Summary of CELGENE CORP /DE/

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Information
Certain statements contained or incorporated by reference in this Quarterly Report on Form 10-Q are forward-looking statements concerning our business, results of operations, economic performance and financial condition based on our current expectations. These forward-looking statements are not guarantees of future performance and involve risks and uncertainties that could cause actual results to differ materially from those implied by such forward-looking statements. Given these risks and uncertainties, you are cautioned not to place undue reliance on any forward-looking statements. Executive Summary
Celgene Corporation and its subsidiaries (collectively "we" or "our") is a global integrated biopharmaceutical company primarily engaged in the discovery, development and commercialization of innovative therapies designed to treat cancer and immune-inflammatory related diseases. Our primary commercial stage products are REVLIMIDŽ (lenalidomide), THALOMIDŽ / Thalidomide and VIDAZAŽ (azacitidine for injection). REVLIMIDŽ was approved by the U.S. Food and Drug Administration, or FDA, the European Commission, or the EC, the Swiss Agency for Therapeutic Products, or Swissmedic, the Australian Therapeutic Goods Administration, or TGA, and in October 2008 by Health Canada for treatment in combination with dexamethasone for multiple myeloma patients who have received at least one prior therapy. In addition, REVLIMIDŽ was approved by the FDA and the Canadian Therapeutic Products Directorate for treatment of patients with transfusion-dependent anemia due to low- or intermediate-1-risk myelodysplastic syndromes, or MDS, associated with a deletion 5q cytogenetic abnormality with or without additional cytogenetic abnormalities. We are now launching REVLIMIDŽ in the European markets and preparing to launch in Canada and Australia. THALOMIDŽ was approved by the FDA for treatment in combination with dexamethasone for patients with newly diagnosed multiple myeloma and is also approved for the treatment and suppression of cutaneous manifestations of erythema nodosum leprosum, or ENL, an inflammatory complication of leprosy. In April 2008, the TGA approved a supplemental filing granting Thalidomide PharmionŽmarketing approval for use in combination with melphalan and prednisone for patients with untreated multiple myeloma or ineligible for high dose chemotherapy and also granted Thalidomide PharmionŽ marketing approval in combination with dexamethasone for induction therapy prior to high dose chemotherapy with autologous stem cell rescue, for the treatment of patients with untreated multiple myeloma. In addition, in April 2008, Thalidomide PharmionŽ was granted full marketing authorization by the EC for use in combination with melphalan and prednisone as a treatment for patients with newly diagnosed multiple myeloma. VIDAZAŽ is a pyrimidine nucleoside analog that has been shown to reverse the effects of DNA hypermethylation and promote subsequent gene re-expression. VIDAZAŽ was licensed from Pharmacia & Upjohn, now part of Pfizer, Inc., and was approved by the FDA for the treatment of all subtypes of MDS. Additionally, VIDAZAŽ was granted orphan drug designation by the FDA for the treatment of acute myeloid leukemia. We sell ALKERANŽ in the United States, which we obtain through a supply and distribution agreement with GlaxoSmithKline, or GSK. The agreement with GSK expires in March 2009 and the current expectation is that it will not be renewed. Subsequent to expiration of the agreement, GSK will be required to pay Celgene a royalty on sales of the product made by GSK for the first 24 months following expiration. We also sell FOCALINŽ, which we sell exclusively to Novartis Pharma AG, or Novartis. Another source of revenue is derived from royalties which we primarily receive from Novartis on its sales of the entire family of RITALINŽ drugs and FOCALIN XRŽ.
In the second quarter of 2008, we received FDA and the European Medicines Agency, or EMEA, clearance to open our new manufacturing facility in Switzerland. This state of the art facility provides us with operational and financial advantages for delivering REVLIMIDŽ and potentially other oral therapies to patients worldwide.

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On March 7, 2008, we acquired all of the outstanding common stock and stock options of Pharmion Corporation in a transaction accounted for under the purchase method of accounting. Under the purchase method of accounting, the assets and liabilities of Pharmion were recorded as of the acquisition date, at their respective fair values, and consolidated with our financial statements. Prior to the acquisition, Pharmion was a global biopharmaceutical company that acquired, developed and commercialized innovative products for the treatment of hematology and oncology patients. We acquired Pharmion to enhance our portfolio of therapies for patients with life-threatening illnesses worldwide with the addition of Pharmion's marketed products, and several products in development for the treatment of hematological and solid tumor cancers. Pharmion's results of operations are included in our consolidated financial statements from the date of acquisition. The purchase price, including acquisition-related fees and all other costs, as determined on March 7, 2008 was $2.761 billion and includes the previously owned Pharmion shares at historical cost. This amount was based on the total number of Pharmion shares outstanding, including Pharmion shares owned by Celgene at that time and Pharmion stock options outstanding. The impact of purchase accounting, based on a preliminary valuation, resulted in charges in the nine-month period ended September 30, 2008 including $1.74 billion for acquired in-process research and development (IPR&D), $76.2 million for amortization of acquired intangible assets which are being amortized over a weighted average period of 6.5 years, and $18.7 million of the $25.0 million related to the step-up to fair value of Pharmion's product inventory. The $1.74 billion IPR&D charge related to various research and development projects which had not been completed and for which there was no alternative future use. The amount of the charge was determined by estimating the risk-adjusted future value of these projects discounted at rates between 9 percent and 11 percent.
We are dedicated to innovative research and development designed to bring new therapies to market and are involved in research in several scientific areas that may deliver proprietary next-generation therapies, such as intracellular signaling, immunomodulation and placental stem cell research. The drug and cell therapies we develop are designed to treat life-threatening diseases or chronic debilitating conditions where patients are poorly served by current therapies. Building on our growing knowledge of the biology underlying hematological and solid tumor cancers and immune-inflammatory diseases, we are investing in a range of innovative therapeutic programs that are investigating ways to treat and manage chronic diseases by targeting the disease source through multiple mechanisms of action. In March 2008, amrubicin, a third-generation fully synthetic anthracyclin obtained in the Pharmion acquisition, was granted orphan drug designation by the FDA for the treatment of small cell lung cancer. In September 2008, amrubicin was granted Fast Track product designation by the FDA for the treatment of small cell lung cancer after first-line chemotherapy. A drug designated as a Fast Track product is intended for the treatment of a serious or life-threatening condition and demonstrates the potential to provide a therapy where none exists or provide a therapy which may offer a significant improvement in safety and/or effectiveness over existing therapy. Celgene Cellular Therapeutics has successfully filed an Investigational New Drug, or IND, application with the FDA for its human placenta derived cell product (PDA001). This filing will allow a multi-center Phase I clinical trial in patients with moderate-to-severe Crohn's disease refractory to oral corticosteroids and immune suppressants to proceed.
Our future growth and operating results will depend on the successful integration of Pharmion, continued acceptance of our currently marketed products, regulatory approvals of both new products and expanded use of existing products, depth of our product pipeline and ability to commercialize these products, competition to our marketed products and challenges to our intellectual property. See also Risk Factors contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007 and Part II, Item 1A on Form 10-Q for the quarter ended March 31, 2008.

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The following tables summarize total revenues and earnings for the three- and nine-month periods ended September 30, 2008 and 2007:

                                                      Three-Month Periods Ended
                                                            September 30,                            Percent
(Amounts in thousands, except earnings per share)       2008               2007        Increase       Change

Total revenue                                       $     592,465       $  349,908     $ 242,557         69.3 %
Net income                                          $     136,814       $   38,833     $  97,981        252.3 %
Diluted earnings per share                          $        0.29       $     0.09     $    0.20        222.2 %



                                          Nine-Month Periods Ended
                                               September 30,                 Increase         Percent
                                            2008              2007          (Decrease)         Change

Total revenue                          $     1,626,527      $ 991,230      $    635,297            64.1 %
Net (loss) income                      $    (1,384,391 )    $ 151,112      $ (1,535,503 )           N/A
Diluted (losses) earnings per share    $         (3.17 )    $    0.36      $      (3.53 )           N/A

The increase in revenue for the comparative three- and nine-month periods above reflect the continued growth of REVLIMIDŽ and inclusion of sales of former Pharmion products. The net loss in the nine-month period ended September 30, 2008 was primarily due to an in-process research and development charge and amortization of acquisition intangibles related to our acquisition of Pharmion in March 2008, which offset the favorable impact of increased revenues. Results of Operations:
Three-Month Periods Ended September 30, 2008 and 2007 Total Revenue: Total revenue and related percentages for the three-month periods ended September 30, 2008 and 2007 were as follows:

                                         Three-Month Periods Ended
                                               September 30,                 Increase         Percent
(Amounts in thousands)                     2008               2007          (Decrease)         Change

Net product sales:
REVLIMIDŽ                              $     342,620       $  199,261      $    143,359            71.9 %
THALOMIDŽ / Thalidomide                      132,368          110,730            21,638            19.5 %
VIDAZAŽ                                       63,531                -            63,531             N/A
ALKERANŽ                                      21,802           18,858             2,944            15.6 %
Other                                          6,696            2,320             4,376           188.6 %

Total net product sales                $     567,017       $  331,169      $    235,848            71.2 %
Collaborative agreements and other
revenue                                        2,402            4,616            (2,214 )         -48.0 %
Royalty revenue                               23,046           14,123             8,923            63.2 %

Total revenue                          $     592,465       $  349,908      $    242,557            69.3 %

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REVLIMIDŽ net sales increased for the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007 primarily due to increased unit sales in the United States and international markets. Increased market penetration and the increase in duration of patients using REVLIMIDŽ in multiple myeloma accounted for most of the U.S. growth. International sales in the 2008 three-month period reflect the expansion of our international commercial activities in over 65 countries.
THALOMIDŽ / Thalidomide net sales increased for the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007 primarily due to the inclusion of 2008 sales recorded by former Pharmion entities.
VIDAZAŽ was acquired as part of the purchase of Pharmion effective March 7, 2008.
ALKERANâ net sales were higher for the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007 primarily due to an increase in unit sales of the injectable form.
Net product sales for the three-month period ended September 30, 2008 increased $235.8 million, or 71.2%, compared to the three-month period ended September 30, 2007. The change was comprised of net volume increases of $204.1 million, or 61.7%, as well as price increases of $27.6 million, or 8.3%, and impact of foreign exchange of $4.1 million or 1.2%.
Collaborative Agreements and Other Revenue: Revenues from collaborative agreements and other sources declined by $2.2 million for the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007 due to the elimination of license fees and amortization of deferred revenues related to Pharmion.
Royalty Revenue: Royalty revenue totaled $23.0 million for the three-month period ended September 30, 2008, representing an increase of $8.9 million, compared to the three-month period ended September 30, 2007. The increase was primarily due to amounts received from Novartis on sales of the entire family of RITALINŽ drugs and FOCALIN XRŽ. Royalty revenue for the three-month period ended September 30, 2007 was unfavorably impacted by a decline in Novartis' sales volume which was impacted by a drawdown of its wholesalers' inventories. Gross to Net Sales Accruals: We record gross to net sales accruals for sales returns and allowances; sales discounts; government rebates; and chargebacks and distributor service fees.
We base our sales returns allowance on estimated on-hand retail/hospital inventories, measured end-customer demand as reported by third-party sources, actual returns history and other factors, such as the trend experience for lots where product is still being returned or inventory centralization and rationalization initiatives conducted by major pharmacy chains, as applicable. If the historical data we use to calculate these estimates does not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that period could be materially affected. Under this methodology, we track actual returns by individual production lots. Returns on closed lots, that is, lots no longer eligible for return credits, are analyzed to determine historical returns experience. Returns on open lots, that is, lots still eligible for return credits, are monitored and compared with historical return trend rates. Any changes from the historical trend rates are considered in determining the current sales return allowance. THALOMIDŽ is drop-shipped directly to the prescribing pharmacy and, as a result, wholesalers do not stock the product. REVLIMIDŽ is distributed primarily through contracted pharmacies lending itself to tighter controls of inventory quantities within the supply channel and, thus, resulting in lower returns activity to date. VIDAZAŽand ALKERANŽ are sold in the United States to pharmaceutical wholesalers, who in turn distribute product to physicians, retail pharmacies, hospitals and other institutional customers.

Sales discount accruals are based on payment terms extended to customers.

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Government rebate accruals are based on estimated payments due to governmental agencies for purchases made by third parties under various governmental programs. U.S. Medicaid rebate accruals are based on historical payment data and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate amount formula established by the Center for Medicaid and Medicare Services. Certain foreign markets have government-sponsored programs that require rebates to be paid and accordingly the rebate accruals are determined primarily on estimated eligible sales.

Chargebacks and distributor service fees accruals are based on the differentials between product acquisition prices paid by wholesalers and lower government contract pricing paid by eligible customers covered under federally qualified programs. Distributor services accruals are based on contractual fees to be paid to the wholesale distributor for services provided. On January 28, 2008, the Fiscal Year 2008 National Defense Authorization Act was enacted, which expands TRICARE to include prescription drugs dispensed by TRICARE retail network pharmacies. TRICARE rebate accruals reflect this program expansion and are based on estimated Department of Defense eligible sales multiplied by the TRICARE rebate formula.

See Critical Accounting Policies for further discussion of gross to net sales accruals.
Gross to net sales accruals and the balance in the related allowance accounts for the three-month periods ended September 30, 2008 and 2007 were as follows:

                               Returns                                             Chargebacks
(Amounts in thousands)           and                             Government         and Dist.
2008                          Allowances        Discounts         Rebates         Service Fees         Total

Balance at June 30, 2008     $     17,949      $     3,195      $     23,481      $      20,571      $  65,196
Allowances for sales
during 2008                           948            9,065             9,579             22,514         42,106
Credits/deductions issued
for prior year sales               (2,439 )              -               (44 )              (22 )       (2,505 )
Credits/deductions issued
for sales during 2008                (686 )         (9,188 )          (9,319 )          (22,996 )      (42,189 )

Balance at September 30,
2008                         $     15,772      $     3,072      $     23,697      $      20,067      $  62,608




                               Returns                                             Chargebacks
(Amounts in thousands)           and                             Government         and Dist.
2007                          Allowances        Discounts         Rebates         Service Fees         Total

Balance at June 30, 2007     $     14,944      $     2,617      $      9,167      $       9,058      $  35,786
Allowances for sales
during 2007                         4,015            7,640             6,626             19,083         37,364
Allowances for sales
during prior periods                6,022                -                 -                  -          6,022
Credits/deductions issued
for prior year sales               (4,010 )            (23 )             (29 )                -         (4,062 )
Credits/deductions issued
for sales during 2007              (1,545 )         (7,151 )          (5,930 )          (16,514 )      (31,140 )

Balance at September 30,
2007                         $     19,426      $     3,083      $      9,834      $      11,627      $  43,970

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A comparison of allowances for sales within each of the four categories noted above for the three-month periods ended September 30, 2008 and 2007, respectively, follows:
Returns and allowances decreased by $9.1 million for the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007 primarily due to reduced THALOMIDŽ inventory in the sales channel due to the 2007 THALOMIDŽ inventory centralization and rationalization at several major pharmacy chains, which also resulted in additional returns during 2007. In addition, the 2007 period includes an increase in THALOMIDŽ returns resulting from the anticipated increase in use of REVLIMIDŽin multiple myeloma. Discounts increased by $1.4 million for the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007 primarily due to increased sales of REVLIMIDâ, as well as the inclusion of former Pharmion products, which resulted in additional discounts taken. Government rebates increased by $3.0 million in the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007 primarily due to the increased international government rebates resulting from our global expansion, as well as the inclusion of former Pharmion products. Chargebacks and distributor service fees increased by $3.4 million in the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007 primarily due the new TRICARE rebate program, as well as the inclusion of former Pharmion products.
Operating Costs and Expenses: Operating costs, expenses and related percentages for the three-month periods ended September 30, 2008 and 2007 were as follows:

                                         Three-Month Period Ended
                                               September 30,                               Percent
(Amounts in thousands)                     2008              2007          Increase         Change

Cost of goods sold (excluding
amortization expense)                  $      70,534       $  34,066      $   36,468           107.1 %
Percent of net product sales                    12.4 %          10.3 %

Research and development               $     160,911       $ 130,841      $   30,070            23.0 %
Percent of total revenue                        27.2 %          37.4 %

Selling, general and administrative    $     168,607       $  94,736      $   73,871            78.0 %
Percent of total revenue                        28.5 %          27.1 %

Amortization of acquired intangible
assets                                 $      32,833       $   2,290      $   30,543             N/A

Cost of Goods Sold (excluding amortization expense): Cost of goods sold increased by $36.5 million for the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007 primarily due to increased unit volume for REVLIMIDâ, increased material costs for ALKERANâ for injection and the inclusion of $35.3 million in cost of sales related to former Pharmion products, particularly VIDAZAâ and Thalidomide Pharmionâ, including $7.5 million of the $25.0 million of inventory step-up. As a percent of net product sales, cost of goods sold (excluding amortization expense) increased to 12.4% in the 2008 three-month period from 10.3% in the 2007 three-month period primarily due to the inclusion of higher costs for VIDAZAâ and ALKERANâ and the $7.5 million of inventory step-up.

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Research and Development: Research and development expenses increased by $30.1 million for the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007, primarily due to the increase in spending related to clinical research and development in support of multiple programs, including REVLIMIDâ, other IMiDsâand other compounds across a broad range of diseases, the inclusion of expenses for former Pharmion entities which were partly related to amrubicin , increased spending for regulatory affairs primarily due to the expansion of REVLIMIDâ in international markets and the collaborative arrangement with Acceleron Pharma Inc., or Acceleron. The increase was partly offset by the 2007 inclusion of a combined $41.1 million in upfront payments for collaborative research and development arrangements for early stage compounds with Array BioPharma Inc., or Array, and PTC Therapeutics, or PTC. The following table provides an additional breakdown of research and development expenses:

                                                    Three-Month Periods Ended
                                                          September 30,                 Increase
(Amounts in thousands)                                2008               2007          (Decrease)

Human pharmaceutical clinical programs            $      83,347       $   32,700      $     50,647
Other pharmaceutical programs                            60,959           83,868           (22,909 )
Biopharmaceutical discovery and development              12,165           10,360             1,805
Placental stem cell and biomaterials                      4,440            3,913               527

Total                                             $     160,911       $  130,841      $     30,070

Other pharmaceutical programs for the three-month periods ended September 30, 2008 and 2007 include spending for toxicology, analytical research and development, drug discovery, quality and regulatory affairs. Spending for the three-month period ended September 30, 2007 includes a combined $41.1 million in upfront payments for collaborative research and development arrangements for early stage compounds with Array and PTC.
Research and development expenditures support ongoing clinical progress in multiple proprietary development programs for REVLIMIDâ and other IMiDsâcompounds; for VIDAZAâ; amrubicin, our lead compound for small cell lung cancer; apremilast (CC-10004), our lead anti-inflammatory compound that inhibits PDE-4, which results in the inhibition of multiple proinflammatory mediators such as TNF-? and which is currently being evaluated in Phase II clinical trials in the treatment of psoriasis and psoriatic arthritis; CC-4047, CC-11006 and CC-11050, which are currently either being evaluated in Phase I clinical trials or for which Phase II clinical trials are planned or ongoing; and our kinase and ligase inhibitor programs as well as the placental stem cell program. The Company and Acceleron have initiated Phase II studies of ACE-011 in multiple myeloma patients suffering from cancer-related bone loss.
Selling, General and Administrative: Selling, general and administrative expenses increased by $73.9 million for the three-month period ended September 30, 2008 compared to the three-month period ended September 30, 2007, primarily reflecting an increase in marketing expenses of $27.4 million, sales force costs of $14.3 million, administrative expenses of $20.5 million and donations to non-profit foundations of $7.9 million. The increase reflects the integration of the former Pharmion commercial organization, marketing and sales expenses related to ongoing product launch activities for REVLIMIDâ and Thalidomide in Europe, Canada and Australia. The increase also reflects the activities related to the relaunch of VIDAZAâ in the United States after obtaining an expanded FDA approval to reflect new overall survival achieved in the AZA-001 survival study of patients with higher-risk MDS and launch in Europe. The increase in expense also reflects the continued expansion of our international commercial activities in over 65 countries.

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