $ 4,047 $ 4,033
BrachySeed ................................... 565 70 1,017 104
OncoScint .................................... 56 145 110 225
-------- -------- -------- --------
Total product sales ................... 2,592 2,004 5,174 4,362
Quadramet royalties .......................... 510 595 1,009 1,036
-------- -------- -------- --------
Total product related ................. 3,102 2,599 6,183 5,398
License and contract revenues .................. 65 257 280 472
-------- -------- -------- --------
Total revenues ........................ 3,167 2,856 6,463 5,870
-------- -------- -------- --------
Operating Expenses:
Cost of product sales........................... 1,241 644 2,295 1,819
Research and development ....................... 1,746 2,483 5,545 4,222
Equity loss in PSMA LLC ........................ 595 - 1,108 -
Selling and marketing .......................... 1,622 1,577 3,075 3,331
General and administrative ..................... 1,200 1,349 2,710 2,522
-------- -------- -------- --------
Total operating expenses .............. 6,404 6,053 14,733 11,894
-------- -------- -------- --------
Operating loss ........................ (3,237) (3,197) (8,270) (6,024)
Interest income ................................. 72 156 149 377
Interest expense ................................. (42) (44) (84) (92)
-------- -------- -------- --------
Net loss ......................................... $ (3,207) $ (3,085) $ (8,205) $ (5,739)
======== ======== ======== ========
Basic and diluted net loss per share ............. $ (0.04) $ (0.04) $ (0.10) $ (0.07)
======== ======== ======== ========
Weighted average common shares outstanding ....... 83,082 77,444 82,172 76,836
======== ======== ======== ========
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)
Six Months Ended June 30,
-------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................... $ (8,205) $ (5,739)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................... 407 580
Imputed interest ................................ - (22)
Stock-based compensation expenses ............... 747 257
Amortization of deferred revenue ................ (280) (430)
Stock-based milestone charge .................... 2,000 -
Changes in assets and liabilites:
Receivables, net .............................. 872 (348)
Inventories ................................... 518 (979)
Other assets .................................. (511) 830
Accounts payable and accrued liabilities ...... (462) (1,219)
-------- --------
Net cash used in operating activities ........... (4,914) (7,070)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of product rights ............................. (500) -
Net proceeds from sale of equipment .................... 100 -
Purchases of property and equipment .................... (24) (303)
-------- --------
Net cash used in investing activities ........... (424) (303)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock ................. 12,980 14,201
Payment of long-term debt .............................. (49) (108)
-------- --------
Net cash provided by financing activities ....... 12,931 14,093
-------- --------
Net increase in cash and cash equivalents .............. 7,593 6,720
Cash and cash equivalents, beginning of period ......... 11,309 11,993
-------- --------
Cash and cash equivalents, end of period ............... $ 18,902 $ 18,713
======== ========
The accompanying notes are an integral part of these statements.
4
CYTOGEN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
Cytogen Corporation ("Cytogen" or the "Company") is a biopharmaceutical
company with an established and growing product line in prostate cancer and
other areas of oncology. FDA-approved products include ProstaScint(R) (a
monoclonal antibody-based imaging agent used to image the extent and spread of
prostate cancer); BrachySeed(TM) I-125 and Pd-103, (uniquely designed,
next-generation radioactive seed implants for the treatment of localized
prostate cancer); and Quadramet(R) (a therapeutic agent marketed for the relief
of bone pain in prostate and other types of cancer). Cytogen is evolving a
pipeline of oncology product candidates by developing its prostate specific
membrane antigen, or PSMA technologies, which are exclusively licensed from
Memorial Sloan-Kettering Cancer Center.
AxCell Biosciences Corporation, a subsidiary of Cytogen Corporation, is
engaged in the research and development of novel biopharmaceutical products
using its portfolio of functional proteomics solutions and collection of
proprietary signal transduction pathway information. Through the systematic and
industrialized measurement of protein-to-protein interactions, AxCell is
assembling ProChart(TM), a proprietary database of signal transduction pathway
information that is relevant in a number of therapeutically important classes of
molecules including growth factors, receptors and other potential protein
therapeutics or drug targets. AxCell's database content and functional
proteomics tools are available on a non-exclusive basis to biotechnology,
pharmaceutical and academic researchers. AxCell is continuing its research
activities to further elucidate the role of novel proteins through both external
collaborations and data mining.
Basis of Consolidation
The consolidated financial statements include the accounts of Cytogen and
its subsidiaries. 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 generally accepted accounting principles and should be read in
5
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, 2001. 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.
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.
Marketable Securities
In connection with the acquisition of Prostagen Inc. in June 1999, the
Company received 275,350 shares of Northwest Biotherapeutics, Inc. common stock.
The Company has classified this investment as available-for-sale securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Available-for-sale securities are carried at fair value, based on quoted market
prices, with unrealized gains or losses reported as a separate component of
stockholders' equity. As of June 30, 2002 and December 31, 2001, the Company had
unrealized gains of $321,000 and $860,000, respectively, related to this
investment. There is no assurance, however that the Company can sell these
securities within a reasonable amount of time without negatively affecting the
price of the stock since the daily trading volume has been low.
Inventories
The Company's inventories are primarily related to ProstaScint and
OncoScint CR/OV. Inventories are stated at the lower of cost or market using the
first-in, first-out method and consisted of the following:
June 30, December 31,
2002 2001
------------- -------------
Raw materials................. $ 506,000 $ 506,000
Work-in process............... 24,000 1,371,000
Finished goods................ 841,000 12,000
---------- ----------
$1,371,000 $1,889,000
========== ==========
Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130") requires
reporting and displaying comprehensive income (loss) and its components which,
for the Company, include net loss and unrealized gains or losses on available
for sale marketable securities. In accordance with SFAS 130, the accumulated
balance of other comprehensive income or loss is displayed as a separate
6
component of stockholders' equity. The following table reconciles net loss to
comprehensive loss for the three and six months ended June 30, 2002.
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
------------------ ----------------
Net loss............................. $(3,207,000) $(8,205,000)
Other comprehensive loss:
Unrealized losses on available
for sale marketable securities..... (223,000) (539,000)
------------ ------------
Comprehensive loss................... $(3,430,000) $(8,744,000)
============ ============
During the three and six months ended June 30, 2001, the Company had no
unrealized gains or losses on marketable securities.
Net Loss Per Share
Basic net loss per share is based upon the weighted average common
shares outstanding during each period. Diluted net loss per share is the same as
basic net loss per share, as the inclusion of common stock equivalents would be
antidilutive.
Reclassifications
Certain reclassifications have been made to the 2001 financial
statements to conform to the 2002 presentation.
2. EQUITY LOSS IN PSMA DEVELOPMENT CO. LLC:
In June 1999, Cytogen entered into a joint venture called the PSMA
Development Co. LLC (the "Joint Venture"), with Progenics Pharmaceuticals Inc.
("Progenics"), to develop vaccine and antibody-based immunotherapeutic products
utilizing Cytogen's exclusively licensed PSMA technology. The Joint Venture is
owned equally by Cytogen and Progenics. The Company accounts for the Joint
Venture using the equity method of accounting. Progenics was obligated to fund
the initial $3.0 million of development costs of the Joint Venture. Beginning in
December 2001, the Company and Progenics began to equally share the costs of the
Joint Venture. Since December 2001, Cytogen has recognized 50% of the Joint
Venture's operating results in its consolidated results of operations. Selected
financial statement information of the Joint Venture is as follows:
Statement of Operations Data:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ------------ ------------
Interest income.............. $ 4,000 $ 11,000 $ 4,000 $ 26,000
Total expenses............... 1,193,000 594,000 2,220,000 1,035,000
----------- ----------- ------------ ------------
Net loss................... $(1,189,000) $ (583,000) $(2,216,000) $(1,009,000)
============ =========== ============ ============
7
3. SALES OF CYTOGEN COMMON STOCK:
In January 2002, the Company sold 2,970,665 shares of Cytogen common
stock to the State of Wisconsin Investment Board ("SWIB"), for an aggregate
purchase price of $8.0 million or $2.69 per share, pursuant to a January 2002
Share Purchase Agreement between SWIB and the Company. In June 2002, the Company
sold an additional 4,166,700 shares of Cytogen common stock to SWIB for an
aggregate purchase price of $5.0 million or $1.20 per share. Pursuant to its
agreements with SWIB, in January 2002 the Company agreed not to enter into
equity line arrangements in the future, issue certain securities at less than
fair market value or undertake certain other securities issuances without
requisite stockholder approval.
4. AMENDMENT OF AGREEMENT AND MILESTONE PAYMENTS:
Pursuant to a Stock Exchange Agreement ("Prostagen Agreement") related to
the acquisition of Prostagen Inc. ("Prostagen") in June 1999, the Company agreed
to issue up to an additional $4.0 million worth of Cytogen common stock to the
shareholders and debtholders of Prostagen, if certain milestones are achieved in
the dendritic cell therapy and PSMA development programs. During the first
quarter of 2002, the Company and former Prostagen shareholders agreed that a
milestone was achieved based on the progress of the dendritic cell prostate
cancer clinical trials at Northwest Biotherapeutics, Inc. As a result, the
Company accrued a $2.0 million stock liability with a corresponding charge
recorded as research and development expense in the first quarter of 2002. In
May 2002, the Company entered into an addendum to the Prostagen Agreement (the
"Addendum") which clarifies the milestone payments to be made under the
Prostagen Agreement, as well as the timing of such payments. Pursuant to the
Addendum, Cytogen will issue and register with the Securities and Exchange
Commission (the "SEC") $2.0 million worth of Cytogen common stock, or 1,226,994
shares in satisfaction of the stock liability. In addition, the Company may be
obligated to pay two additional milestone payments of $1.0 million each, upon
the earlier of certain clinical achievements regarding the PSMA development
programs or January 2003 and July 2003, respectively, provided that the payments
shall be due on these dates only if safety has been established in a completed
Phase I clinical trial and the research program on immunotherapy for prostate
cancer is continuing on such dates. Any future milestone payments are payable in
shares of Cytogen common shares which will be registered with the SEC after
issuance.
Under the terms of a Product, Manufacturing and Supply Agreement
entered in December 2000 between Cytogen and Draximage Inc., Draximage will
supply radioactive iodine and palladium seeds to Cytogen in exchange for product
transfer payments, royalties on sales and certain milestone payments. Pursuant
to the agreement, Cytogen is obligated to pay Draximage $1.0 million upon the
first sale of BrachySeed Pd-103, which occurred in May 2002. As of June 30,
2002, the Company paid $500,000 of this milestone and has accrued the remaining
balance which will be paid at a later date. The Company has recorded the $1.0
million milestone in other assets in the accompanying consolidated balance sheet
as of June 30, 2002 and will amortize it over the approximately eight year
remaining term of the Draximage agreement.
8
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains historical information as well as
forward looking statements that involve a number of risks and uncertainties.
Statements contained or incorporated by reference in this Quarterly Report on
Form 10-Q that are not based on historical facts are "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended. Generally, forward looking statements can be identified by the
use of phrases like "believe", "expect", "anticipate", "plan", "may", "will",
"could", "estimate", "potential", "opportunity" and "project" and similar terms.
The Company's actual results could differ materially from the Company's
historical results of operations and those discussed in the forward looking
statements. Factors that could cause actual results to differ materially,
include, but are not limited to those identified in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001 under the caption "Additional
Factors That May Affect Future Results". Investors are cautioned not to put
undue reliance on any forward looking statement.
Cautionary Statement
In addition to the risks discussed under the caption referred to above,
among other factors that could cause actual results to differ materially from
expected results are the following: (i) the Company's ability to access the
capital markets in the near term and in the future for continued funding of its
operations including the continued listing of the Company's common stock on the
Nasdaq National Market; (ii) the ability to attract and retain personnel needed
for business operations and strategic plans; (iii) the timing and results of
clinical studies, and regulatory approvals; (iv) market acceptance of the
Company's products, including programs designed to facilitate use of the
products, such as the Partners in Excellence or PIE Program; (v) demonstration
over time of the efficacy and safety of the Company's products; (vi) the degree
of competition from existing or new products; (vii) the decision by the majority
of public and private insurance carriers on whether to reimburse patients for
the Company's products; (viii) the ability of the Company and its partners to
comply with applicable governmental regulations and changes thereto; (ix) the
profitability of its products; (x) the ability to attract, and the ultimate
success of, strategic partnering arrangements, collaborations, and acquisition
candidates; (xi) the ability of the Company and its partners to identify new
products as a result of those collaborations that are capable of achieving FDA
approval, that are cost-effective alternatives to existing products and that are
ultimately accepted by the key users of the product; (xii) the ability to
integrate the in-licensed products such as BrachySeed; (xiii) the success of the
Company in obtaining marketing approvals for its products in Canada and Europe;
(xiv) the ability of the Company to protect its proprietary technology, trade
secrets or know-how under the patent and other intellectual property laws of the
United States and other countries; and (xv) the ability of Advanced Magnetics
Inc. to satisfy the conditions specified by the FDA regarding approval to market
Combidex in the United States.
The following discussion and analysis should be read in conjunction with
the Financial Statements and related notes thereto contained elsewhere herein,
as well as the Company's Annual Report on Form 10-K for the year ended December
31, 2001 and from time to time the Company's other filings with the Securities
and Exchange Commission.
9
Significant Events in 2002
During May 2002, the Company launched the palladium version of
BrachySeed(TM) (Pd-103), a uniquely designed next generation radioactive seed
implant for the treatment of localized prostate cancer. The Company introduced
the iodine version of BrachySeed (I-125) in 2001, and since then has increased
its penetration of the brachytherapy iodine market, resulting in consistent
quarter-over-quarter growth in BrachySeed sales. Despite such historical
quarter-over-quarter sales increase, there can be no assurance that such
increase will continue in the future. The Company is utilizing its existing
oncology sales force to market both BrachySeed products.
Also in 2002, the Company received regulatory approval in Canada for
ProstaScint(R), the Company's radio-labeled monoclonal antibody prostate cancer
imaging agent. ProstaScint was approved for marketing in the United States in
1996. In both Canada and the United States, ProstaScint is indicated for use in
patients newly diagnosed with prostate cancer who are at risk for lymph node
metastases and for patients with recurrent prostate cancer following a radical
prostatectomy who are suspected of having occult metastatic disease. In Canada,
ProstaScint is also indicated for use in identifying those patients with
recurrent prostate cancer who are likely to benefit from receiving local salvage
radiation therapy. The Company plans to launch both ProstaScint and Quadramet in
Canada, alone or with a partner during 2002. Quadramet, which was approved for
marketing in Canada in 1998, is a therapeutic agent marketed in the U.S. for the
relief of bone pain in prostate and other types of cancer. There can be no
assurance, however, regarding the timing of launch for ProstaScint and Quadramet
in Canada, the market acceptance of the newly launched products including
BrachySeed I-125 and Pd-103 and whether these products will significantly
increase the revenues of the Company.
The Company is currently exploring strategic alternatives for its
subsidiary, AxCell BioSciences Corporation ("AxCell"), that would allow the
Company to reduce its cash expenditures relating to AxCell in order to leverage
its oncology franchise. AxCell is engaged in the research and development of
novel biopharmaceutical products using its portfolio of functional proteomics
solutions and collection of proprietary signal transduction pathway information.
The Company expects to complete its review of these strategic alternatives by
the end of the third quarter of 2002.
Results of Operations
Three Months Ended June 30, 2002 and 2001
Revenues. Total revenues for the second quarter of 2002 were $3.2 million
compared to $2.9 million for the same period in 2001. The increase from the
prior year period is due to higher product related revenues, partially offset by
lower license and contract revenues. Product related revenues, which included
product sales and royalties, accounted for 98% and 91% of total revenues for the
second quarters of 2002 and 2001, respectively. License and contract revenues
accounted for the remainder of revenues.
Product related revenues for the second quarter of 2002 were $3.1 million
compared to $2.6 million for the same period in 2001. Sales of ProstaScint
accounted for 64% and 69% of product related revenues in the second quarters of
2002 and 2001, respectively, while Quadramet royalties accounted for 16% and 23%
10
of product related revenues for such quarters, respectively. Sales of
ProstaScint were $2.0 million for the second quarter of 2002, $182,000 higher
than the $1.8 million recorded in the second quarter of 2001. Future growth of
ProstaScint is dependent upon increased marketing and sales initiatives by
Cytogen's in-house sales force, entry in additional markets and the
implementation of new product applications, such as using ProstaScint scans to
guide the placement of brachytherapy seeds and/or external beam radiation. There
can be no assurance, however, that such initiatives will significantly increase
the sales of ProstaScint.
Sales of BrachySeed during the second quarter of 2002 were $565,000 and
accounted for 18% of product related revenues, compared to $70,000 recorded in
the same period of 2001. Since the market introduction of BrachySeed I-125 in
February 2001, the Company has increased its penetration of the brachytherapy
iodine market resulting in consistent quarter-over-quarter growth. BrachySeed
sales in 2002 also include the initial sale of BrachySeed Pd-103, which was
launched in May 2002. There can be no assurance, however, as to the market
acceptance of the BrachySeed I-125 and Pd-103 or whether the sale of these
products will significantly increase the revenues of the Company.
Sales of OncoScint CR/OV during the second quarter of 2002 were $56,000
compared to $145,000 in the same period of 2001. The market for OncoScint CR/OV
for colorectal cancer diagnosis has been negatively affected by positron
emission tomography or "PET" scans which have shown the same or higher
sensitivity than OncoScint CR/OV. Accordingly, the Company is decreasing its
emphasis on OncoScint in order to focus on its prostate cancer products.
Quadramet royalties for the second quarter of 2002 were $510,000, $85,000
less than the $595,000 reported in the same period of 2001. Quadramet is
currently marketed by the Company's marketing partner, Berlex Laboratories
("Berlex"). Although Cytogen believes that Berlex is an advantageous partner,
there can be no assurance that Quadramet will achieve greater market penetration
on a timely basis or result in significant revenues for Cytogen.
License and contract revenues for the second quarter of 2002 were $65,000
compared to $257,000 for the same period of 2001. As a result of the Company's
adoption of Securities and Exchange Commission's Staff Accounting Bulletin
No.101 (SAB 101) in 2000, license revenues include the recognition of deferred
revenues from certain up-front, non-refundable license fees previously
recognized in prior years. License and contract revenues have fluctuated in the
past and will continue to fluctuate in the future.
Operating Expenses. Total operating expenses for the second quarter of
2002 were $6.4 million compared to $6.1 million recorded in the same quarter of
2001. The increase from the prior year period is attributable primarily to
increased product costs related to higher product sales and increased
development costs associated with PSMA Development Company LLC, a joint venture
between Cytogen and Progenics Pharmaceuticals, Inc. ("Progenics") for the
development of in vivo immunotherapies utilizing prostate specific membrane
antigen, or PSMA. The increase is partially reduced by decreased research and
development expenses related to the signal transduction research activities at
AxCell and the development of a new manufacturing and purification process for
ProstaScint.
11
Cost of product for the second quarter of 2002 was $1.2 million compared
to $644,000 recorded in the same period of 2001. The increase from the prior
year period is primarily due to the increase in sales of our BrachySeed products
which carry a lower margin and a $140,000 charge to reserve for excess inventory
for ProstaScint, partially offset by lower facility related costs associated
with the manufacturing of ProstaScint.
Research and development expenses for the second quarter of 2002 were $1.7
million compared to $2.5 million recorded in the same period of 2001. The
decrease from the prior year period is attributable primarily to decreased costs
associated with the AxCell's signal transduction inhibitors research programs
and the development of a new manufacturing and purification process for
ProstaScint. During the second quarters of 2002 and 2001, the Company invested
$1.0 million and $1.2 million, respectively, in AxCell's signal transduction
research activities, and $352,000 and $856,000, respectively, in the development
of a new manufacturing process for ProstaScint. The Company is exploring
strategic alternatives for AxCell, that would allow the Company to reduce its
cash expenditures relating to AxCell in order to leverage its oncology
franchise. Funding for the development of a new manufacturing process for
ProstaScint has been put on hold pending further evaluation of the development
results.
The Company's share in the equity loss in the PSMA Development LLC, our
joint venture with Progenics Pharmaceuticals, Inc., was $595,000 during the
second quarter of 2002 and represented 50% of the Joint Venture's operating
results. The Joint Venture is equally owned by Cytogen and Progenics and the
Company accounts for the Joint Venture using the equity method of accounting.
Progenics was obligated to fund the initial $3.0 million of development costs of
the Joint Venture. Beginning in December 2001, the Company and Progenics began
to equally share the costs of the Joint Venture. The Company expects to incur
significant costs in the future to fund its share of the development costs from
the Joint Venture.
Selling and marketing expenses were $1.6 million for each second quarter
in 2001 and 2002. These expenses reflects costs associated with the launches of
BrachySeed I-125 in 2001 and BrachySeed Pd-103 in 2002.
General and administrative expenses for the second quarter of 2002 were
$1.2 million compared to $1.3 million for the comparable period in 2001. The
decrease from the prior year period is due primarily to decreased spending in
legal and professional fees.
Interest Income/Expense. Interest income for the second quarter of 2002
was $72,000 compared to $156,000 recorded in the same period of 2001. The
decrease from the prior year period is due to a lower average yield on
investments during 2002. Interest expense for the second quarter of 2002 was
$42,000 compared to $44,000 recorded in the same period of 2001. The interest
expenses included finance charges related with various equipment leases.
Net Loss. Net loss for the second quarter of 2002 was $3.2 million compared
to $3.1 million reported in the second quarter of 2001. The net loss per share
for the second quarter of 2002 was $0.04 based on weighted average common shares
outstanding of 83.1 million compared to a net loss per share of $0.04 based on
the weighted average common shares outstanding of 77.4 million for the same
period in 2001.
12
Six months ended June 30, 2002 and 2001
Revenues. Total revenues for the first half of 2002 and 2001 were $6.5
million and $5.9 million, respectively. The increase from the prior year period
is due to higher product related revenues, partially offset by lower license and
contract revenues. Product related revenues, which included product sales and
royalties, accounted for 96% of total revenues in 2002 compared to 92% from the
comparable period of 2001. License and contract revenues accounted for the
remainder of revenues. For the fiscal year 2002, the Company projects total
revenues to be in the range of $12.5 million to $14.5 million.
Product related revenues for the first half of 2002 and 2001 were $6.2
million and $5.4 million, respectively. Sales of ProstaScint accounted for 65%
and 75% of product related revenues in the first half of 2002 and 2001,
respectively, while Quadramet royalties accounted for 16% and 19% of product
related revenues for such periods, respectively. Sales of ProstaScint were $4.0
million for each of the first half of 2001 and 2002. Future growth of
ProstaScint is dependent upon increased marketing and sales initiatives by
Cytogen's in-house sales force, entry in additional markets and the
implementation of new product applications, such as using ProstaScint scans to
guide the placement of brachytherapy seeds and/or external beam radiation. There
can be no assurance, however, that such initiatives will significantly increase
the sales of ProstaScint. Royalties from Quadramet were $1.0 million for each of
the first half of 2001 and 2002. Quadramet royalties are based on net sales of
Quadramet by Berlex.
Sales of BrachySeed for the first half of 2002 were $1.0 million and
accounted for 16% of product related revenues, compared to $104,000 recorded in
the same period of 2001. The increase from prior year period is due to increased
market penetration of BrachySeed I-125 since its market introduction in February
2001, and to the initial sale of BrachySeed Pd-103, which was launched in May
2002. Sales of BrachySeed Pd-103 have not been substantial to date, since the
product is still in the initial launch phase. There can be no assurance,
however, as to the market acceptance of BrachySeed I-125 and Pd-103 or whether
the sale of these products will significantly increase the revenues of the
Company.
Sales of OncoScint CR/OV were $110,000 in 2002 compared to $225,000 in the
same period of 2001. The market for OncoScint CR/OV for colorectal cancer
diagnosis has been negatively affected by positron emission tomography or "PET"
scans which have shown the same or higher sensitivity than OncoScint CR/OV.
Accordingly, the Company is decreasing its emphasis on OncoScint in order to
focus on its prostate cancer products.
License and contract revenues for the first half of 2002 and 2001 were
$280,000 and $472,000, respectively. As a result of the Company's adoption of
SAB 101 in 2000, license revenues for both 2002 and 2001 include the recognition
of deferred revenues from certain up-front non-refundable license fees
previously recognized in prior years.
Operating Expenses. Total operating expenses for the first half of 2002
were $14.7 million compared to $11.9 million recorded in 2001. The increase from
the prior year period is attributable primarily to a one-time, non-cash
milestone of $2.0 million related to the progress of the dendritic cell prostate
cancer clinical trials at Northwest Biotherapeutics, Inc. ("Northwest") and to
increased development costs associated with the PSMA Development Company LLC.
13
For fiscal year 2002, the Company projects total operating expenses, excluding
cost of sales and one-time non-cash charges, to be in the range of $20.0 million
to $22.0 million.
Cost of product for the first half of 2002 was $2.3 million compared to
$1.8 million in the same period of the prior year. The increase from the prior
year period is due primarily to the increase in sales of our BrachySeed
products, which carry a lower margin and to a $157,000 charge to reserve for
excess inventory for OncoScint and ProstaScint, partially reduced by lower
facility related costs associated with the manufacturing of ProstaScint.
Research and development expenses for the first half of 2002 were $5.5
million compared to $4.2 million recorded in the same period of 2001. The
increase from the prior year period is attributable primarily to a one-time,
non-cash milestone of $2.0 million related to the progress of dendritic cell
prostate cancer clinical trials at Northwest, partly offset by decreased costs
associated with the AxCell's signal transduction inhibitors research programs
and the development of a new manufacturing and purification process for
ProstaScint. During the first six months of 2002 and 2001, the Company invested
$2.3 million and $2.4 million, respectively, in AxCell's signal transduction
research activities, and $583,000 and $900,000 respectively, in the development
of a new manufacturing process for ProstaScint. The Company is exploring
strategic alternatives for AxCell, that would allow the Company to reduce its
cash expenditures relating to AxCell in order to leverage its oncology
franchise. Funding for the development of a new purification and manufacturing
process for ProstaScint has been put on hold pending further evaluation of the
development results.
The Company's share in the equity loss in the PSMA Development LLC, our
joint venture with Progenics Pharmaceuticals, Inc., was $1.1 million during the
first half of 2002 and represented 50% of the Joint Venture's operating results.
The Joint Venture is equally owned by Cytogen and Progenics and the Company
accounts for the Joint Venture using the equity method of accounting. Progenics
was obligated to fund the initial $3.0 million of development costs of the Joint
Venture. Beginning in December 2001, the Company and Progenics began to equally
share the costs of the Joint Venture. The Company expects to incur significant
costs in the future to fund its share of the development costs from the Joint
Venture (see Note 2 to the Consolidated Financial Statements).
Selling and marketing expenses were $3.1 million for the first half of
2002 compared to $3.3 million in the same period of 2001. The decrease from the
prior year period is due primarily to the 2001 launch of BrachSeed I-125.
General and administrative expenses for the first half of 2002 were $2.7
million compared to $2.5 million for the comparable period in 2001. The increase
from the prior year period is due in part to stock based compensation for a key
employee.
Interest Income/Expense. Interest income for the first half of 2002 was
$149,000 compared to $377,000 recorded in the same period of 2001. The decrease
from the prior year period is due a lower average yield on investments in 2002.
Interest expense for the first half of 2002 was $84,000 compared to $92,000
recorded in the same period of 2001. The interest expenses included finance
charges related with various equipment leases.
14
Net Loss. Net loss for the first half of 2002 was $8.2 million compared to
$5.7 million recorded in the same period of 2001. The net loss per share for the
first half of 2002 was $0.10 based on weighted average common shares outstanding
of 82.2 million compared to a net loss per share of $0.07 based on the weighted
average common shares outstanding of 76.8 million for the same period in 2001.
The 2002 net loss included a one-time, non-cash milestone of $2.0 million
related to the progress of dendritic cell prostate cancer clinical trials at
Northwest.
Liquidity and Capital Resources
The Company's cash and cash equivalents were $18.9 million as of June 30,
2002, compared to $11.3 million as of December 31, 2001. The cash used for
operating activities for the six months ended June 30, 2002 was $4.9 million
compared to $7.1 million in the same period of 2001. The decrease from the prior
year period is due primarily to the improved working capital management and to
the build-up of ProstaScint inventory in 2001 as the Company is in the process
of seeking a new manufacturer of ProstaScint. For fiscal year 2002, the Company
projects that cash used in operations will be in the range of $9.5 million to
$10.5 million.
Historically, the Company's primary sources of cash have been proceeds from
the issuance and sale of its stock through public offerings and private
placements, product related revenues, revenues from contract manufacturing and
research services, fees paid under license agreements and interest earned on
cash and short-term investments.
The Company filed a shelf Registration Statement on Form S-3 to register
10,000,000 shares of its common stock in October 2001. Such Registration
Statement was declared effective by the Securities and Exchange Commission in
November 2001. The Company may issue such registered shares of common stock from
time to time and may use the proceeds thereof for general corporate purposes,
including, but not limited to, continued development and commercialization of
its proteomics technologies, research and development of additional products and
expansion of its sales and marketing capabilities. As of June 30, 2002 the
Company has registered 7,137,365 shares of common stock under such shelf
registration statement and a total of 2,862,635 shares of the Company's common
stock remain available to be registered.
In January 2002, the Company sold 2,970,665 shares of Cytogen common
stock to the State of Wisconsin Investment Board ("SWIB") for an aggregate
purchase price of $8.0 million or $2.69 per share. In June 2002, the Company
sold an additional 4,166,700 shares of Cytogen common stock for an aggregate
purchase price of $5.0 million or $1.20 per share. Pursuant to its agreement
with SWIB, in January 2002 the Company agreed not to enter into equity line
arrangements in the future, issue certain securities at less than fair market
value or undertake certain other securities issuances without requisite
stockholder approval.
On June 18, 2002, the Company received approval from the stockholders
of the Company at the Company's Annual Meeting to amend the Company's By-Laws,
the 1995 Stock Option Plan and the 1999 Non-Employee Director Plan to effect
such restrictions imposed pursuant to the SWIB financings.
In January 2002, the Company received cash of $1.1 million relating to
the December 2001 sale of New Jersey State net operating losses and research and
development credits. Under the current legislation, the Company may be able to
15
sell a minimum $634,000 of its remaining approved $2.4 million of tax benefits
in 2002 assuming the State of New Jersey continues to fund this program. The
actual amount of net operating losses and tax credits the Company may sell will
also depend upon the allocation among qualifying companies of an annual pool
established by the State of New Jersey.
Beginning in December 2001, Cytogen and Progenics began to equally
share the costs of the Joint Venture. Since that date, Cytogen has recognized
50% of the Joint Venture's operating results, which, during the first half of
2002 was a loss of $1.1 million. The Company expects its share of losses in the
PSMA Development Co. LLC to continue at even higher levels in subsequent
periods.
The Company's capital and operating requirements may change depending
upon various factors, including: (i) whether the Company and its strategic
partners achieve success in manufacturing, marketing and commercialization of
its products; (ii) the amount of resources which the Company devotes to clinical
evaluations and the expansion of marketing and sales capabilities; (iii) results
of clinical trials and research and development activities; and (iv) competitive
and technological developments, in particular, the Company expects to incur
significant costs for the development of its proteomics and PSMA technologies.
The Company's financial objectives are to meet its capital and operating
requirements through revenues from existing products and licensing arrangements.
To achieve its strategic objectives, the Company 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 the
Company in either cash or stock in addition to the costs associated with
developing and marketing a product or technology. There can be no assurance as
to the success of such strategies or that resulting funds will be sufficient to
meet cash requirements until such time as product revenues are sufficient to
cover operating expenses, if ever. To fund these strategic and operating
activities, the Company may sell assets, equity or debt securities as market
conditions permit or enter into credit facilities.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to implement its planned product development efforts,
including acquisition of products and complementary technologies, research and
development, clinical studies and regulatory activities, and to further its
marketing and sales programs. The Company expects that its existing capital
resources should be adequate to fund the Company's operations during 2003. The
Company cannot assure you that its business or operations will not change in a
manner that would consume available resources more rapidly than anticipated. The
Company expects that it will have additional requirements for capital from the
issuance of debt or equity securities, irrespective of whether and when it
reaches profitability, for further product development costs, product and
technology acquisition costs, and working capital.
The Company's future capital requirements and the adequacy of available
funds will depend on numerous factors, including the successful
commercialization of its products, the costs associated with the acquisition of
complementary products and technologies, progress in its product development
efforts, the magnitude and scope of such efforts, progress with clinical trials,
progress with regulatory affairs activities, the cost of filing, prosecuting,
16
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, and the expansion of strategic
alliances for the sales, marketing, manufacturing and distribution of its
products. To the extent that the currently available funds and revenues are
insufficient to meet current or planned operating requirements, the Company will
be required to obtain additional funds through asset sales, 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 the
Company. If adequate funds are not available, the Company may be required to
delay, further scale back or eliminate certain aspects of its operations or
attempt to obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain of its
technologies, product candidates, products or potential markets. If adequate
funds are not available, the Company's business, financial condition and results
of operations will be materially and adversely affected.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, 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 this
Quarterly Report on Form 10-Q and Note 1 to our Consolidated Financial
Statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, include 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 from those
estimates.
Revenue Recognition
We recognize revenue from the sale of our products upon shipment. We do
not grant price protection to customers. Quadramet royalties are recognized when
earned. The Securities and Exchange Commission has issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition", which provides guidance on the
recognition of up-front, non-refundable license fees. Accordingly, we defer
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
the performance periods is subject to management's estimates, future revenues to
be recognized could be affected by changes in such estimates.
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 doubtful accounts if our future
17
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 our 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.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company does not have operations subject to risks of foreign currency
fluctuations, nor does it use derivative financial instruments in its operations
or investment portfolio. The Company does not have exposure to market risks
associated with changes in interest rates, as it has no variable interest rate
debt outstanding. The Company does not believe it has any other material
exposure to market risks associated with interest rates.
18
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to the Vote of Security Holders
On June 18, 2002, the Company held its annual meeting of stockholders
to (i) elect six directors; (ii) to consider and vote upon a proposal
to amend, as required, the Company's 1995 Stock Option Plan, 1999
Non-Employee Director Stock Option Plan and By-Laws, as applicable, to
provide that without the approval of a majority of the Company's
stockholders, the Company shall not: (a) grant stock appreciation
rights with an exercise price that is less than the fair market value
of the underlying common stock; or (b) effectively amend or replace
certain outstanding equity-based awards in a manner that would result
in lower exercise prices, accelerated vesting schedules or the
issuance of restricted stock; and (iii) transact such other business
as might be brought up before the meeting.
The following tables set forth information regarding the number of
votes cast for, against or withheld, abstentions and broker non-votes,
with respect to each matter presented at the meeting. Under the rules
of the Nasdaq Stock Market, brokers who hold shares in street name for
customers who are beneficial owners of those shares may be prohibited
from giving a proxy to vote shares held for such customers on certain
matters without specific instructions from such customers (broker
non-votes). Under Delaware law, abstentions and broker non-votes are
counted as shares represented at the meeting for purposes of
determining the presence or absence of a quorum at a stockholders
meeting. The election of directors is decided by a plurality of the
votes cast. Therefore, votes that are withheld have no effect on the
outcome of the vote. Adoption of the remaining proposal required the
affirmative vote of a majority of shares cast at the meeting.
Therefore, abstentions and broker non-votes have no effect on the
vote.
(i) Election of Directors:
Against or Broker
Nominee For Withheld Abstentions Non-Votes
------- --- ---------- ----------- ---------
John E. Bagalay Jr. 74,300,649 3,406,760 N/A N/A
Stephen K. Carter 76,070,588 1,636,821 N/A N/A
James A. Grigsby 75,784,639 1,922,770 N/A N/A
Robert F. Hendrickson 65,408,808 12,298,601 N/A N/A
Kevin G. Lokay 65,455,560 12,251,849 N/A N/A
H. Joseph Reiser 76,224,110 1,483,299 N/A N/A
(ii) Proposal to amend, as required, the Company's 1995 Stock
Option Plan, 1999 Non-Employee Director Stock Option Plan
and By-Laws, as applicable, to provide that without the
approval of a majority of the Company's stockholders, the
Company shall not: (a) grant stock appreciation rights with
an exercise price that is less than the fair market value of
the underlying common stock; or (b) effectively amend or
replace certain outstanding equity-based awards in a manner
that would result in lower exercise prices, accelerated
vesting schedules or the issuance of restricted stock.
19
Against or Broker
For Withheld Abstentions Non-Votes
--- ---------- ----------- ---------
74,495,767 2,807,028 404,614 N/A
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 - Sublease Agreement by and between Cytogen Corporation and Hale
and Dorr, LLP dated as of May 23, 2002. Filed herewith.
10.2 - Addendum to Stock Exchange Agreement among Cytogen Corporation
and the Shareholders and Debt holders of Prostagen, Inc. dated as
of May 14, 2002, and amended as of August 13, 2002. Filed
herewith.
99.1 - Certification of Disclosure on Form 10-Q for the period ended
June 30, 2002 by H. Joseph Reiser, President and Chief Executive
Officer of Cytogen Corporation. Filed herewith.
99.2 - Certification of Disclosure on Form 10-Q for the period ended
June 30, 2002 by Lawrence R. Hoffman, Vice President and Chief
Financial Officer of Cytogen Corporation. Filed herewith.
(b) Reports on Form 8-K
During the three months ended June 30, 2002, the Company filed
with the Securities and Exchange Commission four Current Report on
Form 8-K and Form 8-K/A. The Form 8-K and Form 8-K/A dated May 20,
2002, reported on "Item 4. Changes in Registrant's Certifying
Accountant" the change of the Company's independent public accountants
to KPMG LLP for the fiscal year ending December 31, 2002 replacing
Arthur Andersen LLP, effective immediately. The Form 8-K dated May 29,
2002, reported on "Item 5. Other Events" the followings: i) Cytogen's
launch of Draxis Health's BrachySeed Palladium Pd-103 product in the
United States for the treatment of prostate cancer and ii) the
Company's financial guidance and strategic planning and operation for
2002. The Form 8-K dated June 4, 2002, reported on "Item 5. Other
Events" the sale of 4,166,700 shares of Cytogen common stock to The
State of Wisconsin Investment Board for an aggregate purchase price of
approximately $5.0 million on June 4, 2002.
20
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 August 14, 2002 By: /s/ H. Joseph Reiser
-------------------- ---------------------------------------------
H. Joseph Reiser
President and Chief Executive Officer
Date August 14, 2002 By /s/ Lawrence R. Hoffman
-------------------- ----------------------------------------------
Lawrence R. Hoffman
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
21