**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

** **

**Form 10-K**

** **

**AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the fiscal year ended December 31, 2003**

 

**Commission File Number 0-15313**

 

**SAVIENT PHARMACEUTICALS, INC.**

(Exact name of Registrant as specified in itscharter)

 
| **Delaware**                                                                 |   | **13-3033811**                           |
|------------------------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization)              |   | (I.R.S. Employer  Identification Number) |
|                                                                         |   |                                     |
| **One Tower Center, 14th Floor,  East Brunswick, New Jersey**                |   | **08816**                                |
| (Address of principal executive offices)                                     |   | (Zip Code)                               |
|                                                                         |   |                                     |
| Registrant’s telephone number, including  area code: **(732) 418-9300** |
|                                                                         |   |                                     |
| Securities registered pursuant to Section  12(b) of the Act:                 |
| **Common Stock, $.01 par value**                                             |
| (Title of class)                                                             |
|                                                                         |   |                                     |
| Securities registered pursuant to Section  12(g) of the Act:                 |
| **None**                                                                     |
| (Title of each class)                                                        |

 

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

YES ý     NO o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicate by check mark whether the Registrant is an accelerated filer(as defined in Rule 12b-2 of the Act). Yes ý  No o

 

As of March 5, 2004, the number of shares of Common Stock outstandingwas 59,799,345.  The aggregate marketvalue of Common Stock held by non-affiliates of the registrant (based on theclosing price of these securities as reported by the National Association ofSecurities Dealers Automated Quotation System on June 30, 2003) isapproximately $277,769,680.  Shares ofCommon Stock held by executive officers and directors of the registrant are notincluded in the computation.  However,the registrant has made no determination that such individuals are “affiliates”within the meaning of Rule 405 under the Securities Act of 1933.

 

**Documentsincorporated by reference:**

 

Portions of the Registrant’s definitive proxy statement for its 2004annual meeting of stockholders are incorporated by reference into Part III ofthis report.

 

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**PARTI**

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**ITEM 1.**     **BUSINESS**

 

General Overview

 

We are engaged in the research, development,manufacture and marketing of pharmaceutical products that address unmet medicalneeds in both niche and larger market segments.  We distribute our products on a worldwide basis primarily througha direct sales force in the United States (including both Savient employees andrepresentatives of a contract sales organization), the United Kingdom (for ouroral liquid products) and Israel and primarily through third-party license anddistribution relationships elsewhere. Through a combination of internalresearch and development, acquisitions, collaborative relationships andlicensing arrangements, Savient has assembled a diverse portfolio oftherapeutic products, many of which are currently being marketed, several ofwhich are in registration or clinical trials and one of which is inpre-clinical development.

 

Savient, formerly known as Bio-Technology GeneralCorp., was founded in 1980 to develop, manufacture and market novel therapeuticproducts.  In September 2002, weacquired Rosemont Pharmaceuticals Limited (“Rosemont”), a specialtypharmaceutical company located in the United Kingdom that develops,manufactures and markets primarily prescription products in oral liquidform.  Savient’s overall administration,finance, business development, human clinical studies, U.S. sales and marketingactivities, quality assurance and regulatory affairs are primarily coordinatedat our headquarters in East Brunswick, New Jersey.  Pre-clinical studies, research and development activities andmanufacturing of our biotechnology-derived products are primarily carried outthrough Bio-Technology General (Israel) Ltd. (“BTG-Israel”), our wholly ownedsubsidiary in Israel. Development, manufacture, distribution and sale of ouroral liquid products are principally carried out through Rosemont in the UnitedKingdom.

 

Products and Applications(1)

 

Our largest selling product is Oxandrin, which weare marketing in the United States primarily with a direct sales force(including both Savient employees and representatives of a contract salesorganization), as well as co-promoting to the long-term care market through athird party.  Our other significantcommercialized products are Delatestryl, which we are distributing on our ownin the United States, our oral liquid products, which we are marketing on ourown in the United Kingdom, and Bio-Tropin, our human growth hormone productthat is being marketed in Japan and Europe by third parties under licensingarrangements.  Savient’s othercommercialized products are generally being marketed by third parties underlicensing arrangements and by BTG-Israel in Israel.

 

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(1) Mircette is a trademark of Organon, Inc.Arthrease is a trademark of DePuy Orthopaedics, Inc., except in Israel, whereit is owned by BTG-Israel.  Puricase isa trademark of Mountain View Pharmaceuticals, Inc.  Tev-Tropin is a trademark of Teva Pharmaceutical Industries,Inc.  Fibrimage is a trademark ofDraximage.  Silkis is a trademark ofGalderma, except in Israel where it is owned by Solvay. All other trademarksare owned by Savient.

 

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The following table presents information regardingSavient’s principal products:

 
| **Product**                                                                                     |   | **Indication/Application**                                     |   | **Territory**                                                                          |
|-------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|----------------------------------------------------------------------------------------|
| ***COMMERCIALIZED  PRODUCTS****:*                                                               |   |                                                           |   |                                                                                   |
| **Oxandrin**®(oxandrolone)                                                                 |   | Involuntary weight loss                                        |   | United States and to a lesser extent various other countries                           |
| **Oral Liquid  Pharmaceutical Products**                                                        |   | Oral liquid formulations of medicines                          |   | United Kingdom and to a lesser extent on an export basis                               |
| **Bio-Tropin**TM(human growth hormone)                                                          |   | Growth hormone deficiency in children and Turner syndrome      |   | Japan, Europe and various other countries                                              |
| **Delatestryl**®(injectable testosterone)                                                  |   | Hypogonadism                                                   |   | United States                                                                          |
| **BioLon**®(sodium hyaluronate)                                                            |   | Injectable viscous solution for ophthalmic surgical procedures |   | Worldwide                                                                              |
| **Mircette**®(oral contraceptive dosing regimen)                                           |   | Reduced pregnancy risk                                         |   | United States                                                                          |
| **Silkis**®(vitamin D derivative)                                                          |   | Anti-psoriasis/contact dermatitis agent/other skin disorders   |   | Europe and Latin America                                                               |
| **Bio-Hep-B®**                                                                             |   | Hepatitis-B vaccine                                            |   | Israel and the Far East                                                                |
| **Sodium Hyaluronate  for Osteoarthritis**(formerly known as ArthreaseTM)  (sodium hyaluronate) |   | Osteoarthritic knee pain                                       |   | Europe and Israel   Registration pending in the United States and other countries |
| **Insulin**                                                                                     |   | Diabetes                                                       |   | Eastern Europe                                                                         |
|                                                                                            |   |                                                           |   |                                                                                   |

 
|                                                 |   | **Status**                      |
|------------------------------------------------------|--------|---------------------------------|
| ***PRODUCTS IN  REGISTRATION AND CLINICAL TRIALS:*** |   |                            |
| **Fibrimage**®(thrombus-imaging agent)          |   | Diagnosis of deep vein thrombus |   | Phase III |
| **Prosaptide**                                       |   | Treatment of neuropathic pain   |   | Phase II |
| **Puricase**®                                   |   | Refractory gout                 |   | Phase II |

 
|                                                     |   | **Status**                                             |
|----------------------------------------------------------|--------|--------------------------------------------------------|
| ***PRODUCTS IN  LABORATORY AND PRE-CLINICAL RESEARCH:*** |   |                                                   |
| **BioGenerica**                                          |   | Generic version of one biologic pharmaceutical product |   | Pre-clinical development |
| **BTG-271**                                              |   |                                                   |   | Research |

 

Commercialized Products

 

OXANDRIN (oxandrolone)

 

Savient’s Oxandrin is an oral anabolic agent thatis an analogue of testosterone and is used to promote weight gain followinginvoluntary weight loss.  There isgrowing recognition in the medical community that interventional management ofdisease-related weight loss (cachexia) is an extremely important facet ofpatient care.  Involuntary weight lossis associated with a relatively wide range of clinical conditions that, unlessmonitored and carefully managed, can lead to a delay in recovery and a rapidescalation in the incidence of infection, morbidity and ultimately death.  Published studies indicate that the loss ofonly 10% (the clinical definition of cachexia) of an individual’s lean bodymass (*i.e.*,muscle) is associated with a 20% increase in mortality.  At 35% loss of lean body mass, the deathrate approaches 100%.  Additionally,weight loss may lead to increased intensive care and longer recovery andrehabilitation periods, thereby increasing the cost of treating the underlyingdisease.  We estimate the incidence ofinvoluntary weight loss in the United States is several million persons eachyear.

 

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The causes of involuntary weight loss suffered bypersons with a wide variety of chronic and acute diseases are believed to bethe result of a number of factors, with inadequate nutrient intake and analtered metabolic state playing central roles. Malnutrition, the pathophysiology of which is frequently unknown, is theone feature common to all weight loss disorders, regardless of etiology.  It is generally accepted that anabolicagents promote protein synthesis, which enhances the building of lean body massand ultimately weight gain.  However,because natural androgens, such as testosterone, also possess androgenic or virilizingproperties that have undesirable side-effects when used for treating weightloss, particularly in women, potent anabolic and weak androgenic effects arepreferable drug properties for the treatment of this condition.  Clinical trials have shown that Oxandrin isan effective adjunctive therapy to promote weight gain in a variety ofpathophysiologic conditions and that it has low androgenic activity.  Unlike many other anabolic agents, Oxandrinappears to undergo less overall metabolic transformation in the liver, whichSavient believes offers a safety advantage over other androgenic/anabolicalternatives that are fully metabolized in the liver and have the potential tocause liver toxicity.  Unlike appetite enhancerscurrently used for treating weight loss, studies indicate that Oxandrinpromotes weight gain primarily through the building of lean body mass ratherthan fat and water. Savient also believes that Oxandrin is preferable to humangrowth hormone for treatment of weight loss because of the ease ofadministration of Oxandrin (oral versus injectable) and its lower cost.

 

In 1964, the United States Food and DrugAdministration (“FDA”) approved Oxandrin for weight gain following weight lossdue to severe trauma, chronic infection or extensive surgery and for patientswho, without definite pathophysiologic reasons, fail to gain or to maintainnormal weight.  This approval permitsthe use of Oxandrin to treat disease-related weight loss other than starvation.  G.D. Searle & Company Limited (“Searle”),now a subsidiary of Pfizer, which originally developed and obtained FDAapproval of Oxandrin, ceased marketing Oxandrin in the 1980s. Savient acquiredthe rights to Oxandrin from Searle in 1990, and Searle contract manufacturesoxandrolone, the active pharmaceutical ingredient of Oxandrin, forSavient.  See “—Manufacturing and SupplyArrangements,” “—Risk Factors—We are dependent on Oxandrin sales for asignificant portion of our revenue, and any decrease in Oxandrin sales couldadversely affect our results of operations and our ability to conduct ourbusiness” and “—We are dependent on third party suppliers, and any failure bythem to fulfill their obligations to us could adversely affect our ability tomeet demand for our products.”

 

With the growing awareness of the importance ofcombating disease-related involuntary weight loss, Savient decided to re-launchthe product on its own under the Oxandrin trade name. Savient started sellingOxandrin in the United States for indications under the FDA approval inDecember 1995.  In October 2002, Savientintroduced a 10mg Oxandrin tablet to complement its existing 2.5mg tablet.  The new tablet strength, which allowspatients taking 20mg a day, the most common dosage, to convert from eight 2.5mg tablets to the convenience of one 10mg tablet twice daily, is expected toimprove patient adherence to therapy as well as treatment outcomes.  By the end of 2003, approximately one-thirdof all prescriptions were being filled with the 10mg tablet.  Until the fourth quarter of 2002, Savientsold its Oxandrin to Nova Factor, Inc., a subsidiary of Accredo Health,Incorporated, and its predecessors (collectively, “Accredo”), which then resoldthe product to wholesalers.  With theintroduction of the 10mg tablet, Savient began to sell Oxandrin directly towholesalers, although Accredo continued to distribute the 2.5mg Oxandrintablets in its inventory until they completed the liquidation of theirinventory position in March 2003.  InApril 2000, Savient signed an agreement with the Ross Products Division ofAbbott Laboratories (“Ross”) to co-promote Oxandrin in the long-term caremarket in the United States.

 

Since our launch of Oxandrin in December 1995, asignificant portion of Oxandrin sales has been for treatment of patients sufferingfrom AIDS-related weight loss.  In orderto increase market awareness and acceptance of Oxandrin for the treatment ofother disease-related weight loss conditions, Savient has been supportinginvestigator-originated post-approval clinical studies at leading institutionsto provide further clinical support for the use of Oxandrin for suchconditions.  To date, clinical studieshave been completed relating to:

 

•                                          the effect of Oxandrin as an adjunct to promote weight gain and hastenthe rate of skin regrowth and healing in burn patients and as an adjunct topromote weight gain and hasten healing of decubitus ulcers in malnourishedpatients;

 

•                                          the use of Oxandrin for the promotion of weight gain in patientssuffering from weight loss due to chronic obstructive pulmonary disease;

 

•                                          the use of Oxandrin for the promotion of weight gain in malnourishedcancer patients; and

 

•                                          the use of Oxandrin for the promotion of weight gain in the frailelderly population.

 

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Manuscripts summarizing the results of thesestudies have been published and others are planned for submission in thefuture.  In the second half of 2003 weexpanded our marketing and sales focus for Oxandrin to include the treatment ofinvoluntary weight loss associated with cancer.

 

Inconnection with our focus on increasing market acceptance of Oxandrin for thetreatment of disease-related weight loss conditions and our commitment topharmacovigilance, we sponsored a clinical study to investigate the interactionbetween Oxandrin and warfarin, the active ingredient in many widely-usedanti-coagulant drugs.  Warfarin is anarrow therapeutic index drug. Therefore, careful titration is required in order to prevent excessiveanti-coagulation, which could cause uncontrolled bleeding, or inadequateanti-coagulation, with the risk of failing to prevent the consequences ofthromboembolic events such as life-threatening blood clots.  The study demonstrated that when warfarinwas co-administered with oxandrolone, the usual dose of warfarin necessary toachieve appropriate therapeutic effect should be decreased by 80-85% at themaximum Oxandrin dosage level of 20mg. We submitted the results of this study to the FDA, amended the Oxandrinpackage insert prescribing information and communicated the package insertchange to healthcare professionals in a “Dear Healthcare Professional” letterin accordance with FDA instructions to ensure that patient safety would not becompromised.

 

InFebruary 2004 we filed a Citizens Petition with the FDA requesting that, in theinterest of public health, the FDA establish specific bio-equivalencerequirements for oral products containing oxandrolone because of several uniqueaspects of such product, including serious safety issues regarding interactionsbetween oxandrolone and anti-coagulant drugs containing the active ingredientwarfarin.  Given the likely variabilityin bioavailability of other potential oxandrolone drugs and the careful dosetitration required for warfarin in order to prevent excessive anti-coagulationor inadequate anti-coagulation, and their respective risks, we requested in ourpetition that any company wishing to introduce an oxandrolone product into theU.S. market should, prior to the issuance of marketing approval, be required toalso conduct a clinical study to investigate the interaction between theirproduct and warfarin and demonstrate that it is identical to the interactionbetween Oxandrin and warfarin.

 

Several companies have filed drug master files withthe FDA relating to a generic oxandrolone product, and while we cannot predictwhen generic competition for Oxandrin will begin, it is possible the FDA mayapprove one or more generic versions of Oxandrin as early as mid-2004.  The introduction of generic oxandroloneproducts would materially adversely affect our Oxandrin sales, could materiallyadversely affect our results of operations, cash flows, financial condition andprofitability and may require us to scale back our business activities in certainareas.

 

Savient has been granted U.S. patents directed tothe use of oxandrolone in the treatment of skin wounds, chronic obstructivepulmonary disease and in ameliorating muscle weakness/wasting in HIV-positivepatients.  Savient has filed patent applicationsdirected to oxandrolone compositions, methods of skin and wound healing andmethods of treating burns and trauma-induced weight loss that are pending inthe United States and other countries.

 

There are limited sales of Oxandrin for pediatricgrowth disorders in Australia and Israel. In addition, Oxandrin is currently being marketed on a “name patientbasis” in Scandinavia.

 

Oral Liquid Pharmaceutical Products

 

Rosemont develops and markets oral liquidformulations of off-patent drugs to treat patients who, because of age, medicalconditions or personal preference, take medication in oral liquid form.  The primary patient population for oralliquid formulations is the elderly, although these formulations areadministered to the pediatric population as well.  Rosemont has developed over 80 oral liquid formulations ofpharmaceutical medications and has successfully positioned itself in the UnitedKingdom as “The Specialist in Oral Liquid Medicines.”

 

Under U.K. regulations, Rosemont is permitted to selltwo categories of products.  For thoseproducts for which Rosemont completes bioequivalence and stability studies, itreceives a product license from the U.K. Medicines and Healthcare ProductsRegulatory Agency (“MHRA”) and is permitted to promote such products tophysicians, nurses and pharmacists. For compounds that are not licensed in anoral liquid formulation, Rosemont holds a license to accept custom orders forsuch products, known as “Specials,” but is not permitted to promote Specials.

 

Rosemont currently sells more than 80products.  For the years ended December31, 2001, 2002 and 2003, licensed products accounted for approximately 62%, 65%and 74%, respectively, of Rosemont’s sales. Products in three therapeutic areas — central nervous system, diureticsand cardiovascular — accounted for approximately 64%, 66% and 62% of Rosemont’ssales in 2001, 2002 and 2003, respectively. Of the licensed products, 74% are branded by Rosemont (*i.e.*,sold under a Rosemont

 

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trademark) and 52% are unique in oral liquidform.  Rosemont currently produces 43Specials, including six Specials introduced during 2003, and is planning tointroduce eight additional Specials during 2004. Nine licensed products and theSpecials accounted for approximately 70% of total Rosemont sales in 2003.  Rosemont has to date focused on the U.K.domestic market and its export sales to date have been minimal.

 

Rosemont maintains an extensive list of availableSpecials.  Typically, when an ordercomes in for a Special it can be filled within 48 hours.  For a product where no Special formulationalready exists, the process of creating it takes six to nine months.  Rosemont’s strategy is to first produceproducts as Specials, then conduct bioequivalence and stability studies toobtain licensure for those products. This process generally requires two to three years.  Rosemont maintains an in-house developmentcapability to develop new products.

 

Rosemont has worked to date with compounds that arenot patent protected and has found a market niche in which it faces limitedcompetition due to the limited size of the oral liquids segment.  Rosemont’s products do not follow thetypical life cycle of off-patent drugs, as they may continue to grow for manyyears without significant price erosion. We expect Rosemont’s growth in the near term will primarily result fromnew rheumatology, pain or cardiovascular products coming off patent, targetinga mainly elderly patient population.  Inthe U.K., the oral liquids segment of the market is forecast to grow atapproximately 15% per annum over the next several years, more than double therate of growth of the U.K. pharmaceutical market as a whole.  We anticipate market growth will be drivenprimarily by the aging population and an increased awareness of the use ofoptimal formulations. We believe U.K. Government policy helps to drive theconsumption of oral liquid formulations. The U.K. Government guidelines of“best practice” and providing optimal care for the elderly (published March2001) states that “when administering medicines, in the best interests of thepatient you must consider the method of administration in the context of thecondition of the patient.”  Rosemont’scompetitors are U.K. pharmaceutical companies active in the marketing of drugsfor elderly and pediatric use.

 

Above a certain level of annual sales of brandedlicensed products to the National Health Service, pharmaceutical companies inthe U.K. generally must not exceed government-agreed pricing levels.  Given the composition of Rosemont’s businessand the projected growth rates of its branded licensed products, we do notexpect to face any price limits under the current regulations.  For Specials, Rosemont is generally free toset its own introductory prices.

 

Rosemont has used its formulation know-how todevelop an oral liquid formulation of tamoxifen (trademarked Soltamox).  Tamoxifen is an off-patent drug for thetreatment of both advanced and early stage breast cancers.  Savient now holds global rights toSoltamox.  The formulation is patentedin the U.S. and the European Union, and a patent application is pending inJapan.  Rosemont holds product registrationin Germany and Ireland and work is currently being performed to register theproduct in other E.U. countries. Rosemont is currently upgrading itsmanufacturing facility to obtain FDA approval of this facility, which is anecessary prerequisite for Savient to sell Soltamox in the U.S.  Savient filed an application for an InvestigationalNew Drug (“IND”) for Soltamox in the United States in November 2003 and the FDAapproved the clinical protocol in January 2004.

 

BIO-TROPIN (human growth hormone)

 

Human growth hormone (“hGH”) is naturally secretedby the pituitary gland and controls many physiological functions that areessential for normal development and maturation.  A deficiency of hGH results in diminished growth and, in extremecases, dwarfism.  We estimate thatcurrent annual worldwide sales of hGH for the treatment of growth hormonedeficiency are approximately $1.6 billion, and that geographic distribution ofworldwide sales is approximately 22% in Japan, 30%in the United States and 31%in Europe, with the balance in other countries.

 

Savient’s scientists first produced hGH byrecombinant DNA methods in the early 1980s. Although the FDA approved Bio-Tropin for marketing in the United Statesin May 1995, to date we have been unable to market Bio-Tropin in the UnitedStates as a result of a seven-year Orphan Drug exclusivity period granted to acompetitor, followed by extensive and continuing patent litigation withGenentech, Inc. (“Genentech”), which resulted in a settlement whereby we agreednot to market Bio-Tropin produced with our original expression system in theUnited States until July 2003, when the Genentech patent expired.  In September 1999, the FDA approvedSavient’s supplemental application for a new expression system for biosynthesisof Bio-Tropin that we believe does not infringe Genentech’s patent, although a patentissued to Novo Nordisk (“Novo”), which Savient is challenging, could precludeSavient from marketing in the United States hGH produced using this newexpression system.  See “Item 3. LegalProceedings.”

 

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In April 1993, JCR Pharmaceuticals Co., Ltd.(“JCR”), Savient’s marketing partner in Japan, received regulatory approval forhGH for the treatment of short stature, and began marketing hGH in June1993.  In December 2000, JCR receivedregulatory approval for the use of Savient’s hGH to treat Turner syndrome, acondition in which girls born with non-functioning ovaries do not developsecondary sexual characteristics and are shorter than normal.  In January 1995, we granted JCR exclusivedistribution rights in The People’s Republic of China for all hGH-relatedpharmaceutical indications.  In January1998, JCR signed an agreement memorandum with Sumitomo Pharmaceuticals Co.,Ltd. (“Sumitomo”), relating to a marketing alliance for the marketing of hGH inJapan.  Under the terms of the agreementmemorandum, JCR is supplying Sumitomo with our hGH and Sumitomo commenceddistribution in Japan in January 1999, following termination of its agreementto distribute GenotropinTM, the recombinant human growth hormone product ofPharmacia Upjohn Co., Ltd., now a subsidiary of Pfizer, at the end of1998.  Upon termination of Pharmacia’sagreement with Sumitomo, Pharmacia began to market Genotropin in Japan on itsown.

 

Savient sells bulk product to JCR at a fluctuating pricebased on changes in the yen/dollar relationship and government price controls,as the Japanese Health Ministry has in recent years put significant pressure onprice on an industry-wide basis.  Webelieve that our sales of hGH to JCR measured in dollar terms will decrease dueto this pricing pressure.  Savient isobligated to indemnify JCR for all expenses incurred and damages suffered byJCR as a result of any infringement of third-party patents.  A substantial portion of our hGH sales hasbeen to JCR.  In 2003, we renewed ouragreement with JCR for an additional 10 years and it now expires in November2013. See “Item 3. Legal Proceedings.”

 

In November 1992, Savient entered into an exclusivedistribution agreement with the Ferring Group (“Ferring”) for the marketing ofour human growth hormone for enhancing growth and stature in growth hormonedeficient children in Europe and the countries comprising the former SovietUnion.  Sales began during the fourthquarter of 1994, and our hGH is now approved in more than 20 countries inFerring’s territory. Savient sells finished product to Ferring and receives apercentage of Ferring’s net sales. Ferring has the right to purchase bulk product from Savient andformulate, vial and package the product. Savient is obligated to indemnifyFerring for all expenses incurred and damages suffered by Ferring as a resultof any infringement of third-party patents.

 

Savient received approval for hGH from the IsraelMinistry of Health in April 1988 and began direct marketing in Israel under theBio-Tropin trademark in October 1988. In July 1992, Bio-Tropin was approved by the Israel Ministry of Healthfor the treatment of a second indication, Turner syndrome.  In July 1997, Bio-Tropin was approved by theIsrael Ministry of Health for the treatment of children suffering from renalinsufficiency.  See “Item 3.  Legal Proceedings” for information regardinga Genentech patent application filed in Israel relating to human growth hormonethat we are opposing.

 

In September 1999, we granted Teva PharmaceuticalIndustries Ltd. (“Teva”) exclusive marketing rights for hGH in the UnitedStates, effective July 1, 2003 (subsequently amended to July 1, 2000).  Under the terms of the agreement we willsell finished product to Teva and receive a percentage of Teva’s netsales.  We are unable to predict when orif Teva will begin marketing our human growth hormone product in the UnitedStates.  Teva plans to market our humangrowth hormone product under the name Tev-TropinTM.  In connection with execution of the agreement, we received a $10million license fee from Teva.  Theintroduction of Tev-TropinTM in the U.S. is currently the subject oflitigation.  See “Item 3.  Legal Proceedings.”

 

Savient’s human growth hormone is also being soldby third-party distributors in several countries in South America and the FarEast.  In addition, regulatory approvalto market Savient’s human growth hormone is pending in South Africa and severalPacific Rim countries.

 

DELATESTRYL (testosterone enanthate)

 

Delatestryl is Savient’s injectable testosteroneproduct used to treat men with hypogonadism (testosterone deficiency), acondition associated with reduced libido, insufficient muscle development andbone loss. Savient acquired the approved New Drug Application (“NDA”) andtrademark from Bristol-Myers Squibb Company (“BMS”).  We began the sale and distribution of Delatestryl in mid-1992.Savient pays BMS royalties based on its sales of Delatestryl.  BMS contract manufactured Delatestryl forSavient until it closed its manufacturing facility in July 2001.  In 2003, Sabex 2002 Inc. of Canada (“Sabex”)became our contract manufacturer of Delatestryl, and we obtained FDA approvalof the Delatestryl manufactured by Sabex in August 2003.  To date we have not actively promoted ourDelatestryl product.  See “—RiskFactors—We are dependent on third-party suppliers, and any failure by them tofulfill their obligations to us could adversely affect our ability to meetdemand for our products.”

 

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Demand for Delatestryl increased significantlybeginning in late 1998 when the FDA stopped the production of a competinggeneric injectable testosterone product used to treat men with hypogonadism. InMarch 2004, the FDA allowed the reintroduction of this product into the market,and  we expect the reintroduction ofthis generic product will adversely affect our sales of Delatestryl .  In addition, testosterone gels and patchesare becoming more popular.  While thisincreases the demand for testosterone, we believe that our injectable productcannot compete with these gels and patches, and any growth in Delatestrylmarket share will come from switching patients from Pfizer’s injectabletestosterone product currently on the market.

 

BIOLON (sodium hyaluronate)

 

Sodium hyaluronate is a high-viscosity, gel-likefluid. Savient has developed a fermentation-derived sodium hyaluronate-basedproduct, trademarked BioLon, for use in ophthalmic surgery procedures such ascataract removal and intraocular lens implantation.  BioLon is a syringe filled with a 1% sodium hyaluronate solutionthat facilitates such surgery by acting as a highly viscous lubricant allowingfor surgical manipulation of the ocular tissues.

 

Sales of BioLon commenced in early 1993, and BioLonis currently being sold through third-party distributors in the United Statesand more than 20 othercountries, including most countries in Europe and several countries in LatinAmerica, Africa, Asia and the Far East. The distribution agreements generally provide for license fees and/orroyalties and most require minimum guaranteed purchases in the first yearsafter registration and commencement of commercialization.  Sales of BioLon in Italy, Spain and Portugalaccounted for slightly more than 50% of our 2003 BioLon sales.

 

In June 1995, BioLon was approved as a medicaldevice by mdc, a European Union medical device certification body.  As a result, a CE mark granted to theproduct and appearing on the product box allows Savient’s partners to freelymarket BioLon throughout Europe.

 

We have completed the development of asecond-generation product, BioLon PrimeTM, that has a higherviscosity than BioLon and gives increased support inside the chamber of the eyeduring the surgical procedure.  Thisproduct was granted a CE mark in June 1997, and approval was received in Israelin February 1998.  The product wasapproved in Canada and Brazil in July 1999 and September 1999, respectively,and sales commenced in 2000.

 

MIRCETTE (oral contraceptive dosing regimen)

 

Savient acquired a patent to an oral contraceptivedosing regimen that is intended to reduce both the risk of pregnancy, in theevent a woman forgets to take a pill, and the breakthrough bleeding andspotting experienced by many women who use conventional low-dose oralcontraceptives.

 

Organon, Inc., a subsidiary of AKZO Nobel N.V., haslicensed Savient’s patented oral contraceptive dosing regimen and has developeda product using this regimen with the progestogen desogestrel.  Organon filed an NDA with the FDA in April1997 and, following receipt of approval in April 1998, started to sell theproduct under the trademark Mircette in the third quarter of 1998.  Our license agreement with Organon providesfor milestone payments and royalties on sales. Regulatory authorities in Germany and the United Kingdom have declinedto approve Organon’s desogestrel product using the oral contraceptive regimenas a result of reported higher incidence of thromboembolic disease thancompeting levonorgestrel oral contraceptive regimens.

 

In 2000, Duramed Pharmaceuticals, Inc. filed anAbbreviated New Drug Application with the FDA seeking approval of a genericversion of Mircette.  Pursuant to itslicense agreement with Organon, Savient filed a patent infringement suitagainst Duramed, which was subsequently acquired by Barr Laboratories.  Discovery and document production in thislitigation are underway.  Organon’ssales of Mircette, and our royalties, have been adversely affected by Barr’slaunch of its generic version of Mircette in 2002.  See “Item 3.  LegalProceedings.”

 

SILKIS (vitamin D derivative)

 

Savient has obtained an exclusive license topatents covering the composition and use of certain vitamin D derivatives fortopical treatment of psoriasis, dermatitis and other skin disorders. Patentshave issued in the United States, Israel and in major countries in Europe,including Great Britain.  The Britishpatent has also been extended to Singapore and Hong Kong.  In March 1996, we sublicensed exclusive rightsunder the patents in the United States to Galderma S.A. (“Galderma”).  Galderma has agreed to pay 

 

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license fees upon the attainment of certainmilestones and a royalty on sales in the United States.  The licensee of Savient’s rights under thepatents for the remainder of the world sublicensed those rights to Galderma in1996.  We receive a royalty on allcommercial sales of products containing these vitamin D derivatives incountries outside the United States in which the vitamin D derivative patentshave issued.  Although the product wasapproved in The Netherlands and Switzerland in 1995, Galderma elected to changethe formulation prior to marketing. Galderma launched Silkis in Brazil,Germany, Switzerland and The Netherlands in 2000, and it is currently beingmarketed throughout Europe and Latin America. Galderma began a Phase II/III clinical trial in the United States inearly 2002 and has advised us that it expects to introduce Silkis in the U.S.in 2007.

 

BIO-HEP-B (hepatitis-B vaccine)

 

Savient has genetically engineered a thirdgeneration vaccine against the hepatitis-B virus. Our Bio-Hep-B vaccineintegrates the S, pre-S1 and pre-S2 surface proteins of the virus.  Clinical trials in Israel, the Far East andEurope in adults, children and neonates have been completed and showed thevaccine to be safe and highly immunogenic. We believe the high immunogenicity and initial faster rate of responseof our Bio-Hep-B vaccine may provide us with a competitive advantage,particularly in the less developed countries where hepatitis-B isprevalent.  Many of these countries arepursuing hepatitis-B immunization programs for all newborns in an effort todecrease substantially the incidence of hepatitis-B.

 

Savient’s application for approval of its Bio-Hep-Bvaccine, which was filed with the Israel Health Ministry in November 1996, wasapproved in February 2000.  Thisapproval, together with a Certificate of Free Sale, has allowed Savient and itslicensees to initiate the registration process in many countries worldwide. Wecurrently market Bio-Hep-B in Israel only for adults, as price constraintsprevent us from entering the Israeli neonatal market.

 

We have licensed marketing rights to SciGen PteLtd, a Singapore company (“SciGen”), for the commercialization of Bio-Hep-B incertain Pacific Rim territories (excluding Japan) and certain other countries,including The Peoples Republic of China, Australia, New Zealand and India.Savient and SciGen have completed clinical trials in several countries. SciGenlaunched Bio-Hep-B in Vietnam in December 2002, registered Bio-Hep-B for salein the Philippines during 2002 and in Hong Kong and Singapore in 2003 and ispreparing registrations in several other countries.  Pursuant to our agreement with SciGen, during 2004 we expect totransfer our manufacturing technology to an Indian company that will use it tomanufacture Bio-Hep-B for sale in Sci-Gen’s territory.

 

In February 1998, Savient entered into developmentand licensing agreements with respect to its Bio-Hep-B product with BernaBiotech AG (formerly Swiss Serum and Vaccine Institute Berne) for WesternEurope and various other countries. Berna Biotech will purchase vaccine from Savient for distribution, andwe will receive milestone payments from Berna Biotech, as well as royalties onsales of the vaccine.  Berna Biotechexpects to file for regulatory approval in Europe in mid 2004.  Berna Biotech has advised us that theyintend to market our Bio-Hep-B product primarily to non-responders, as theyplan to market their own hepatitis-B vaccine to the general population.

 

SODIUM HYALURONATE FOR OSTEOARTHRITIS

 

Our sodium hyaluronate osteoarthritis product(“Savient HA”) is a fermentation-derived sodium hyaluronate composition wedeveloped for intra-articular injection into the knee to reduce osteoarthritispain.  We conducted a clinicalevaluation of Savient HA versus Synvisc®, the market leader, inEurope to examine the product’s efficacy and safety in treating the pain ofosteoarthritis.  The clinical trial,completed in the second half of 2000, demonstrated equivalent efficacy, andEuropean approval was obtained from mdc, one of the medical devicecertification bodies in the European Union, and a CE mark was awarded in November2000.  According to IMS Research, theU.S. market for viscosupplementation products for the treatment of knee paindue to osteoarthritis has been growing at an annual rate of more than 15% forthe past five years and it now exceeds $280 million annually.

 

Savient licensed worldwide rights to Savient HA,other than for Israel and Japan, to DePuy Orthopaedics Inc., a Johnson andJohnson Company (“DePuy”), in June 2000. DePuy started to sell the product in Europe under the Arthreasetradename in the second half of 2001 following completion of the clinicaltrial, and filed for regulatory approval in the U.S. in May 2001.  In September 2003, we reacquired rights toSavient HA from DePuy, but not the Arthrease tradename.  In October 2003 the FDA issued an approvableletter with respect to Savient HA for the treatment of pain associated withosteoarthritis of the knee.  The FDAstated in the letter that final FDA approval was subject to satisfactory

 

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inspection of our new manufacturing facility inIsrael and finalization of product labeling. An amendment to our pre-market approval application, detailing SavientHA manufacture in our new facility, was filed with FDA in December 2003.  We expect the FDA will inspect ourmanufacturing facility during the first half of 2004, which is a prerequisiteto our gaining final FDA approval to market Savient HA in the United States,once we provide the FDA with additional information it requested.  This product is marketed under the trademarkArthrease in Israel, where we own the tradename; we are currently in theprocess of choosing a name for Savient HA for the remainder of the world.

 

INSULIN

 

Insulin is a polypeptide hormone essential for thecontrol of blood glucose levels that is frequently administered to patientssuffering from diabetes mellitus, a metabolic disorder characterized byhyperglycemia resulting from relative or absolute insulin deficiency.  Biosynthetic recombinant human insulin iscurrently manufactured by two processes: in *E. coli* (by Eli Lilly and Company andHoechst AG) or in yeast (by Novo-Nordisk A/S). Savient has developed aproprietary expression system and a purification process for the efficientproduction of recombinant human insulin in *E. coli*. Patent applications relating to this process have been filed in manycountries. Savient’s insulin is identical to naturally occurring human insulinand does not differ from commercially-available insulins in terms of purity orbiological activity.

 

In January 1999, we entered into a technologytransfer and license agreement with Akzo Nobel’s wholly-owned subsidiary,Diosynth b.v., granting Diosynth rights to our recombinant human insulinproduct in most countries of the world. Under the terms of the agreement, Savient transferred its recombinanthuman insulin technology to Diosynth and Diosynth will manufacture the productin bulk form for the licensed territory. Another Akzo Nobel subsidiary, Organon, may in certain instances finishthe bulk and market it in finished form. Savient will receive license feeslinked to the achievement of certain milestones and royalties on all commercialsales of the product.  We understandthat Diosynth is working toward the launch of the product in Europe in thesecond half of 2004.

 

In January 1998, Savient entered into a licensingagreement with IBATECH Sp. z.o.o., a Polish corporation that subsequentlymerged with Bioton Sp. z.o.o (“Bioton”), covering the development, productionand commercialization of Savient’s recombinant human insulin.  Under the agreement, Bioton and Savient havecollaborated on the development of the know-how for large scale manufacturingof Savient’s recombinant human insulin for the insulin markets in Poland andseveral other East European countries. Bioton began manufacturing and selling insulin in Poland in the secondhalf of 2001 following receipt of Polish regulatory approval. Savient hasreceived certain milestone payments and receives royalties on sales of theproduct in the licensed territory.

 

We have also licensed distribution andmanufacturing rights for insulin to SciGen in the Pacific Rim, China and India.We will receive royalties on sales of insulin in the licensed territories.

 

Products in Registration and Clinical Trials

 

FIBRIMAGE (thrombus-imaging agent)

 

Fibrimage (formerly called Imagex) is a novel agentfor the detection of thrombi and blood clots in patients suffering from deepvein thrombosis or pulmonary embolism. Deep vein thrombosis, which results from the development of thrombi,causes a reduction in the venous blood flow. Pulmonary embolism is the dislodgment of a piece of thrombus and itsrelocation via the circulatory system to the lungs.  Fibrimage consists of a genetically-engineered portion of thefibrin binding domain of fibronectin attached to a radiopharmaceuticaltag.  Once injected in the patient, ittargets and binds to fibrin, a substance that is essentially present only inblood clots. Savient holds various patents covering Fibrimage in the UnitedStates and in several other countries. In August 1994, we licensed worldwide rights to the polypeptide to MerckFrosst Canada Inc. (“Merck Frosst”) for the development and commercializationof a diagnostic imaging agent for the detection of thromboembolism.  Merck Frosst filed an IND with the CanadianBureau of Biologics in April 1996.  InSeptember 1997 DRAXIS Health Inc. (“Draxis”) acquired the radio-pharmaceuticaldivision of Merck Frosst and all rights to Fibrimage.  Draxis successfully completed a Phase I study of Fibrimagein Canada in December 1997, and a Phase II study in 1999.  Although Draxis planned to initiate a PhaseIII efficacy study in Canada in February 2002, the study was placed on holdpending resolution of formulation issues. Draxis has advised us that it is planning to initiate the Phase IIIstudy in both Canada and the U.S. during 2004.

 

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PROSAPTIDE

 

Prosaptide, a 14 amino acid peptide derived fromthe natural protein prosaposin, is being developed to treat neuropathic pain,which causes substantial disability in patients.  Neuropathic pain is associated with nerve injury and can be aresult of metabolic trauma (diabetes), physical trauma (phantom limb pain),infectious trauma (HIV, post-polio syndrome) or chemical trauma (chemotherapyand anti-retroviral therapy).  Anestimated 3 million people in the United States suffer from neuropathic pain,including approximately 600,000 suffering moderate to severe pain associatedwith diabetic peripheral neuropathy and 300,000 suffering moderate to severepain associated with HIV neuropathy. Peripheral neuropathy is a common neurological disorder caused by damageto the peripheral nerves located in the arms, hands, legs and feet, and is themost prevalent complication of diabetes. No product is currently approved in the United States specifically forthe treatment of neuropathic pain associated with HIV/AIDS, although severalproducts are in clinical trials in this patient population as treatments for neuropathicpain and/or treatments of the underlying neuropathy, including topicalcapsaicin, neurophilin, acetyl-L carnitine and cannabinoid compounds.  Due to the fact that available treatmentoptions for neuropathic pain are often unsatisfactory and frequentlyaccompanied by unacceptable side effects, only approximately one-third ofpatients who are diagnosed and symptomatic are currently treated.  We believe that the annual U.S. marketpotential for Prosaptide in the treatment of neuropathic pain may be in excessof $300 million.

 

A Phase II(a) human clinical trial in Type I andType II diabetes mellitus conducted prior to our acquisition of the productdemonstrated that Prosaptide effectively decreases pain associated withdiabetic peripheral neuropathy without deleterious side effects.  Following the acquisition of Prosaptide, wedecided to change the initial clinical indication for Prosaptide afterconsultation with leading experts in peripheral nerve disease led us toconclude that the clinical development program for the HIV population could beless complex than for the diabetes population initially pursued.  In addition, pursuit of the HIV neuropathicpain indication provided us with the opportunity to collaborate with theNeurologic AIDS Research Consortium (“NARC”), a group that views the need for asafe and effective therapy for HIV neuropathic pain as a key priority.  In July 2003 we commenced a Phase II(b)clinical trial of Prosaptide in patients with HIV-associated peripheralneuropathy to supplement the findings of the previous clinical trial.  We currently anticipate this clinical trialwill be completed in early 2005; however, to date, enrollment in the clinicaltrial has been slower than expected and if we cannot achieve sufficientenrollment in the clinical trial by mid-2004, we may determine to terminate thetrial and stop development of Prosaptide. If the Phase II results are favorable, Savient currently intends to seeka partner to commercialize Prosaptide, and does not currently plan to continuefurther clinical development on its own.

 

Prosaptide was shown in a series of animal studiesto not only alleviate peripheral neuropathic pain but also to mitigate theunderlying neuropathy, thereby inducing neuronal regeneration and preventing neuronaldeath.  The data from these studiessuggest that if these findings are replicated in human clinical trials, theremay well be additional potential for Prosaptide in the treatment of peripheralneuropathy, in addition to its ability to decrease neuropathic pain.  No approved drugs are available to preventor reverse the neuropathy itself.  Wehold various patents and patent applications relating to Prosaptide in theUnited States and in several other countries.

 

Savient acquired Prosaptide in March 2001 throughthe acquisition of Myelos Corporation, a privately-held biopharmaceuticalcompany focused on the development of novel therapeutics to treat diseases ofthe nervous system.  Under the terms ofthe acquisition agreement, Savient paid Myelos stockholders $35 million in acombination of cash and stock ($14 million in cash and $21 million through theissuance of approximately 2,344,700 shares of our common stock).  An additional future payment of $30 millionis contingent upon Savient being in position to file an NDA for FDA approval ofProsaptide in the treatment of neuropathic pain.  The acquisition agreement provides for a final payment of 15% ofworldwide net sales of Prosaptide in the third year of commercialization.  These payments will be made in shares of ourcommon stock, although we have the right to elect to make a portion of thesepayments in cash.  See “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations–Acquisition of Myelos Corporation.”

 

PURICASE

 

Gout occurs when uric acid accumulates in thejoints.  The disease causes severe painand disability and creates a risk of kidney failure, which may lead tolife-threatening complications. Current treatments for gout and relatedconditions are sometimes ineffective because of side effects or lack ofefficacy of approved medications. PEG-uricase is a bio-engineered and chemically modified enzyme ofmammalian origin that converts uric acid to a more soluble and readily excretedproduct.  The PEG-

 

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modified enzyme has a much longer circulatinglifetime and is less likely to induce immune reactions than the unmodifiedenzyme.  Therefore, the PEG-uricaseenzyme should effectively and efficiently eliminate excess uric acid from thebody of individuals with refractory gout who cannot otherwise eliminate excessuric acid.

 

In August 1998, Savient licensed exclusiveworldwide rights from Duke University Medical Center (“Duke”) of North Carolinaand Mountain View Pharmaceuticals, Inc. (“MVP”) to technology relating topolyethylene glycol (“PEG”) conjugates of uricase (urate oxidase).  Duke had developed recombinant uricases and,together with MVP, had developed PEG conjugates of uricases to make them saferand longer acting. MVP has transferred its PEG technology to Savient, and wewill produce uricase and PEG conjugates of uricase, undertake clinical trialsand commercialize the product.

 

We filed an IND with the FDA in November 2001 andthe Phase I clinical trial, utilizing delivery by subcutaneous injection,started in February 2002 at Duke University Medical Center.  While a dose-dependent reduction in serumuric acid levels was noted in the trial, topical hypersensitivity reactions insome individuals participating in the study were also observed.  We completed a new Phase I clinical trial inthe third quarter of 2003 utilizing an intravenous route of administration, andno allergic response was observed.  Weinitiated a Phase II safety and efficacy study of Puricase in February 2004; weanticipate this study will be completed in late 2004.

 

We are aware of at least one other product,febuxistat, currently in development for the treatment of refractory goutpatients who may be intolerant of or inadequately responsive toallopurinol.  Additionally, CardiomePharma Corp. has announced the December 2003 filing of an NDA for oxypurinolfor the treatment of gout patients who are intolerant of allopurinol.

 

Oral Liquid Pharmaceutical Products

 

Rosemont’s strategy is to launch products asSpecials, then conduct bioequivalence and stability studies to gain licensurefor those products that generate sufficient sales to warrant the expense.  This process generally requires two to threeyears.  Rosemont maintains an in-house developmentcapability to develop new products.  Forfurther information regarding Rosemont’s oral liquid pharmaceutical products,see “—Commercialized Products–Oral Liquid Pharmaceutical Products.”

 

Products in Laboratory and Pre-ClinicalResearch

BIOGENERICATM

 

Pursuant to an agreement entered into with TevaPharmaceutical Industries Ltd. in 1999, Savient is currently pursuing thedevelopment of a recombinant human therapeutic protein chosen by Teva that iscurrently marketed worldwide by other companies and which is approaching theend of its patent protection in a number of countries.  Under the agreement, Savient is responsiblefor conducting development work on the biologic product and manufacturing it.  Teva will distribute and market the productonce regulatory approvals have been obtained. It is likely that clinical trials will be required in order to obtainapproval of this product, and Savient is obligated to pay one-half the cost ofthe trials, which costs may be significant. Savient received a milestonepayment of $2,500,000 in 2000 and will receive up to an additional $5,000,000in milestone payments and a royalty based on Teva’s net sales of the product.

 

BTG – 271

 

Savient has been researching BTG-271, based on ahuman monoclonal antibody, termed Y1, which targets a cell surface antigen withspecific preference to malignant myeloid cells.  Our research found that the antibody binds to leukemic stem cellsbut not to normal stem cells.  In theprocess of elucidating the nature of the receptor to which the antibody binds,we discovered that the receptor had been modified in a unique way.  We found similar unique modifications inother cells that are responsible for thrombosis and inflammation.  Savient will require patent licenses from anumber of companies in order to commercialize BTG-271.  We cannot assure you that we will able toobtain these licenses on reasonable terms or at all.  If we are not able to obtain these licenses, we will not be ableto commercialize BTG-271.

 

The results of pre-clinical research, anticipatedduring the first half of 2004, will determine whether we will continue topursue research on BTG-271 and, if so, the particular applications we willpursue.

 

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Sales and Distribution

 

We market Oxandrin and Delatestryl primarily on adirect basis in the United States, our oral liquid pharmaceutical products on adirect basis in the United Kingdom and our products on a direct basis inIsrael.  We grant exclusive marketing ordistribution rights to third parties for sales of our other products in theUnited States and for sales of all our products in most other countries.

 

Our sales and marketing team in the United States,which we established in the second half of 1995, consisted of 54 people(including 23 people engaged through a contract sales organization) on February1, 2004.  As a result of the expectedintroduction of generic versions of Oxandrin and our inability to in-licenseadditional products for our sales and marketing team to sell, as well as theuncertainty created by the proposed acquisition of us by Teva, we experiencedsignificant difficulty in maintaining a full complement of sales and marketingpersonnel, particularly in the second half of 2003. As a result, we haveengaged a contract sales organization to market Oxandrin and Delatestryl inthose regions of the United States where we lost and could not replace oursales and marketing personnel. Rosemont’s sales and marketing team consisted of39 people on February 1, 2004.  Withrespect to sales outside the United States, Savient’s current distributionarrangements include exclusive relationships with JCR for the sale of humangrowth hormone in Japan and The People’s Republic of China, with Ferring forthe sale of human growth hormone in Europe and the former Soviet Union, withseveral other companies, covering approximately 35 countries, for the sale ofBio-Tropin, approximately 20 companies, covering more than 35 countries, forthe sale of BioLon, and Galderma for the sale of Silkis worldwide. Savient hasgranted Teva exclusive marketing rights to its hGH in the United States, whichTeva will market as Tev-TropinTM. In March 2004 we notified Akorn, Inc. that we were terminating Akorn’sexclusive marketing rights for BioLon in the United States.  We are currently evaluating whether we willmarket our sodium hyaluronate for osteoarthritis product on our own or througha third party**.**

 

In substantially all of Savient’s productdistribution agreements, Savient grants exclusive marketing and distributionrights in one or more countries in exchange for upfront license payments andexclusive supply arrangements.  Pursuantto these agreements, Savient generally supplies product at a price equal to apercentage of the distributor’s net sales price, subject to a minimumprice.  Regulatory approvals areobtained either by Savient or by its distributors, depending on the product,the territory and the terms of the commercial agreement. Savient is generallyobligated to indemnify the distributor for product liability claims resultingfrom the failure of supplied product to meet agreed upon specifications andinfringement of third-party patents. See “—Risk Factors—We are dependent on third-party licensees tocommercialize many of our products, and their failure to perform adequatelycould adversely affect our results of operations.”

 

In connection with the introduction of Oxandrin,Savient entered into an agreement with Gentiva Health Services, Inc., which wassubsequently acquired by Accredo Health, Incorporated, whereby Accredo servedas Savient’s exclusive wholesale distributor of Savient’s Oxandrin andDelatestryl products in the United States. Until the fourth quarter of 2002, sales of Oxandrin were primarily toAccredo.  See “—Risk Factors—We aredependent on Oxandrin sales for a significant portion of our revenue, and anydecrease in Oxandrin sales could adversely affect our results of operations andour ability to conduct our business.”  Inthe fourth quarter of 2002 Savient renegotiated its agreement with Accredo, andSavient now sells Oxandrin and Delatestryl directly to wholesalers and Accredodistributes them for Savient on a fee-for-service basis, although we arecurrently transitioning these services from Accredo to IntegratedCommercialization Services, Inc.  Theservices provided consist primarily of warehousing and shipping ofproduct.  In anticipation of the changein its distribution agreement with Accredo, Savient established directrelationships with key wholesalers. Savient began selling the 10mg Oxandrintablet directly to wholesalers in September 2002.  Accredo continued to distribute the 2.5 mg Oxandrin tablets inits inventory until they completed the liquidation of their inventory positionin March 2003.  Savient’s sales ofOxandrin in the first quarter of 2003 were adversely affected in part by theeffect of the liquidation of Accredo’s available supply of the 2.5mgtablets.  In April 2000 Savient signedan agreement with Ross to co-promote Oxandrin in the United States for thelong-term care market, which, according to IMS Health Incorporated data,represented approximately 14% of Oxandrin wholesaler to end-user sales in both2001 and 2002 and 16% of Oxandrin wholesaler to end-user sales in 2003.  Ross has the right to terminate theagreement at any time upon six months notice. If Ross elects to do so, our Oxandrin sales could be adversely affecteduntil we are able to replace the Ross sales force, which we may not be able todo successfully.  Although Ross did notmeet specified sales levels required by the agreement by the end of 2003, Rosspaid the margin that we would have earned on the difference

 

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between the actual and target sales level and, as aresult, Ross retained the right to co-promote Oxandrin in the long-term caremarket through at least the end of 2005.

 

Research and Development

 

We conduct research on potential products for whichwe have retained future rights for our own account and on behalf of ourpartners for which we receive certain current payments and, if successful,future payments in the form of royalties or manufacturing rights.  At February 1, 2004, our research anddevelopment organization comprised****72scientists, associates and related personnel with expertise in molecularbiology, cell biology, protein chemistry and clinical trials.

 

Our principal products in research and developmentare as follows:

 
| **Product**                                              |   | **Indication/Application**                             |   | **Status**                            |   |
|----------------------------------------------------------|--------|--------------------------------------------------------|--------|---------------------------------------|--------|
| ***PRODUCTS IN  REGISTRATION AND CLINICAL TRIALS:***     |   |                                                   |   |
| **Fibrimage**®(thrombus-imaging agent)              |   | Diagnosis of deep vein thrombus                        |   | Phase III being conducted by Draxis   |   |
| **Prosaptide**                                           |   | Treatment of neuropathic pain                          |   | Phase II                              |   |
| **Puricase**®                                       |   | Refractory gout                                        |   | Phase II February 2004                |   |
| **ORAL LIQUID PHARMACEUTICAL  PRODUCTS**                 |   | Oral liquid formulations of medicines                  |   | Bio-equivalence and stability studies |   |
|                                                     |   |                                                   |   |                                  |   |
| ***PRODUCTS IN  LABORATORY AND PRE-CLINICAL RESEARCH:*** |   |                                                   |   |
| **BioGenerica**                                          |   | Generic version of one biologic pharmaceutical product |   | Pre-clinical development              |   |
| **BTG-271**                                              |   |                                                   |   | Research                              |   |

 

For further information about theseproducts, see “—Products in Registration and Clinical Trials” and “—Products inLaboratory and Pre-Clinical Research.”

 

In light of the long research and developmenttimelines associated with pharmaceutical research, as well as the high risksand costs involved, we have determined to move away from funding internaldiscovery research.  Instead, we intendto focus on recruiting promising later-stage research projects by in-licensingtherapeutics and technologies from external sources and pursuing multiple earlystage collaborations that have the potential to provide new products for therheumatology/orthopedic surgery markets and, to a lesser extent, the urologymarkets or other niche indications.  Wewill focus our internal research expertise and resources on the advancement orrefinement of existing compounds or in-licensed product candidates.  However, to date we have had limited successin in-licensing therapeutics and technologies due to our limited cash resources,and we expect that our limited cash resources will continue to adversely affectour ability to in-license therapeutics and technologies.

 

Rosemont does not engage in any basic researchactivities.  However, Rosemont possessesa high degree of skill in converting drugs from tablet formulation to oralliquid formulations.  The processgenerally requires six months, with another three months required forstability.  When sales of these newlydeveloped products reach a desired level, Rosemont commences bioequivalency andfurther stability studies to obtain licensure of such products.  This process generally requires two to threeyears.

 

Manufacturing and Supply Arrangements

 

We currently operate a production facility inIsrael designed to meet current Good Manufacturing Practices (“cGMP”) forproduction of our bulk human growth hormone, BioLon, Bio-Hep-B and Savient HAproducts, as well as the genetically-engineered portion of the Fibrimageproduct. We also operate a modern filling suite for our BioLon and Savient HAsyringes, which has undergone inspection and was approved by European and U.S.regulatory authorities.  Based on theseinspections, European Device Approval (CE Mark) and, in the case of BioLon, FDAapproval were granted.

 

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In April 1999, Savient purchased an existingbuilding located approximately 12 miles south of its current facility inIsrael.  Basic construction of a modernproduction facility in this building that is designed to meet FDA cGMP requirementsfor drugs, biologics and devices was completed at the end of 2001.  Facility qualification activities conductedduring 2002 and 2003 were substantially completed by the end of 2003.  BioLon and Savient HA manufacturing havebeen moved to the new facility and have received European approval; FDAapproval of the facility for manufacture of BioLon and Savient HA is pending afacility inspection.  The new facilityis designed to allow us to meet current regulatory requirements and ourcurrently foreseeable manufacturing capacity needs.  In general, we cannot manufacture our products for commercialsale in this facility until the facility has been approved for manufacture ofthe specific product by the applicable regulatory agency, which began at theend of 2003 and will continue through 2005, depending on product andterritory.  As a result of the violencein Israel in recent years, the FDA has from time to time suspended inspectionsof manufacturing facilities in Israel; any future suspension of inspectionactivities could have an adverse effect on our ability to begin manufacturingour products at this new facility. Before moving production of a product to the new facility, we willstockpile inventory for the period we anticipate will be required to move theequipment, qualify it in the new facility and obtain the required regulatoryinspections.  If this period takeslonger than anticipated, or sales are higher than anticipated, our stockpiledinventory may be exhausted and, as a result, we may not be able to meet demandfor the product on a timely basis, which could adversely affect our business.

 

Although a substantial portion of the hGH suppliedby Savient to its distributors is in bulk form, Savient also providesdistributors with fully packaged product. For these distributors, Savient’s bulk human growth hormone isformulated, filled in vials and packed in Germany by Dr. Madaus GmbH, oursubcontractor for manufacturing the packaged product.  In addition, sterilization of the BioLon syringe is performed byMediplast Israel Ltd., our subcontractor for these purposes.  We believe that we operate our facilitiesunder, and are in compliance in all material respects with, current FDA goodlaboratory and manufacturing practices.

 

Oxandrolone, the active ingredient of Oxandrin, andour 2.5mg Oxandrin tablet are currently being manufactured for us by Searle, asubsidiary of Pfizer, which originally developed the product.  Our agreement with Searle provides that Searlewill produce and exclusively sell oxandrolone to Savient.  In March 2003 Savient and Searle extendedthe agreement to March 2005.  If ouragreement with Searle is not renewed thereafter and our alternative oxandrolonesuppliers have not received the required regulatory approvals, our business,results of operations, cash flows and financial condition could be materiallyadversely affected.  See “—RiskFactors—We are dependent on Oxandrin sales for a significant portion of ourrevenue, and any decrease in Oxandrin sales could adversely affect our resultsof operations and our ability to conduct our business” and “—We are dependenton third party suppliers, and any failure by them to fulfill their obligationsto us could adversely affect our ability to meet demand for our product.”  The agreement provides that Searle will notproduce oxandrolone for any other entity prior to April 2006.  In addition, DSM Pharmaceuticals, Inc.contract manufactures both 2.5mg and 10mg Oxandrin tablets from bulkoxandrolone supplied to them through Searle.

 

Because our prior alternate supplier of oxandrolonewas unable to obtain the necessary regulatory approvals, in February 1999 weentered into a supply agreement with Gideon-Richter Ltd. (“GRL”) pursuant towhich GRL will supply oxandrolone to Savient on an exclusive basis providedcertain annual minimum purchase requirements are met.  Should Searle for any reason be unable to supply oxandrolone toSavient prior to GRL obtaining the necessary regulatory approvals, Savient’s business,results of operations, cash flows and financial condition could be materiallyadversely affected.  GRL has advised usthat it intends to file a drug master file in the first half of 2004 and we areplanning to file for approval of oxandrolone manufactured by GRL thereafter.See “—Risk Factors—We are dependent on third-party suppliers, and any failureby them to fulfill their obligations to us could adversely affect our abilityto meet demand for our product” and “Item 3. Legal Proceedings.”

 

BMS contract manufactured Delatestryl for Savientuntil it closed its manufacturing facility in July 2001.  We stockpiled inventory prior to the closingof this facility.  In March 2003 Sabexagreed to contract manufacture Delatestryl for us, and we obtained FDA approvalof the Delatestryl manufactured by Sabex in September 2003.  See “—Risk Factors—We are dependent onthird-party suppliers, and any failure by them to fulfill their obligations tous could adversely affect our ability to meet demand for our products.”

 

Rosemont manufactures all of its products at a U.K.Medicines and Healthcare Products Regulatory Agency (“MHRA”) registeredmanufacturing facility that is designed for the production of aqueous oralliquids in a range of presentations from simple syrups to suspensions.  Rosemont holds a Manufacturer’s SpecialsLicense, allowing for the manufacture of unlicensed oral liquid drugs, and aWholesale Dealer’s License, allowing for the distribution of those drugs.  Rosemont’s facility was last

 

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inspected by MHRA in April****2002, and the next MHRAinspection is anticipated in mid 2004. Rosemont dedicates almost all of its manufacturing capacity to theproduction of its own products, and conducts limited contract manufacturing forthird parties.  During the fourthquarter of 2002, Rosemont obtained a “Home Office” license from the U.K.regulatory authorities in order to allow its facility to handle and processU.K. Schedule 4, Part 2 substances, which covers anabolics such as oxandrolone.

 

In February 1995, BTG-Israel was awarded ISO 9002certification by the Standards Institution of Israel (“SII”).  The certification was issued with respect tothe manufacture, packaging and dispatch of Savient’s pharmaceutical productsfor human use manufactured at its manufacturing facility in Rehovot,Israel.  ISO 9002 is one of a series ofQuality Management System Standards established by the InternationalOrganization for Standardization (“ISO”) based in Geneva, Switzerland.  It is equivalent to the European CommunityStandard EN 29002.  SII is a member ofan international organization, the International Quality Certification Network(“IQNet”), that encompasses quality certification institutes worldwide in amutual recognition agreement.  Receiptof the ISO 9002 certification was a significant milestone in the process ofobtaining the BioLon CE mark.  InSeptember 2003, SII awarded BTG-Israel ISO 9001 and ISO 13485 (Medical DeviceQuality System) certification for its new manufacturing facility following anaudit of the facility.  In August 1997,SII awarded BTG-Israel ISO 14001 certification for its Environmental ManagementSystem.  The ISO 14000 series ofstandards, dealing with the environment and its protection, are important fromboth a regulatory and commercial point of view.

 

Governmental Regulation

 

Regulation by governmental authorities in theUnited States and other countries is a significant factor affecting the timingof the commercialization of our products and our ongoing research anddevelopment activities.  All of ourproducts require regulatory approval by governmental agencies prior tocommercialization.  Various laws andregulations govern or influence the research and development, manufacturing,safety, labeling, storage, record keeping and marketing of our products.  The lengthy process of seeking theseapprovals, and the subsequent compliance with applicable laws and regulations,require the expenditure of substantial resources.  Any failure by us to obtain or maintain, or any delay inobtaining or maintaining, regulatory approvals could materially adverselyaffect our business.  Savient’s policyis to conduct its research and development activities in compliance withcurrent United States National Institutes of Health Guidelines for ResearchInvolving Recombinant DNA Molecules, and with comparable guidelines in Israeland other countries where we may be conducting clinical trials or otherdevelopmental activities.  See “—RiskFactors—We are subject to stringent governmental regulation, and our failure tocomply with applicable regulations could adversely affect our ability toconduct our business.”

 

Clinical testing, manufacturing and marketing ofhuman pharmaceutical products require prior approval from the FDA andcomparable agencies in foreign countries. The FDA has established mandatory procedures and safety and efficacystandards that apply to the testing, manufacture and marketing of such productsin the United States.  In the UnitedStates, these procedures include pre-clinical studies, the filing of anInvestigational New Drug Application (“IND”) or equivalent, human clinicaltrials and approval of a New Drug Application (“NDA”).  The results of pre-clinical testing, whichinclude laboratory evaluation of product chemistry and animal studies to assessthe potential safety and efficacy of the product and its formulations, must besubmitted to the FDA as part of an IND that must be reviewed before clinicaltesting can begin.  Clinical trialsgenerally involve a three-phase process:

 

•                                          Phase I trials are conducted in volunteers or patients to determine theearly side effect profile and, perhaps, the pattern of drug absorption,distribution and metabolism;

 

•                                          Phase II trials are conducted in groups of patients with a specificdisease in order to determine appropriate dosages and dose regimens, expandevidence of the safety profile and, perhaps, determine preliminary efficacy;and

 

•                                          Phase III large scale, comparative trials are conducted on patients witha target disease in order to generate enough data to provide the statisticalproof of efficacy and safety required by national regulatory agencies.

 

The results of the preclinical and clinicaltesting are then submitted to the FDA in the form of an NDA for approval tocommence commercial sales.  The FDA may,in responding to an NDA, grant marketing approval, request additionalinformation or deny the approval if it determines that the NDA does not providean adequate basis for approval.  Amongthe conditions for an NDA approval is the requirement that the prospectivemanufacturer’s quality control and manufacturing procedures conform on anongoing

 

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basis with current Good ManufacturingPractices (“GMP”).  In complying withGMP, we must continue to expend time, money and effort in the areas ofproduction and quality control to ensure full compliance.  Following approval of the NDA, we aresubject to periodic inspections by the FDA. Any determination by the FDA of manufacturing deficiencies could materiallyadversely affect our business.

 

European countries generally follow the sameprocedures.  The European Union hasestablished a unified filing system administered by the Committee forProprietary Medicinal Products (“CPMP”) designed to reduce the administrativeburden of processing applications for pharmaceutical products derived from newtechnologies.  Following CPMP review andapproval, marketing applications are submitted to member countries for finalapproval and pricing approval, as appropriate.  In addition to obtaining regulatory approval of products, it isgenerally necessary to obtain regulatory approval of the facility in which theproduct will be manufactured.  Theapproval process for medical devices in Europe is similar but is administeredby private certification organizations known as Notified Bodies, which areaccredited by each member state of the European Union.

 

The receipt of regulatory approvals often takes anumber of years, involves the expenditure of substantial resources and dependson a number of factors, including the severity of the disease in question, theavailability of alternative treatments and the risks and benefits demonstratedin clinical trials.  On occasion,regulatory authorities may require larger or additional studies, leading tounanticipated delay or expense. There can be no assurance that any approvalwill be granted and, even if granted, such approval may be withdrawn ifcompliance with regulatory standards is not maintained.  In addition, the regulatory approvalprocesses for products in the U.S., European countries and other countriesaround the world are undergoing or may undergo changes, and we cannot predictwhat effect any changes in the regulatory approval process may have on ourbusiness.

 

Under U.K. regulations, Rosemont is permitted tosell two categories of products.  Forthose products for which Rosemont completes bioequivalence and stabilitystudies, it applies for a product license from the U.K. Medicines andHealthcare Products Regulatory Agency and is permitted to promote such productsto physicians, nurses and pharmacists. For compounds that are not licensed inan oral liquid formulation, Rosemont holds a license to accept custom ordersfor such products, known as “Specials,” but is not permitted to promoteSpecials.

 

In addition to the foregoing, Savient’s present andfuture business may be subject to various laws and regulations relating to safeworking conditions, clinical, laboratory and manufacturing practices, theexperimental use of animals and the use and disposal of hazardous orpotentially hazardous substances, including radioactive compounds andinfectious disease agents, used in connection with our research, as well asnational restrictions on technology transfer, and import, export and customsregulations and similar laws and regulations in foreign countries.

 

Patents and Proprietary Rights

 

Our scientific staff and consultants are activelyworking in various areas of pharmaceutical development to develop techniques,microorganisms, processes and products to achieve Savient’s commercialaims.  Savient protects its intellectualproperty rights in this work by a variety of means, including filing patent andtrademark applications in the United States, Europe and other majorindustrialized countries.  Savient alsorelies upon design registrations, trade secrets and improvements, unpatentedproprietary know-how and continuing technological innovation to develop andmaintain its competitive position.  See“—Risk Factors—We depend upon proprietary technology, which may be difficult toprotect.”

 

As of March 1, 2004, Savient was maintainingworldwide approximately 409 issued patents either owned or exclusively licensedby Savient, including 63 patents issued in the United States, 16 patents issuedby the European Patent Office (“EPO”), which in turn resulted in the issuanceof 160 national patents in Europe, and 17 patents issued in Israel.  Additionally, approximately 242 patentapplications owned or exclusively licensed by Savient are pending in variouscountries.  There can be no assurancethat any of the patent applications assigned or licensed to Savient will resultin issued patents, or that issued patents will not be circumvented orinvalidated. We believe that important legal issues remain to be resolved as tothe extent and scope of patent protection, and we expect that in certain caseslitigation may be necessary to determine the validity and scope of our andothers’ proprietary rights.  Suchlitigation may consume substantial amounts of our resources.  See “—Risk Factors—If our intellectualproperty positions are challenged, invalidated or circumvented, or if we failto prevail in present and future intellectual property litigation, our businesscould be adversely affected” and “Item 3. Legal Proceedings.”

 

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We are aware of patent applications filed by, orpatents issued to, other entities with respect to technology potentially usefulto Savient and, in some cases, related to products and processes beingdeveloped by Savient.  We cannotpresently assess the effect, if any, that these patents may have on ouroperations.  The extent to which effortsby other researchers have or will result in patents and the extent to which theissuance of patents to others would have a materially adverse effect on ourbusiness or would force us to obtain licenses from others is currentlyunknown.  See “—Risk Factors—If ourintellectual property positions are challenged, invalidated or circumvented, orif we fail to prevail in present and future intellectual property litigation,our business could be adversely affected.”

 

Rosemont’s formulation know-how is not patented,although Rosemont has obtained a patent on one resulting oral liquid product.

 

To date, Savient has been, or currently is, partyto several legal and administrative proceedings relating to its technologies,products and patents and the patents of others.  See “Item 3.  LegalProceedings.”

 

Operations in Israel

 

Savient has significant research and developmentand biologics production activities in Israel that are affected by economic,military and political conditions there and in the Middle East in general.  Since the establishment of the State ofIsrael in 1948, a number of armed conflicts have taken place between Israel andits Arab neighbors and a state of hostility, which varies in degree andintensity, has caused security and economic problems in Israel.  Any major hostilities involving Israel couldadversely affect our research, development and biologics production operations,which would harm our business.  Wecannot assure you that ongoing or revived hostilities related to Israel willnot have a material adverse affect on us or our business.  Despite the progress towards peace betweenIsrael and its Arab neighbors, the future of these peace efforts isuncertain.  In addition, since October2000, there has been a significant increase in violence, primarily in the WestBank and Gaza Strip.  During the courseof military operations, Israel’s military reserves, which include a number ofour employees and executives, may be called up.  To date, we have been able to continue our research anddevelopment and biologics production activities during periods of militarymobilization, although there can be no assurance that such activities could becontinued in the event of future hostilities. See “—Risk Factors—Our business may be adversely affected bydevelopments in Israel.”

 

As a result of the violence in Israel in recentyears, the FDA has from time to time suspended inspections of manufacturingfacilities in Israel.  In addition, theFDA cancelled its scheduled April 2003 visit to Israel in light of the thenexisting situation with Iraq.  To dateEuropean regulatory agencies have not suspended inspections of manufacturingfacilities in Israel.  Products weintend to manufacture at our newly constructed manufacturing facility(currently BioLon, Savient HA, Bio-Tropin and Bio-Hep-B) cannot be shipped intothe United States until the FDA has inspected and approved this facility.  We have transferred our BioLon and SavientHA manufacturing operations to this new facility; however, we cannot sellBioLon and Savient HA manufactured at this facility in the United States untilthese manufacturing operations are inspected and approved by the FDA.  A suspension of inspection activities by theFDA will delay the commencement of manufacturing at our new facility, whichcould adversely affect our business. The suspension of FDA inspections delayedinspection of the contract sterilizer utilized by Savient for its BioLonproduct, which required us to stop shipping BioLon sterilized at that facilityto the U.S. from the fourth quarter of 2001 until September 2002, when thefacility was approved following an inspection by the FDA.  While we have secured alternative contractsterilization arrangements for BioLon in North America, we have not securedalternate arrangements to prevent potential interruption of other manufacturingactivities and we cannot assure that we will be able to secure alternativemanufacturing arrangements on a timely basis on reasonable terms, or at all, ifneeded.

 

Because BTG-Israel is involved in a technologicalindustry and is an exporter of Israeli goods, Savient has enjoyed the benefitsof certain programs promulgated by the Government of Israel in order toencourage the development of technology and export of Israeli products.  However, there can be no guarantee thatthese programs will continue.

 

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Competition

 

Therapeutic drug development is conducted bynumerous companies throughout the world. Competition is intense in the productareas in which Savient has focused its efforts.  Significant competition comes from independent, dedicated biotechnologycompanies as well as from large, established pharmaceutical and specialtypharmaceutical companies.  The primarycompetitive factors in this field are the ability to attract and retain highlyqualified scientists and technicians, to create and maintain scientificallyadvanced technology during a period of rapid technological development and todevelop proprietary products or processes.

 

The principal parameters influencing competitionare the efficacy of products and their production processes, the patentprotection available for such products, the timing of commercializationvis-a-vis competitors’ products and price. Savient’s competitive position in the industry varies on aproduct-by-product and country-by-country basis depending upon the efficacy ofSavient’s products as compared to competing products, the scope of patentprotection in each country for Savient’s products as compared to competingproducts, whether Savient’s product is the first such product to becommercialized and, where there are a number of similar products, the price ofSavient’s product as compared to its competitors’ products, and the relativestrength of Savient’s partner in the territory.

 

Many of our current competitors have significantlygreater financial and organizational resources than Savient.  Since technological developments areexpected to continue at a rapid pace in the biotechnology industry, thesuccessful development of Savient’s products will be dependent upon its abilityto maintain a competitive position with respect to its technology.  See “—Risk Factors—We operate in a highlycompetitive market and our competitors may develop alternative technologies andproducts before or more successfully than we do.”

 

We are currently seeking to expand our operationsand product pipeline through the acquisition of businesses, products and/ortechnologies.  We face significantcompetition for acquisitions, which could adversely affect our ability toexpand our operations and product pipeline. See “—Risk Factors—We are seeking to expand through acquisition, whichentails risks.”

 

Employees

 

As of February 1, 2004, we had approximately 460employees worldwide, most of whom are engaged in manufacturing, qualityassurance, marketing and sales, and research and development activities.  In addition, we have consulting arrangementswith scientists at various institutions and universities in the United States,Europe and Israel.

 

Savient’s ability to develop marketable productsand to establish and maintain its competitive position in light oftechnological developments will depend, in part, on its ability to attract andretain qualified scientific, marketing and management personnel.  Competition for such personnel is intense.

 

None of Savient’s employees is represented by alabor union and Savient has experienced no work stoppages.  We believe our relations with our employeesare good.

 

Available Information

 

Our investor relations website is accessiblethrough www.savientpharma.com.  We makeavailable free of charge on this website, under the caption “InvestorRelations—SEC Filings”, our annual reports on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K and amendments to those reports as soonas reasonably practicable after we electronically file or submit such materialsto the Securities and Exchange Commission.

 

RISK FACTORS

 

This Annual Report on Form 10-K contains certainforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934.  All statements regarding Savient’s expectedfuture financial position, results of operations, cash flows, financing plans,business strategy, competitive position, plans and objectives and words such as

 

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“anticipate,” “believe,” “estimate,” “expect,”“intend,” “plan” and other similar expressions are forward-lookingstatements.  These forward-lookingstatements are based on our current expectations, assumptions, estimates andprojections about our business and the biopharmaceutical and specialtypharmaceutical industries, and involve known and unknown risks, uncertaintiesand other factors that may cause Savient’s results, levels of activity,performance or achievements to be materially different from the results, levelsof activity, performance or achievements expressed or implied in orcontemplated by these forward-looking statements.  Accordingly, stockholders must recognize that Savient’s actualresults could differ materially from those projected or contemplated in theforward-looking statements as a result of a variety of factors, including thefactors set forth below.  Stockholdersshould not place undue reliance on these forward-looking statements.

 

The forward-looking statements speak only as of thedate on which they are made, and Savient undertakes no obligation to update anyforward-looking statement to reflect events or circumstances after the date onwhich the statement is made or to reflect the occurrence of unanticipatedevents.  In addition, we cannot assessthe effect of each factor on our business or the extent to which any factor, orcombination of factors, may cause actual results to differ materially fromthose contained in any forward-looking statements.

 

We are dependent on Oxandrin sales for asignificant portion of our revenue, and any decrease in Oxandrin sales willadversely affect our results of operations and our ability to conduct ourbusiness.

 

Sales of Oxandrin in 2001, 2002 and 2003 amountedto approximately $47.2 million, $45.9 million and $57.6 million, respectively,representing 54%, 48% and 46%, respectively, of Savient’s total product salesin those periods.  Several companieshave filed drug master files with the FDA relating to a generic oxandroloneproduct, and while we cannot predict when generic competition for Oxandrin willbegin, it is possible the FDA may approve one or more generic versions ofOxandrin during 2004. The introduction of these generic products will cause asignificant decrease in our Oxandrin revenues, which will have a materialadverse effect on our results of operations, cash flows, financial conditionand may require us to scale back our business activities in certain areas.

 

In addition to possible competition from genericproducts, Oxandrin is facing competition from other products, including humangrowth hormone.  A substantial number ofusers of Oxandrin are patients with AIDS and as more successful treatments forthis disease, such as protease inhibitors, are developed, the need to useOxandrin by these patients may be reduced. Although Savient is working to expand the use of Oxandrin to treatinvoluntary weight loss associated with other conditions covered by theproduct’s current FDA approval, such as burns, non-healing wounds, chronicobstructive pulmonary disease and cancer, there can be no assurance thatSavient will be successful in its efforts.

 

Since Savient’s launch of Oxandrin in December 1995through December 2000, a significant portion of Oxandrin sales has been fortreatment of patients suffering from AIDS-related weight loss.  However, the rate of growth in theAIDS-related weight loss market has slowed substantially, and there can be noassurance that it will continue to grow in the future.  In addition, three states with budget crises— New York, California and Florida — have, beginning in the second quarter of2003, eliminated or limited reimbursement of prescription drugs for HIV andAIDS, including Oxandrin, under their AIDS Drug Assistance Programs (“ADAP”),which has and is expected to continue to adversely impact sales of Oxandrin inthose states.  Our inability to continueto increase our sales in the AIDS-related weight loss market or to expand intoother markets could have a material adverse effect on our business.

 

Oxandrin sales experienced rapid growth in December2000 and the first half of 2001 in large part as a result of the commencementby Ross of marketing Oxandrin for the treatment of involuntary weight loss inthe long-term care market, which, according to IMS Health data, representedapproximately 14% of Oxandrin wholesaler to end-user sales in both 2001 and2002 and 16% of Oxandrin wholesaler to end-user sales in 2003.  Although Oxandrin prescriptions increasedsignificantly in 2001 and 2002, they decreased 1.1% in 2003 compared to 2002,and prescriptions in the long-term care market in 2003 decreased 16.4% comparedto 2002.  To date the averageprescription written for the long-term care market involves a lower dose ofOxandrin than the average prescription written for the AIDS market and,therefore, the rate of growth in Oxandrin sales will be less than the rate ofgrowth in prescriptions.  Ross has theright to terminate our Oxandrin co-promotion agreement at any time upon sixmonths notice.  If Ross elects to do so,our Oxandrin sales could be adversely affected until we are able to replace theRoss sales force, which we may not be able to do successfully.  There can be no assurance that demand forOxandrin will continue to increase.

 

Quarterly fluctuations in sales of Oxandrin canhave a significant impact on our quarterly results of operations.  Quarterly sales of Oxandrin in 2001, 2002and 2003 are set forth in the following table (dollars in thousands):

 

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|   |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   | **Total** |   |
|--------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|-----------|--------|
|   |   |               |   |                |   |               |   |                |   |      |   |
| 2001   |   | $                  | 16,692 |                | $      | 17,887             |   | $                   | 4,575  |      | $      | 7,996 |   | $ | 47,150 |   |
| 2002   |   | 9,555              |   | 12,329              |   | 13,661             |   | 10,316              |   | 45,861    |   |
| 2003   |   | 11,863             |   | 14,121              |   | 16,867             |   | 14,790              |   | 57,641    |   |
|        |        |                    |        |                     |        |                    |        |                     |        |           |        |  |  |  |  |  |

 

Prior to September 2002, our sales of Oxandrinconsisted solely of sales to Accredo, which served as our wholesale and retaildistributor of Oxandrin in the United States, and, beginning in the thirdquarter of 2000, Ross, which is co-promoting Oxandrin in the long-term caremarket in the United States. Oxandrin sales during the first half of 2001 werefavorably affected by: (i) the commencement, in September 2000, of sales byRoss for the long-term care market for the treatment of patients with involuntaryweight loss, including stocking activity by wholesalers in connection with thelaunch of this product in the long-term care market; (ii) stocking by certainwholesalers in anticipation of a price increase; (iii) increased purchases byAccredo following its completion, in May 2000, of a reduction in the amount ofOxandrin inventory it carried, which reduction began in April 1999; and (iv)increased wholesaler sales of Oxandrin by Accredo.  The increase in Oxandrin sales in 2003 largely reflects higher end-userpurchases, as well as the fact that until the fourth quarter of 2002 Savientsold its Oxandrin to Accredo, which then resold the product to wholesalers.

 

Upon completion of its inventory reduction in May2000, Accredo began to purchase, on a monthly basis, an amount of Oxandrinequal to the average end-user (*i.e.*, wholesaler) sales during thepreceding three months.  However,because of the significant increase in Oxandrin purchases by wholesalers in thefirst quarter of 2001 in anticipation of a price increase and in connectionwith the launch of Oxandrin into the long-term care market, Accredo’s purchasesof Oxandrin in the second quarter were higher than the levels of its sales ofOxandrin to wholesalers in that period. As a result, Accredo’s inventory of Oxandrin increased beyond thedesired level.  Accordingly, Savient andAccredo amended their distribution arrangement effective August 2001 to providefor reduced purchases of Oxandrin until Accredo’s inventory was reduced todesired levels and thereafter to ensure that sales of Oxandrin by Savient toAccredo more accurately reflected end-user demand.  As a result, sales of Oxandrin in the second half of 2001 and thefirst half of 2002 were $22.0 million and $12.7 million lower, respectively,than in the first half of 2001.

 

In the fourth quarter of 2002 Savient renegotiatedits agreement with Accredo, and Savient now sells Oxandrin directly towholesalers and Accredo distributes Oxandrin and Delatestryl for Savient on afee-for-service basis, although we are transitioning these services fromAccredo to Integrated Commercialization Solutions, Inc.  The services provided consist primarily ofwarehousing and shipping of product. The transition to the new arrangement, which was completed in March 2003when Accredo finished liquidating its inventory of the 2.5mg Oxandrin tablets,resulted in sales of Oxandrin decreasing by $3.3 million in the fourth quarterof 2002 compared to the third quarter of 2002, as Accredo began to reduce itsinventory of the 2.5mg Oxandrin tablet. Savient’s sales of Oxandrin in thefirst quarter of 2003 were adversely affected by Accredo’s liquidation of itsinventory of the 2.5mg tablets.  Thedecrease in Oxandrin sales in the fourth quarter of 2003 from the third quarterof 2003 was due to higher purchases in the third quarter in anticipation of aprice increase in the fourth quarter of 2003. Oxandrin sales in the fourth quarter of 2003 include a payment of$841,000****by Ross, representing themargin that we would have earned on the difference between the actual sales andthe specified sales level Ross was required to meet to retain the right toco-promote Oxandrin in the long-term care market through at least the end of2005.

 

Reductions in wholesaler purchases of Oxandrin fromAccredo in the second, third and fourth quarters of 2001 and significantlyreduced purchases of Oxandrin by Accredo in the second half of 2001 adverselyaffected the growth in Savient’s product sales and revenues and Savient’sresults of operations in the second half of 2001.  Because purchases by wholesalers fluctuate from month to monthand quarter to quarter based on their own operating strategies (includingdesired levels of inventories, purchases by their customers and stocking inadvance of anticipated price increases), Savient’s sales will fluctuate fromquarter to quarter.

 

As a result of the expected introduction of genericversions of Oxandrin and our inability to in-license additional products forour sales and marketing team to sell, as well as the uncertainty created by theproposed acquisition of us by Teva, we experienced significant difficulty inmaintaining a full complement of sales and marketing personnel, particularly inthe second half of 2003.  As a result,we have engaged a contract sales organization to market Oxandrin in thoseregions of the United States where we lost and could not replace our sales andmarketing personnel.  We cannot assureyou that the representatives from this contract sales organization will be aseffective as our own employees in marketing Oxandrin.

 

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We are dependent on third-party suppliers,and any failure by them to fulfill their obligations to us could adverselyaffect our ability to meet demand for our products.

 

Savient is dependent on third parties for themanufacture of Oxandrin and Delatestryl, the filling and vialing of itsBio-Tropin product and the sterilization of its BioLon product.  Our dependence upon third parties for themanufacture of these products may adversely impact our profit margins or resultin unforeseen delays or other problems beyond our control.  If for any reason we are unable to retainthese third-party manufacturers, or obtain alternate third-party manufacturers,on commercially acceptable terms, we may not be able to distribute our productsas planned.  If we encounter delays ordifficulties with contract manufacturers in producing, filling, vialing orsterilizing these products, the sale of these products would be adverselyaffected.

 

Although Savient is a party to an exclusive supplyarrangement with Searle, covering the supply of oxandrolone, the activeingredient of Oxandrin, to Savient through April 2005, and a supply agreementwith GRL, there can be no assurance that Searle will continue, or that GRL willbe able, to provide Savient with sufficient supplies of oxandrolone to satisfyits future needs on commercially reasonable terms or at all.  BMS ceased manufacturing Delatestryl for Savientin July 2001 when it closed the manufacturing facility where it producedDelatestryl.  Although Sabex agreed inMarch 2003 to contract manufacture Delatestryl for us, and its Delatestryl wasapproved by the FDA in September 2003, we cannot assure you that Sabex will besuccessful in manufacturing sufficient quantities of Delatestryl to meet demandfor our product.  In addition, Savientis dependent on Dr. Madaus GmbH (“Dr. Madaus”) to fill and vial our Bio-Tropinproduct.  We were forced to stopshipping BioLon sterilized by our Israeli contractor to the U.S. from thefourth quarter of 2001 until September 2002 because the FDA was unable toinspect the new manufacturing facility of this contract sterilizer for BioLondue to the violence in Israel at the time.

 

Third–party suppliers may encounter difficulties inachieving quality control and quality assurance, and also may experienceshortages in qualified personnel, and therefore may not be able to meet ourproduction schedules.  Switchingsuppliers may be difficult because the number of potential manufacturers islimited.  A shutdown in any of themanufacturing facilities utilized by Savient’s suppliers due to technical,regulatory or other problems, resulting in an interruption in supply ofproducts, could significantly delay the manufacture of one or more of ourproducts, which could have an adverse impact on our financial results, and wemay have to seek alternative sources of supply or abandon or sell product lineson unsatisfactory terms.  We might notbe able to enter into alternative supply arrangements at commerciallyacceptable rates, if at all.  Themanufacturing process for pharmaceutical products is highly regulated, andregulators may shut down manufacturing facilities that they believe do notcomply with regulations.  The FDA currentGood Manufacturing Practices are extensive regulations governing themanufacturing process, stability testing, record-keeping and qualitystandards.  We do not have control over,other than by contract, third-party manufacturers’ compliance with these regulationsand standards.  Because the suppliers ofkey components and materials must be named in an NDA filed with the FDA for aproduct, significant delays can occur if the qualification of a new supplier isrequired.  In the event of anyinterruption in supply from Searle, GRL (once approved as a supplier), Sabex orDr. Madaus due to regulatory reasons, processing problems, capacity constraintsor other causes, alternative manufacturing arrangements may not be available ona timely basis, if at all.  Any failureof Searle, GRL, Sabex or Dr. Madaus to fulfill its obligations to Savient couldhave a material adverse effect on our business, results of operations, cashflows and financial condition.  See“—Manufacturing and Supply Arrangements.”

 

We are dependent on third-party licensees tocommercialize many of our products, and their failure to perform adequatelycould adversely affect our results of operations.

 

Except for the sale of Oxandrin and Delatestryl inthe United States, its oral liquid pharmaceutical products in the UnitedKingdom and its products in Israel, which Savient markets on its own or througha contract sales organization, Savient is dependent on third-party licensees todistribute its products.  Thesearrangements typically provide our licensees with certain rights to manufactureand market specified products developed using our proprietary technology,subject to an obligation to pay royalties to us based on any future productsales or to purchase product from us, and require the licensee to conductrequired clinical trials and obtain any necessary regulatory approvals.  The success of these arrangements depends oneach licensee’s own financial, competitive, marketing and strategicconsiderations, which include the relative advantages, including patent andproprietary positions, of alternate products being marketed or developed byothers.  Furthermore, the amounts of anypayments to be received by Savient under its license agreements from sales ofproduct by licensees will be dependent on the extent to which its licenseesdevote resources to the development and commercialization of the products.  Although we believe our licensees have aneconomic motivation to commercialize their products, we have no effectivecontrol over the licensees’ commercialization efforts.

 

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Savient may from time to time seek to collaboratewith larger pharmaceutical companies on the research, development andcommercialization of certain products. In trying to attract corporate partners to collaborate in the research,development and commercialization process, Savient faces serious competitionfrom other biopharmaceutical companies and the in-house research anddevelopment staffs of the larger pharmaceutical companies.  If Savient is unable to enter intoarrangements with corporate partners, its ability to proceed with the research,development and commercialization of its products may be severely limited.  Furthermore, larger pharmaceutical companiesoften explore multiple technologies and products for the same medicalconditions. Therefore, they are likely to enter into collaborations withSavient’s competitors for products addressing the same medical conditionsaddressed by Savient’s products. Depending on how other product candidates advance, a corporate partnermay slow down or abandon its work on Savient’s product candidates or terminateits collaborative arrangement with Savient in order to focus on these otherprospects.

 

If our intellectual property positions arechallenged, invalidated or circumvented, or if we fail to prevail in presentand future intellectual property litigation, our business could be adverselyaffected.

 

Savient’s success will depend, in part, on itsability to obtain patent protection for its technology (including use of itsproducts), preserve trade secrets and operate without infringing theproprietary rights of third parties. The patent positions of pharmaceutical and biopharmaceutical companies arehighly uncertain and involve complex scientific, legal and factualquestions.  Patent disputes are frequentand costly, can delay or preclude the commercialization of products and couldsubject Savient to significant liabilities to third parties. Many biopharmaceuticalcompanies have employed intellectual property litigation as a way to gain acompetitive advantage.

 

Savient has developed patentable technology andproprietary know-how and has acquired from various universities andinstitutions certain basic technologies, as to which either patents have beenissued or patent applications are pending. There can be no assurance that patent applications will result in issuedpatents, that the claims allowed in such issued patents will be sufficientlybroad to protect our proprietary rights or that patents will not be challenged,circumvented or invalidated or that rights granted pursuant to such patentswill provide competitive advantages to Savient.  In addition, our patents may not protect us against competitorswith similar products or technologies because competing products ortechnologies may not infringe our patents. Because patent applications aremaintained in secrecy for a period of time after filing, we cannot be certainthat others have not filed patent applications for technology covered by ourpending applications or that we were the first to file patent applications forsuch technology.  Savient also relies ontrade secrets, proprietary know-how and technological innovation that it seeksto protect with confidentiality agreements with its employees, consultants andlicensees.  There can be no assurancethat these agreements will not be breached, that Savient will have adequateremedies for any breach or that Savient’s trade secrets and proprietary know-howwill not otherwise become known or be independently discovered by competitors.

 

Savient’s commercial success will also depend inpart on our not infringing patents or proprietary rights of third parties.  A number of companies and research andacademic institutions have developed technologies, filed patent applications orreceived patents on various technologies that relate to our business, and suchentities may file applications for or be issued patents in the future withrespect to technology potentially necessary or useful to Savient.  Some of these technologies, applications orpatents may conflict with Savient’s technologies and existing or futurepatents, if any, or patent applications. Such conflict could limit the scope of patents that Savient has obtainedor may obtain in the future or result in patent applications failing to issueas patents.  In addition, if thirdparties obtain patents which cover our activities, there can be no assurancethat Savient would be able to license such patents on reasonable terms, or atall, or be able to license or develop alternative technology on a timely basis,or at all.  As more patents are issuedto third parties, the risk that Savient’s products and activities may give riseto claims that they infringe the patents of others increases.  In addition, the presence of patents orother proprietary rights belonging to other parties may lead to the terminationof research and development of a particular product.

 

Savient has in the past been, is currently and mayin the future be involved in litigation and administrative hearings todetermine the validity and scope of its and others’ patents and proprietaryrights. Such litigation and administrative proceedings have to date required,and may in the future require, a significant commitment of our resources.  Any such commitment may divert resourcesfrom other areas of Savient’s business. See “Item 3.  Legal Proceedings.”

 

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We currently are, and in the future may be,involved in costly legal proceedings to enforce or protect our intellectualproperty rights or to defend against claims that we infringe the intellectualproperty rights of others.

 

Litigation is inherently uncertain, and an adverseoutcome could subject us to significant liability for damages or invalidate ourproprietary rights.  Legal proceedingswe initiate to protect our intellectual property rights could also result incounterclaims or countersuits against us. Any litigation, regardless of its outcome, could be time consuming andexpensive to resolve and could divert our management’s time and attention. Anyintellectual property litigation also could force us to take specific actions,including:

 

•  ceaseselling products that are claimed to be infringing a third party’s intellectualproperty;

•  obtain licenses to make, use,sell, offer for sale or import the relevant technologies from the intellectualproperty’s owner, which licenses may not be available on reasonable terms, orat all;

•  redesign those products thatare claimed to be infringing a third party’s intellectual property; or

•  pursue legal remedies withthird parties to enforce our indemnification rights, which may not adequatelyprotect our interests.

 

We have found it necessary to litigate againstothers, including our customers, to enforce our intellectual property andcontractual and commercial rights, as well as to challenge the validity andscope of the proprietary rights of others and to defend against claims ofinfringement or invalidity.  We arecurrently a party to several lawsuits regarding intellectual property, asdiscussed under “Item 3.  LegalProceedings.  These lawsuits in which weare or have been involved in the past have diverted, and are expected tocontinue to divert, the efforts and attention of our key management andtechnical personnel. We have incurred, and expect to continue to incur,substantial legal fees and expenses in connection with these lawsuits.  As a result, these lawsuits, regardless oftheir eventual outcomes, have been, and will continue to be, costly and timeconsuming.  Furthermore, we could beinvolved in similar disputes or litigation with other third parties in thefuture.

 

The successful development of pharmaceuticalproducts is costly and highly uncertain.

 

A substantial portion of our annual operatingbudget is spent on research, development and clinical activities.  We are currently developing several productsthat may never reach clinical trials, achieve success in the clinic, besubmitted for approval, be approved for manufacturing or marketing or achievecommercial success.  Further, we rely onthird parties to assist in various stages of the development process.  These third parties may be unable tocomplete their work in a timely fashion or in a manner that is satisfactory tous. Should they be unable to meet our needs, our product development processwould be delayed and we may have to incur substantial additional costs.

 

Successful pharmaceutical product development ishighly uncertain and is dependent on numerous factors, many of which are beyondSavient’s control, and very few research and development projects produce acommercial product.  Products thatappear promising in the early phases of development may fail to reach themarket for numerous reasons, including, but not limited to:

 

•  they may be found to beineffective or to have harmful side effects in pre-clinical or clinicaltesting;

•  they may fail to receivenecessary regulatory approvals;

•  they may turn out to beuneconomical because of manufacturing costs or other factors; or

•  they may be precluded fromcommercialization by the proprietary rights of others or by competing productsfor the same indication.

 

Success in pre-clinical and early clinical trialsdoes not ensure that large-scale trials will be successful. Data obtained frompre-clinical and clinical trials are frequently susceptible to varyinginterpretations that may delay, limit or prevent regulatory approvals.  Many biopharmaceutical companies, includingSavient, have suffered significant setbacks in advanced clinical trials, evenafter experiencing promising results in pre-clinical and early human testing.

 

Savient is currently seeking to expand its productpipeline through the acquisition of businesses, products and/ortechnologies.  To the extent Savientacquires products that are still in pre-clinical or clinical trials, it willface the risks discussed above.  To theextent Savient uses its cash resources, incurs debt and/or issues shares of itscommon stock in these acquisitions but the acquired product cannot becommercialized, Savient’s business and prospects could be adversely affected.

 

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The length of time necessary to complete clinicaltrials and to submit an application for marketing approval for a final decisionby a regulatory authority varies significantly and is dependent upon a numberof factors, many of which are outside our control, including the rate ofpatient enrollment.  Patient enrollmentis a function of several factors, including the size of the patient populationand the proximity of patients to clinical sites.  Delays in patient enrollment could result in increased costs anddelays in completion of the clinical trials. In addition, pre-clinical and clinical trials must meet regulatory andinstitutional requirements.

 

The principal factors affecting Savient’s researchand development expenses include the number of and outcome of clinical trialscurrently being conducted by it and/or its collaborators, the number ofproducts in development and later stage research and future levels ofrevenue.  Should our revenues decline,we may limit our spending on research and development.

 

We have limited manufacturing capacity.

 

We currently operate a production facility meetingcurrent Good Manufacturing Practices in Israel for production of our bulk humangrowth hormone, as well as the genetically-engineered portion of the Fibrimageproduct and Puricase.  We completedbasic construction of a new biologics production facility at the end of2001.  Facility qualification activitiesconducted during 2002 and 2003 were substantially completed by the end of2003.  Manufacture of sodium hyaluronatefor our BioLon and Savient HA products and the filling of our BioLon andSavient HA syringes have been transferred to the new facility, and processvalidation for Bio-Hep-B manufacture in the facility is currently inprocess.  Rosemont manufactures all ofits products at a U.K. Medicines and Healthcare Products Regulatory Agency(“MHRA”) registered manufacturing facility that is designed for the productionof aqueous oral liquids in a range of presentations from simple syrups tosuspensions.

 

The manufacture of Savient’s products involves anumber of technical steps and requires meeting stringent quality controlspecifications imposed by governmental regulatory bodies and by Savientitself.  Further, such products can onlybe manufactured in facilities approved by the applicable regulatoryauthorities. As a result, Savient may not be able to quickly and efficientlyreplace its manufacturing capacity in the event that it is unable tomanufacture its products at its facilities. In the event of a natural disaster, equipment failure, strike, war orother difficulty, Savient may be unable to manufacture its products in a mannernecessary to fulfill demand.  Savient’sinability to fulfill demand may permit its licensees and distributors toterminate their agreements, seek alternate suppliers or manufacture theproducts themselves.  Additionally, ifSavient does not receive regulatory approval for its new facility, it wouldlikely be unable to meet the anticipated increased demand for its products,which would have a material adverse effect on Savient’s business, results ofoperations, cash flows and financial condition.  Any substantial delay in obtaining regulatory approval for itsmanufacturing processes and facilities could also have a material adverseeffect on Savient.  As a result of theviolence in Israel in recent years, the FDA has from time to time suspendedinspections of manufacturing facilities in Israel, which could delay FDAinspection of Savient’s new manufacturing facility and, therefore, use of suchfacility to manufacture products for the U.S. market.  In addition, the FDA cancelled its scheduled April 2003 visit toIsrael in light of the then existing situation with Iraq.

 

Savient is dependent on third parties tomanufacture all or a portion of certain of its products.  See “— We are dependent on third-partysuppliers, and any failure by them to fulfill their obligations to us couldadversely affect our ability to supply our products.”

 

During 2003 we transferred our BioLon and SavientHA manufacturing to our new manufacturing facility in Israel.  We expect to transfer our hGH manufacturingoperations to the new facility and file for regulatory approval for thetransfer during 2004.  The manufactureof each product at the new manufacturing facility must be approved byapplicable regulatory authorities, including the FDA for products shipped to theU.S., prior to the resumption of manufacturing of that product at the newfacility.  Prior to transferring themanufacturing for each product to the new facility, Savient builds inventory ofsuch product that it believes will be adequate to meet demand over the periodrequired to transfer the manufacturing operations and have them inspected andapproved.  To the extent it takes longerthan expected to complete the transfer or obtain regulatory approval or demandfor our product exceeds our expectations, our ability to meet our customers’requirements for their products will be adversely affected, which couldadversely affect our business.

 

We have limited marketing capability andexperience.

 

Savient established a sales and marketing force inthe United States during the second half of 1995 to promote distribution ofOxandrin and other Savient products in the United States, and its Rosemontsubsidiary has a sales force that markets Rosemont’s products in the UnitedKingdom.  With

 

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respect to territories outside the UnitedStates (other than the United Kingdom for Rosemont products and Israel).Savient does not yet have an established sales force and relies on thirdparties to market its products.  Therecan be no assurance that our marketing strategy will be successful.  Turnover in our sales and marketingemployees adversely affects our product sales, as it can take several months tofind and train new sales and marketing employees.  Competition for experienced sales and marketing employees isintense, and we compete with companies with greater resources and largerproduct lines.  During 2003 weexperienced significant difficultly in maintaining a full complement of salesand marketing force in the United States due, in part, to the limited number ofproducts we market.  In November 2003 we engaged a contractsales organization to fill territories for which we were lost and could notreplace sales and marketing employees. We cannot assure you that the representatives from this contract salesorganization will be as effective as our own employees in marketingOxandrin.  Savient’s ability to marketits products successfully in the future will be dependent on a number offactors, many of which are not within its control.  See “—We are dependent on third-party licensees to commercializemany of our products, and their failure to perform adequately could adverselyaffect our results of operations.”

 

We are seeking to expand throughacquisitions, which entails risk.

 

Savient is currently seeking to expand itsoperations and product pipeline through the acquisition of businesses, productsand/or technologies.  Expansion throughacquisition involves several risks.  Inorder to consummate an acquisition, Savient may issue additional equity, whichwould dilute current stockholders’ percentage ownership and could diluteearnings per share, incur substantial debt, assume contingent liabilities,create additional expenses related to intangible assets and/or reduce ourreported earnings or earnings per share and cause our stock price todecline.  In addition,accounting-related charges may affect our balance sheet and results ofoperations.  Savient may not be able tosuccessfully integrate any acquired business, product and/or technology withouta significant expenditure of operating, financial and management resources, ifat all.  In addition, acquiredbusinesses may not at the time of acquisition be profitable, and acquiredproducts may require substantial additional research and development and clinicaltrials before they can be commercialized, all of which could adversely affectSavient’s results of operations, cash flows and financial condition.  Potential products acquired at an earlystage of development may fail to reach the market for numerous reasons,including those set forth above under “—The successful development ofpharmaceutical products is costly and highly uncertain.”  To the extent we acquire technology that isnot fully commercially developed and has no alternative future use at the timeof acquisition, we will be required to write off immediately the fair marketvalue of such technology, which will adversely affect our results ofoperations.  Our ability to expandthrough acquisitions is currently limited by our low stock price and the factthat we used a substantial portion of our cash to acquire Rosemont.

 

Other companies, many of which have substantiallygreater financial resources than we do, compete with us for the acquisition ofbusinesses, products and technologies. We may not be able to acquire additional businesses or rights toproducts or technologies on acceptable terms, or at all, or be able to obtainfinancing for such acquisitions on acceptable terms, if at all.  Our inability to acquire additionalbusinesses, products and/or technologies could limit the overall growth of ourbusiness.  Furthermore, even if weobtain rights to a product or technology or acquire a business, we may not beable to generate sales sufficient to create a return on our investment.

 

We expect our quarterly results tofluctuate, which may cause volatility in our stock price.

 

Savient’s revenues and expenses have in the pastand may in the immediate future continue to display significant variations,which variations have in the past caused and would in the future cause ouroperating results to vary significantly from quarter to quarter and year toyear.  These variations are due to avariety of factors, including:

 

•  the amount and timing ofproduct sales, which can be affected by demand for our products, our inabilityto provide adequate supply for our products and changes in wholesaler buyingpatterns,

•  changes in the government’s orprivate payors’ reimbursement policies for our products,

•  increased competition from newor existing products,

•  the timing of the introductionof new products,

•  the timing and realization ofmilestone and other payments from licensees,

• the timing and amount of expenses relating to research and development,product development and manufacturing activities,

• the extent and timing of costs of obtaining, enforcing and defendingintellectual property rights, and

 

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•  any charges related toacquisitions.

 

Because many of Savient’s expenses are fixed,particularly in the short-term, any decrease in revenues will adversely affectSavient’s earnings until revenues can be increased or expenses reduced.  For example, in 1999, the first five monthsof 2000 and the second half of 2001, Savient’s revenues and earnings wereadversely affected by Accredo’s decision to reduce the amount of Oxandrininventory it carried.  We also expectour revenues and earnings to be adversely affected once a generic version ofOxandrin is introduced.  See “—We aredependent on Oxandrin sales for a significant portion of our revenue, and anydecrease in Oxandrin sales could adversely affect our results of operations andour ability to conduct our business.” Because of fluctuations in revenues and expenses, it is possibleSavient’s operating results for a particular quarter or quarters will not meetthe expectations of public market analysts and investors, causing the marketprice of Savient common stock to decline. We believe that period-to-period comparisons of our operating resultsare not a good indication of our future performance and stockholders should notrely on those comparisons to predict our future operating or share priceperformance.  See “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.”

 

We may be unable to obtain any additionalcapital needed to operate and grow our business.

 

The development and commercialization of productsrequires substantial funds.  Inaddition, we may require cash to acquire businesses, products and/or technologies.  Our cash requirements are satisfiedprimarily through product sales. Historically, we have also obtained capital through (i) funding ofprojects through collaborative research and development arrangements, (ii)contract fees, (iii) government of Israel funding of a portion of certainresearch and development projects, mainly through the office of the ChiefScientist of the Ministry of Industry and Trade, and (iv) equity and debtfinancings.  There can be no assurancethat these financing alternatives will be available in the future to satisfyour cash requirements.  We have appliedto the Office of the Chief Scientist for funding of a portion of our researchand development activities, but we cannot assure you that the Chief Scientistwill continue to provide funding to us. We believe that our current cash resources, together with anticipatedproduct sales, will be sufficient to fund our ongoing operations for theforeseeable future.  There can, however,be no assurance that product sales will occur as anticipated, that currentagreements with third party distributors of our products will not be canceled,that the Chief Scientist will continue to provide funding, or thatunanticipated events requiring the expenditure of funds will not occur. In September2002, we used a substantial portion of our cash resources to acquire Rosemont.

 

The satisfaction of our future cash requirementswill depend in large part on the status of commercialization of our products,our ability to enter into additional research and development and licensingarrangements, and our ability to obtain additional equity investments or bankloans if necessary.  There can be noassurance that Savient will be able to obtain additional funds or, if suchfunds are available, that such funding will be on favorable terms.  If additional funds are raised by issuingequity securities of Savient, dilution to existing stockholders mayresult.  If additional funds are raisedthrough the issuance of debt securities or borrowings, Savient may incursubstantial interest expense and could become subject to financial and othercovenants that could restrict our ability to operate our business.  If adequate funds are not available, Savientmay be required to significantly curtail one or more of its commercializationefforts or research and development programs or obtain funds througharrangements with collaborative partners or others on less favorable terms thanmight otherwise be available.

 

We are subject to stringent governmentalregulation, and our failure to comply with applicable regulations couldadversely affect our ability to conduct our business.

 

Virtually all aspects of our business are subjectto extensive regulation by numerous federal and state governmental authoritiesin the U.S., such as the FDA, as well as by foreign countries where wemanufacture or distribute our products. Of particular significance are the requirements covering research anddevelopment, testing, manufacturing, quality control, labeling and promotion ofpharmaceutical products for human use. All of Savient’s products, manufacturingprocesses and facilities require governmental licensing or approval prior tocommercial use.  A pharmaceuticalproduct cannot be marketed in the United States until it has been approved bythe FDA, and then can only be marketed for the indications and claims approvedby the FDA.  As a result of theserequirements, the length of time, the level of expenditures and the laboratoryand clinical information required for approval of an NDA are substantial.  The approval process applicable to productsof the type being developed by Savient usually takes five to seven years fromthe commencement of human clinical trials and typically requires substantialexpenditures.  Savient and its licenseesmay encounter significant delays or excessive costs in their respective effortsto secure necessary approvals or licenses. Before obtaining regulatory approval for the commercial sale of itsproducts, Savient is required to conduct pre-clinical and clinical trials to

 

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demonstrate that the product is safe andefficacious for the treatment of the target disease.  The timing of completion of clinical trials is dependent upon anumber of factors, many of which are outside our control.  In addition, Savient and its partners mayencounter delays or rejections based upon changes in the policies of regulatoryauthorities.  The FDA and foreignregulatory authorities have substantial discretion to terminate clinical trials,require additional testing, delay or withhold registration and marketingapproval, and mandate product withdrawals.

 

Failure to obtain requisite governmental approvals,or failure to obtain approvals of the scope requested, could delay or precludeSavient or its licensees from marketing their products, could limit thecommercial use of the products and could also allow competitors time tointroduce competing products ahead of product introduction by Savient andthereby have a material adverse effect on Savient’s results of operations,liquidity and financial condition.  Evenafter regulatory approval is obtained, use of the products could reveal sideeffects that, if serious, could result in suspension of existing approvals anddelays in obtaining approvals in other jurisdictions.

 

Regulation by governmental authorities in theUnited States and other countries is a significant factor affecting the timingof the commercialization of Savient’s products and its ongoing research anddevelopment activities.  The timing ofregulatory approvals is not within our control.  To date, the length of time required to obtain regulatoryapproval of genetically-engineered products has been significantly longer thanexpected, both for Savient and the biotechnology industry in general.  These delays have had and, if they continue,could have a material adverse effect on our results of operations and financialcondition.  We believe that these delayshave in the past negatively impacted our ability to attract funding and that,as a result, the terms of such financings have been less favorable to us thanthey might otherwise have been had Savient’s product revenues providedsufficient funds to finance the large costs of taking a product from discoverythrough commercialization.  As a result,Savient has had to license the commercialization of many of its products tothird parties in exchange for research funding and royalties on product sales,resulting in lower revenues than if Savient had commercialized the products onits own.

 

Failure to comply with applicable regulatoryrequirements can, among other things, result in significant fines or othersanctions, termination of clinical trials, suspension of regulatory approvals,product recalls, seizure of products, imposition of operating restrictions andcriminal prosecutions.  While we havedeveloped and instituted a corporate compliance program based on current bestpractices, we cannot assure you that we or our employees have been or will bein compliance with all potentially applicable federal and state regulations.

 

Further, FDA policy or similar policies ofregulatory agencies in other countries may change and additional governmentalrequirements may be established that could prevent or delay regulatory approvalof our products.  We cannot predict whateffect changes in regulations, enforcement positions, statutes or legalinterpretation, when and if promulgated, adopted or enacted, may have on ourbusiness in the future.  Changes could,among other things, require changes to manufacturing methods or facilities,expanded or different labeling, new approvals, the recall, replacement ordiscontinuance of certain products, additional record keeping and expandedscientific substantiation.  Thesechanges, or new legislation, could adversely affect our business.

 

Our sales depend on payment andreimbursement from third-party payors, and a reduction in the payment orreimbursement rate could result in decreased use or sales of our products.

 

Savient’s ability to successfully commercializehuman therapeutic products depends in part on the extent to which reimbursementfor the cost of such products and related treatment will be available fromgovernment health administration authorities, private health coverage insurersand other organizations. Significant uncertainty exists as to the reimbursementstatus of newly approved healthcare products, and there can be no assurancethat adequate third-party coverage will be available for Savient to maintainprice levels sufficient for the realization of an appropriate return on itsinvestment in product development. Government and other third party payors are increasingly attempting tocontain healthcare costs by limiting both coverage and the level of reimbursementfor new therapeutic products approved for marketing by the FDA and by refusing,in some cases, to provide any coverage for use of approved products for diseaseindications for which the FDA has not granted marketing approval.  If adequate coverage and reimbursementlevels are not provided by government and third-party payors for use of ourhealthcare products, the market acceptance of these products would be adverselyaffected.  In addition, in recent yearsa number of federal and state healthcare reform proposals have been introducedto contain healthcare costs.  There canbe no assurance as to the ultimate content, timing or effect of any healthcarereform legislation, nor is it possible at this time to estimate the impact ofpotential legislation on our business.

 

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Regulatory approval of prices is also required inmost countries outside the United States. In particular, certain European countries will condition their approvalof a product on the agreement of the seller not to sell the product for morethan a certain price in that country. There can be no assurance that the establishment of a price in oneEuropean country will not have the practical effect of requiring our marketingpartners to sell the product in other European countries at no higher than suchprice.  Because Savient generallysupplies product to its marketing partners for a specified percentage of netsales, there can be no assurance that the resulting prices would be sufficientto generate an acceptable return on our investment in our products or evencover our manufacturing costs for such product.  In addition, in the U.K. pharmaceutical companies generally mustnot exceed government-agreed pricing levels when sales to the National HealthService exceed a specified level.

 

Beginning in the second quarter of 2003, threestates with budget crises – New York, California, and Florida – have eliminatedor limited reimbursement of prescription drugs for HIV and AIDS, includingOxandrin, under their AIDS Drug Assistance Programs (“ADAP”), which has and isexpected to continue to adversely impact sales of Oxandrin in thosestates.  Efforts and discussions areongoing with these state agencies to reverse these recent state ADAP changes,but to date we have not been successful and we cannot predict whether we willbe successful in the future.  If we arenot successful, our Oxandrin sales in this HIV/AIDS related involuntary weightloss market will continue to be adversely impacted.

 

We operate in a highly competitive marketand our competitors may develop alternative technologies and products before ormore successfully than we do.

 

The pharmaceutical and biotechnology industries areintensely competitive, and the technological areas in which we work continue toevolve at a rapid pace.  Our futuresuccess depends upon maintaining our ability to compete in the research,development and commercialization of products and technologies in our areas offocus.  Competition from pharmaceutical,chemical and biotechnology companies, universities and research institutions isintense and expected to increase.  Manyof these competitors have substantially greater research and developmentcapabilities and experience and manufacturing, marketing, financial andmanagerial resources than we do.  Acquisitionsof competing companies by large pharmaceutical companies or other companiescould enhance the financial, marketing and other resources available to thesecompetitors.

 

Our competitors may develop products that aresuperior to those we are developing. Rapid technological development may result in our products or processesbecoming obsolete before marketing of these products or before we recover asignificant portion of the research, development and commercialization expensesincurred with respect to those products.

 

Our products must compete with others to gainmarket acceptance and market share.  Animportant factor will be the timing of market introduction of competitiveproducts.  Accordingly, the relativespeed with which we and competing companies can develop products, complete theclinical testing and approval processes, and supply commercial quantities ofthe products to the market will be an important element of market success.  Significant competitive factors include:

 

• capabilities of our collaborators,

• product safety and efficacy,

• timing and scope of regulatory approval,

• product availability,

• marketing and sales capabilities,

• reimbursement coverage from insurance companies and others,

• the amount of clinical benefit of our product candidates relative totheir cost,

• the method of administering a product,

• price, and

• patent protection.

 

Our competitors may develop more effective or moreaffordable products or achieve earlier product development completion, patentprotection, regulatory approval or product commercialization than we do.  Our competitors’ achievement of any of thesegoals could have a material adverse effect on our business.  These companies also compete with Savient toattract qualified personnel and to attract third parties for acquisitions,joint ventures or other collaborations.

 

We may be unable to attract, hire and retainskilled personnel.

 

We are dependent upon the efforts of our officers,scientists and other employees.  Theloss of certain of these key employees could materially and adversely affectour business.  Our business is dependentupon our ability to attract, hire and retain qualified research, marketing andmanagerial

 

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personnel. There is a great deal of competition for the limited number ofscientists with expertise in the area of Savient’s operations.  We do not maintain, and have no currentintention of obtaining, “key man” life insurance on any of our employees.  We cannot assure you that we will besuccessful in hiring or retaining the personnel we require for continuedgrowth.  Our failure to hire and retainsuch personnel could materially adversely affect our business.  We have experienced difficulty in attractingand retaining sales and marketing personnel because of the limited number ofproducts that we market.  In addition,beginning in 2003 we have experienced difficulty in attracting and retainingother personnel because of the uncertainty created by the proposed acquisitionof us by Teva and the scaling back of our research program.

 

Our business may be adversely affected bydevelopments in Israel.

 

Savient conducts significant research, developmentand biologics production activities in Israel and these activities can beaffected by economic, military and political conditions in that country and inthe Middle East in general.  Since theestablishment of the State of Israel in 1948, a number of armed conflicts havetaken place between Israel and its Arab neighbors and a state of hostility,which varies in degree and intensity, has caused security and economic problemsin Israel.  Any major hostilitiesinvolving Israel could adversely affect our research, development andproduction operations, which would harm our business.  We cannot assure you that ongoing or revived hostilities relatedto Israel will not have a material adverse affect on us or on our business andon our share price.  Despite theprogress towards peace between Israel and its Arab neighbors, the future ofthese peace efforts is uncertain.  Inaddition, since October 2000, there has been a significant increase inviolence, primarily in the West Bank and Gaza Strip.  During the course of military operations, Israel’s militaryreserves, which include a number of our employees and executives, may be calledup, which could adversely affect our ability to conduct our business.

 

As a result of the violence in Israel in recentyears, the FDA has from time to time suspended inspections of manufacturingfacilities in Israel.  In addition, theFDA cancelled its scheduled April 2003 visit to Israel in light of the thenexisting situation with Iraq.  Productswe intend to manufacture at our newly constructed manufacturing facility cannotbe shipped into the United States until the FDA has inspected and approved thisfacility.  We have already transferredour BioLon and Savient HA manufacturing operations to the new facility, butcannot sell BioLon and Savient HA manufactured at this facility in the U.S.until these manufacturing operations are inspected by the FDA.  Suspension of these activities by the FDAwill delay the commencement of manufacturing at our new facility, which couldadversely affect our business.  Thesuspension of FDA inspections delayed inspection of the contract sterilizerutilized by Savient for its BioLon product, which required us to stop shippingBioLon sterilized in this facility to the United States from fourth quarter of2001 until September 2002, when the facility was approved following aninspection by the FDA.

 

We may face significant risks in expandingour international operations.

 

We significantly expanded our internationaloperations with the acquisition of Rosemont on September 30, 2002.  Our product sales outside the United Statesaccounted for approximately 44% of our total product sales in 2003.  On a pro forma basis giving effect to theacquisition of Rosemont as if it occurred as of January 1, 2001, our productsales outside the United States would have accounted for approximately 45% and41% of our total product sales for the years ended December 31, 2001 and 2002,respectively. International operations involve a number of additional risks,including the following:

 

•  difficulties in staffing andmanaging foreign operations;

•  less familiarity with businesscustoms and practices;

•  the imposition of tariffs andimport and export controls;

•  the impact of possiblerecessionary environments in economies outside the U.S.;

•  unexpected changes inregulatory requirements;

•  currency exchange rate fluctuations;

•  the burdens of complying with avariety of foreign laws; and

•  potentially adverse taxconsequences.

 

To the extent that our international operationsexpand, we expect that an increasing portion of our international product salesand other revenues will be denominated in foreign currencies. We do notcurrently engage in currency hedging transactions.  However, as we continue to expand our international operations,exposures to gains and losses on international currency transactions mayincrease.  We may choose to limit ourexposure by the purchase of forward foreign exchange contracts or similarhedging strategies.  The currencyexchange strategy that we adopt may not be successful in avoidingexchange-related losses.  In addition,the above-listed factors may cause a decline in our future internationalrevenue

 

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and, consequently, may harm our business.  We may not be able to sustain or increaserevenue that we derive from international sources.

 

We may incur substantial product liability.

 

The testing and marketing of Savient’s productsentail an inherent risk of product liability and associated adversepublicity.  Pharmaceutical productliability exposure could be extremely large and pose a material risk. AlthoughSavient has so far been able to obtain indemnification from pharmaceuticalcompanies commercializing its products, there can be no assurance that othersuch companies will agree in the future to indemnify Savient for other of Savient’sproducts or that such companies will, if obligated to do so, have adequateresources to fulfill their indemnity agreements.  Further, to the extent Savient elects to test or market productsindependently, it will bear the risk of product liability directly.  Savient presently has $20,000,000 of productliability insurance coverage in place. There can be no assurance that we willbe able to maintain existing insurance or obtain additional insurance onacceptable terms, or at all.  It ispossible that a single product liability claim could exceed our insurancecoverage limits, and multiple claims are possible.  Any successful product liability claim made against Savient couldsubstantially reduce or eliminate any stockholders’ equity Savient may have andcould have a significant adverse impact on Savient’s business. Productliability claims, regardless of their merits, could be costly and divertmanagement’s attention, and adversely affect our reputation and the demand forour products.

 

Our stock price is volatile, which couldadversely affect your investment.

 

The market prices for securities ofbiopharmaceutical companies, including Savient, have been volatile, and it islikely that the price of our common stock will fluctuate in the future.  Factors such as announcements oftechnological innovations or new commercial products by Savient or itscompetitors, announcements by Savient or its competitors of results inpre-clinical testing and clinical trials, governmental regulation, patent orproprietary rights developments, public concern as to the safety or otherimplications of biotechnology products, changes in earnings estimates andrecommendations by securities analysts, period-to-period fluctuations infinancial results and market conditions in general may have a significantimpact on the market price of our common stock.  The volatility of our common stock imposes a greater risk ofcapital losses on our stockholders than would a less volatile stock.  In addition, such volatility makes itdifficult to ascribe a stable valuation to a stockholder’s holdings of ourcommon stock.  The stock market has alsoexperienced significant price and volume fluctuations that are often unrelatedto the operating performance of particular companies. In the past, following periodsof volatility in the market price of the securities of biopharmaceuticalcompanies, securities class action litigation has often been instituted againstthese companies.  Such litigation wouldresult in substantial costs and a diversion of management’s attention andresources, which could adversely affect our business.  See “—The ultimate outcome of pending securities litigation isuncertain.”

 

In addition, the market price of our common stockcould be adversely affected by future exercises of outstanding options and theissuance of common stock in acquisitions of businesses, products and/ortechnologies.  At December 31, 2003options to purchase an aggregate of approximately 8,363,000 shares of commonstock were outstanding.  A portion ofthese options have exercise prices below the current market price of the commonstock.  All of the shares of commonstock issuable upon exercise of these outstanding options have been registeredunder the Securities Act of 1933, as amended, and, accordingly, when issuedwill be freely tradable without restriction. The sale of a significant amount of these shares at one time couldadversely affect the market price of our common stock.  In addition, Savient may issue additionalstock, warrants and/or options to raise capital or complete acquisitions in thefuture.  Savient may also issueadditional securities in connection with its employee benefit plans.  During the terms of such options andwarrants, the holders thereof are given the opportunity to profit from a risein the market price of the common stock. The exercise of such options and warrants may have an adverse effect onthe market value of the common stock. The existence of such options and warrants may adversely affect theterms on which Savient can obtain additional equity financing. To the extentthe exercise prices of such options and warrants are less than the net tangiblebook value of the common stock at the time such options and warrants areexercised, Savient’s stockholders will experience an immediate dilution in thenet tangible book value of their investment. Further, the future sale of a substantial number of shares of commonstock by existing stockholders and option holders may have an adverse impact onthe market price of the common stock. See “Item 5. Market for Registrant’s Common Equity and RelatedStockholder Matters.”

 

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Effecting a change of control of Savientcould be difficult, which may discourage offers for shares of our common stock.

 

Our certificate of incorporation and the DelawareGeneral Corporation Law contain provisions that may delay or prevent an attemptby a third party to acquire control of us. These provisions include the requirements of Section 203 of the DelawareGeneral Corporation Law.  In general,Section 203 prohibits designated types of business combinations, includingmergers, for a period of three years between us and any third party that owns15% or more of our common stock.  Thisprovision does not apply if:

 

•                  our Board of Directors approves of the transaction before the thirdparty acquires 15% of our stock,

•                  the third party acquires at least 85% of our stock at the time itsownership goes past the 15% level, or

•                  our Board of Directors and two-thirds of the shares of our common stocknot held by the third party vote in favor of the transaction.

 

We have also adopted a stockholder rights planintended to deter hostile or coercive attempts to acquire us.  Under the plan, if any person or groupacquires more than 20% of our common stock without approval of our Board ofDirectors under specified circumstances, our other stockholders have the rightto purchase shares of our common stock, or shares of the acquiring company, ata substantial discount to the public market price.  The plan thus makes an acquisition much more costly to apotential acquirer.

 

Our certificate of incorporation also authorizes usto issue up to 4,000,000 shares of preferred stock in one or more differentseries with terms fixed by the Board of Directors.  Stockholder approval is not necessary to issue preferred stock inthis manner.  Issuance of these sharesof preferred stock could have the effect of making it more difficult for aperson or group to acquire control of us. No shares of our preferred stock are currently outstanding.  While our Board of Directors has no currentintentions or plans to issue any preferred stock, issuance of these sharescould also be used as an anti-takeover device.

 

The ultimate outcome of pending securitieslitigation is uncertain.

 

After the restatement of our financial statementsfor the years ended December 31, 1999, 2000 and 2001 and the first two quartersof 2002, we and some of our current and former officers were named in a seriesof similar purported securities class action lawsuits.  The complaints in theses actions allegeviolations of U.S. securities law through alleged material misrepresentationsand omissions and seek an unspecified award of damages.  In addition, members of our Board ofDirectors prior to June 2003 and Arthur Andersen LLP, our prior auditor, werenamed in derivative actions that claimed, among other things, that ourdirectors breached their fiduciary duties by failing to implement and maintainan adequate internal accounting control system.  While these derivative suits were dismissed by the court, we havereceived a letter on behalf of a purported shareholder demanding that wecommence an action against most of our directors, certain former directors,Arthur Andersen and others who were responsible for the actions that resultedin the restatement of our financial statements.  We intend to contest these actions vigorously.  There can be no guarantee as to the ultimateoutcome of this pending litigation or whether the ultimate outcome may have amaterial adverse effect on our financial position or results of ouroperations.  Savient has referred theseclaims to its directors and officers insurance carrier, which has reserved itsrights as to coverage with respect to these actions.  See “Item 3.  LegalProceedings.”

 

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# **EXECUTIVE OFFICERS OF SAVIENT**

 

Our current executive officers are asfollows:

 
| **Name**                 |   | **Age** |   | **Positions**                                                                         |
|--------------------------|--------|---------|--------|---------------------------------------------------------------------------------------|
| Sim Fass                 |   | 62      |   | Chairman of the Board and Chief Executive Officer; President of  BTG-Israel; Director |
|                     |   |    |   |                                                                                  |
| Christopher Clement      |   | 48      |   | President and Chief Operating Officer                                                 |
|                     |   |    |   |                                                                                  |
| Zebulun D. Horowitz, M.D |   | 52      |   | Senior Vice President-Chief Medical Officer                                           |
|                     |   |    |   |                                                                                  |
| Dov Kanner, Ph.D.        |   | 50      |   | Executive Vice President-Chief Technology Officer; General Manager,  BTG-Israel       |
|                     |   |    |   |                                                                                  |
| Ernest Kelly, Ph.D.      |   | 54      |   | Senior Vice President-Quality Assurance, Quality Control and  Regulatory Affairs      |
|                     |   |    |   |                                                                                  |
| Alan J. Rubinfeld        |   | 58      |   | Acting Chief Financial Officer and Treasurer                                          |

 

*SimFass* has served as Chief Executive Officer ofSavient and President of BTG-Israel since May 1984 and as Chairman of the Boardof Directors since March 1997.  He hasalso been a Director of Savient since August 1983.  Dr. Fass served as Chief Operating Officer of BTG-Israel fromAugust 1983 to May 1987, as President of Savient from May 1984 to May 1999 andTreasurer of Savient from August 1983 to June 2001. From April 1980 to August1983, he was Vice President, General Manager of Wampole Laboratories, adivision of Carter-Wallace, Inc., a company that manufactures healthcare-related products.  Prior to that,he held various positions at Pfizer Inc. from September 1969 until March 1980,including Director, Marketing Research and Planning, Pfizer Pharmaceuticals,and Vice President, Marketing and Sales, Pfizer Diagnostics Division of PfizerPharmaceutical and Group Marketing Manager of Pfizer Laboratories.  Dr. Fass received his Ph.D. in developmentalbiology/biochemistry from the Massachusetts Institute of Technology.

 

*ChristopherClement* joined Savient in May 2002 as President andChief Operating Officer.  From September2000 until joining Savient, Mr. Clement served as CEO and Chairman of EpicytePharmaceutical, Inc., a bio-technology company.  From 1997 until he joined Epicyte, he held the positions ofExecutive Vice President and Senior Vice President, Chief Marketing Officer atAres-Serono Group.  From 1988 to 1997,Mr. Clement held a number of senior management positions at SearlePharmaceuticals, including Vice President of Marketing, Vice President ofCorporate Product Planning, Vice President, General Manager of GlobalFranchises, and Division President.  Mr.Clement has a B.A. in Marketing/Business from Mercy College.

 

*DovKanner*, Ph.D. was appointed Executive VicePresident—Chief Technology Officer of Savient in June 2003 and General Managerof BTG-Israel in January 2000.  Heserved as Senior Vice President of Savient from January 2000 until June2003.  Prior thereto, he served as VicePresident—Quality Assurance and Regulatory Affairs of BTG-Israel from September1994.  Dr. Kanner joined BTG-Israel in1981 as a staff scientist, served as Head of Fermentation from 1984 to 1989 andas Deputy Director, Manufacturing and Process Development, from 1989 to1994.  He obtained his Ph.D. in microbiologyfrom Rutgers University in 1980.

 

*ZebulunHorowitz,*M.D., joined Savient inMarch 2003 as Senior Vice President—Chief Medical Officer.  Prior to joining Savient, Dr. Horowitz wasExecutive Director and Global Head, Clinical Research and Development ofNovartis Pharmaceuticals.  Prior tojoining Novartis in 1996, he was Principal Scientist and Medical Director, NewDrug Development at Procter & Gamble Pharmaceuticals from 1992 to 1996;Associate Professor of Clinical Medicine at University of Cincinnati College ofMedicine (Endocrinology) from 1989 to 1996; Section Chief and Consultant inEndocrinology, Diabetes, Metabolism at Veterans Administration Medical Center,Cincinnati, Ohio, from 1989 to 1996; Assistant Professor of Medicine andAssistant Attending Physician, New York University School of Medicine —Bellevue Hospital Medical Center from 1983 to 1989, and Attending Physician inEndocrinology, Diabetes, Metabolism at New Gouverneur Hospital in New York Cityfrom 1982 to 1984.  He received his M.D.in June 1978 from New York University School of Medicine and is a Diplomate,ABIM: Endocrinology, Diabetes, and Metabolism (1985), Diplomate, ABIM: InternalMedicine (1981) and Diplomate, National Board of Medical Examiners (1979).

 

*ErnestKelly*, Ph.D. joined Savient in February 1996 inthe newly created position of Senior Vice President—Quality Assurance, QualityControl and Regulatory Affairs. Prior to joining Savient, he was

 

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Vice President, Worldwide Quality Assurance forRhone-Poulenc Rorer Inc. (“RPR”).  From1979 to 1996, Dr. Kelly served in various positions at RPR in both research anddevelopment and industrial operation quality assurance.  Prior to joining RPR, he served Merck Sharpand Dohme from 1974 to 1979 and McNeil Labs from 1972 to 1974 in qualityassurance and analytical research positions. Dr. Kelly received his Ph.D. in Physical Chemistry from VillanovaUniversity, served on several United States Pharmacopeia Advisory Panels andalso served as Adjunct Professor of Pharmaceutics at Temple University.

 

*Alan J.Rubinfeld*joined Savient in January2004 as Acting Chief Financial Officer and Treasurer.  Mr. Rubinfeld has been a partner with Tatum CFO Partners, LLP, aprofessional services firm, since September 2003. He served as an independentbusiness and financial consultant from January 2003 through August 2003.  From December 2001 through November 2002, hewas employed by Atlantic Express Transportation Group, Inc., a bustransportation company, and served as its Chief Financial Officer from January2002 to August 2002.  From November 2000through July 2001, he served as Chief Operating Officer of VitaquestInternational, Inc., a manufacturer of vitamins and nutraceuticals.  From 1995 to 2000, he was employed by VivaInternational Group, a supplier of ophthalmic frames and sunglasses, initiallyas Vice President and Chief Financial Officer and from 1997 to 2000 asExecutive Vice President and Chief Operating Officer.  Mr. Rubinfeld earned a B.S. from Rider College, an M.B.A. fromSeton Hall University, and is a Certified Public Accountant in the State of NewJersey.

 

**ITEM 2.**     **PROPERTY**

 

Savient’s corporate headquarters are located inEast Brunswick, New Jersey, where Savient has leased approximately 53,000square feet of office space.  The leasehas a base average annual rental expense of approximately $1,728,000 andexpires in March 2013.  There are twofive-year renewal options.****In addition, Savient leases approximately2,000 square feet in New York City for its business activities, including itsinvestor and public relations activities. This lease expires in February 2009. We also lease approximately 10,000 square feet of space in San Diego,California, where our Prosaptide research is being conducted.  This lease expires in October 2004.

 

Savient has a research, development and biologicsmanufacturing facility located in Rehovot, Israel, where BTG-Israel leasesapproximately 77,000 square feet at an annual rental of approximately $970,000.This lease expires in December 2005.  InApril 1999 BTG-Israel purchased a building in Be’er Tuvia, Israel, locatedapproximately 12 miles south of its current facility, for approximately $6.25million.** **Basic construction of a modernbiologics production facility designed to meet FDA GMP requirements for drugs,biologics and devices was completed at the end of 2001.  Facility qualification activities conductedduring 2002 and 2003 were substantially completed by the end of 2003.  During 2003, we transferred our BioLon andSavient HA manufacturing to our new manufacturing facility.  We expect to transfer our hGH manufacturingto the new facility during 2004.  Inaddition, Savient had agreed to purchase additional property adjacent to thenew manufacturing facility for approximately $1,200,000, of which approximately$400,000 has been paid to date.  Savienthad intended to locate its principal biopharmaceutical research and developmentactivities, as well as management and administrative activities, adjacent tothe new manufacturing facility.  Savienthas terminated discussions regarding the purchase of this property and believesit will receive a municipal tax credit from the local municipality in respectof its $400,000 payment.  Rosemont’sdevelopment and manufacturing facility is located in Leeds, U.K., where itleases approximately 41,000 square feet at an annual rental of approximately$298,000.  Under a recent agreementbetween Rosemont and the landlord, this lease will expire in December 2019,although Rosemont has the option to terminate the lease in December 2009.

 

**ITEM 3.**     **LEGAL PROCEEDINGS**

 

Patent Related Litigation

 

On December 1, 1994, Genentech filed a lawsuitagainst Savient in the United States District Court for the District ofDelaware alleging that Savient’s importation of hGH produced according to itsoriginal expression system infringed two Genentech process patents.  In January 1995, Savient commenced an actionagainst Genentech in the United States District Court for the Southern Districtof New York (the “U.S. District Court”) seeking, among other things,declaratory judgments as to the non-infringement, invalidity andunenforceability of certain Genentech patents. The Delaware action was consolidated with the New York action, and inAugust 1995 the U.S. District Court granted a preliminary injunctionprohibiting the commercial introduction in the United States of Savient’s hGHpending the

 

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outcome of the patent infringement action. The U.S.Court of Appeals for the Federal Circuit (“CAFC”) rejected Savient’s appeal ofthe grant of the preliminary injunction, and the United States Supreme Courtdenied Savient’s petition for a writ of *certiorari*.

 

The action in the U.S. District Court was tried inJanuary 2000, at which time two of the Genentech patents originally at issuehad expired, and only a third patent of Genentech, expiring in July 2003,remained in issue.  The U.S. DistrictCourt found that the remaining Genentech patent was invalid and vacated thepreliminary injunction.  FollowingGenentech’s appeal, which was heard in December 2000, the CAFC reversed theDistrict Court’s decision in September 2001, reinstated the preliminaryinjunction and remanded the issue of infringement to the District Court forfurther proceedings.  Savient petitionedthe CAFC for a rehearing en banc, which was denied in December 2001.  Savient and Genentech settled this dispute, anda modified injunction was issued that precluded Savient from importing or sellingin the United States its hGH product produced according to its originalexpression system until July 2003, when the remaining Genentech patentexpired.  See “Item 1.  Business—Products andApplications—Commercialized Products—BIO-TROPIN (human growth hormone).”

 

Three patent applications of Genentech in Israel,which cover general methods relating to genetically engineered products and tohuman growth hormone, have been allowed — two in 1983 and one in 1985. Savientopposed the grant of all these patents. Two of these patent applications expired during 1998 without ever beinggranted.  The third, which expired inJune 2000, corresponds to the U.S. patent that was invalidated by the U.S.District Court in January 2000. Procedurally, hearings before the Israel Registrar of Patents took placeduring 1999 regarding the third patent application and summations and replieswere subsequently filed. Savient filed a motion in December 2001 requestingthat the Registrar strike****out Genentech’s patent application due toits expiration and rule that the matter should no longer be heard.  The Registrar denied the motion and Savienthas applied for leave to appeal, which was granted in March 2003.  Genentech has filed an application to amendor strike the appeal and a hearing is scheduled for April 2004.  The Registrar who heard the arguments in theopposition left office in October 2002 without rendering a decision.  A new Registrar took office in May 2003 andhas asked the parties if they would like him to issue a decision in theopposition. Genentech has requested that he issue a decision, while Savient hasreplied requesting that he postpone the decision until the appeal isdecided.  The filing of an appeal doesnot bar the new Registrar from rendering a decision on the merits of the patentapplication.  There can be no assurancethat Savient will be successful in its opposition to the grant of this nowexpired patent application. If Savient is unsuccessful in its opposition andthe appeal in Israel the patent application may be deemed retroactivelyeffective and Genentech may sue for infringement and seek damages in respect ofhGH manufactured in Israel prior to its expiration date.

 

In September 1993, JCR received a letter fromattorneys representing Genentech and its licensee, Kabi Pharmacia, claimingthat JCR’s sale of Savient’s hGH infringed certain Genentech patents and patentapplications and demanding that JCR cease the sale of Savient’s hGH in Japan.JCR and Savient have filed oppositions to five Genentech patent applications inJapan; oppositions with respect to four of these patent applications weredenied but the fifth was successful, which resulted in that patent applicationbeing revoked during 1999.  We do notbelieve that we are infringing or have ever infringed any valid Genentechpatent or patent application, but there can be no assurance that our hGH willnot be found to infringe certain Genentech patents in Japan, the latest ofwhich expired in July 2000, or any patents issued pursuant to pending patentapplications, the latest of which expired in April 2001.  If Savient’s hGH is found to infringecertain Genentech patents in Japan, JCR and/or Savient may be obligated to paydamages with respect to sales made while the patents were in effect.  Our sales of hGH to JCR totaledapproximately $83.6 million through April 2001.

 

In 1997 Novo was issued a U.S. patent for abiosynthetic ripe human growth hormone free of contaminants from pituitaryderived****humangrowth hormone.  At Savient’s request,the United States Patent Office Board of Patent Appeals and Interferences (the“Patent Office”) in 2000 declared an interference to determine whether Savient,rather than Novo, should hold the patent to biosynthetic ripe human growthhormone on the basis that Savient scientists, not Novo scientists, were thefirst to invent.  The Patent Officeruled in favor of Novo, and Savient commenced an action in federal courtseeking a determination that Savient scientists were the first to invent.  Should Savient not be awarded priority,Savient could be precluded from marketing in the United States hGH producedusing this new expression system.  InApril 2002 Novo commenced an action in federal court against Savient and TevaPharmaceuticals USA, Inc., Savient’s exclusive distributor of human growthhormone in the U.S., claiming that Savient’s manufacture of human growthhormone using its new expression system and the sale or offer for sale ofTev-TropinTM human growth hormone by Teva in the U.S. infringes Novo’spatent.  Novo sought an injunction that,if issued, would preclude Teva from marketing Tev-TropinTM in the U.S. andunspecified monetary damages.  On June7, 2002, the United States District Court for the District of Delaware grantedNovo’s motion for a preliminary injunction prohibiting the sale of Tev-TropinTMrecombinant human growth hormone in the U.S. In November 2002, the United States Court of

 

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Appeals for the Federal Circuit determined thatNovo did not meet the requirement for a preliminary injunction of establishinga reasonable likelihood of success on the merits, and vacated theinjunction.  This action was tried fromJuly 28, 2003, through August 8, 2003. Closing post-trial briefs were filed in December 2003, but a decision isnot expected before mid-2004.

 

We have been advised by SciGen, our Bio-Hep-Blicensee in certain countries in the Far East, that in April 1993 Biogeninitiated suit against SciGen in Singapore asserting that SciGen’s conduct ofclinical trials in Singapore with respect to our hepatitis-B vaccineconstitutes infringement of Biogen’s patent rights in Singapore and claimingrights in the data obtained by SciGen through its clinical trials in Singaporeand that an interlocutory hearing was held in September 1993. SciGen notifiedSavient that the application for the injunction was dismissed by the High Courtin September 1994, but Biogen has not withdrawn its case against SciGen inSingapore.  Biogen’s Singapore patentrights are based on the registration of its corresponding U.K. patents, and thevalidity of patents in Singapore depends on the validity of the correspondingU.K. patents.  Biogen’s broad U.K.patent was invalidated by the U.K. Court of Appeals in October 1994.  The House of Lords upheld this decision inOctober 1996, although Biogen had claims of a more limited scope allowed to thesame patent.  Additionally, three claimsof a narrower U.K. patent were upheld. We believe that none of these claims will affect commercialization ofour vaccine, although there can be no assurance of this.  We are aware of certain other patents thathave been granted or are pending and which, if granted, may prevent us fromselling our vaccine in the United States, Europe and certain othercountries.  Savient’s failure to obtainany needed license, or a determination that its vaccine infringes the patentrights of Biogen or others, would substantially limit, if not prohibit, thecommercialization of the Bio-Hep-B vaccine in those countries in which Biogenor others have a patent until such patent is revoked or expires.  Our ability to secure any necessary licensesor sublicenses to these patents or applications cannot be predicted.

 

In 2000, Duramed Pharmaceuticals, Inc. filed anAbbreviated New Drug Application with the FDA seeking approval of a genericversion of Mircette.  Pursuant to itslicense agreement with Organon, Savient has commenced a patent infringementsuit against Duramed, which was subsequently acquired by BarrLaboratories.  In December 2001, thecourt granted Barr’s motion for summary judgment of non-infringement ofSavient’s patent.  Savient appealed thisdecision and on April 1, 2003, the CAFC reversed the District Court’s grant ofsummary judgment and sent the case back to the District Court for furtherproceedings, where it has been assigned to a new judge because the judge whooriginally was presiding retired. Organon has been joined as a party to this action, which is in discoveryand document production.  If the patentis held not to be infringed, Organon may assert that it is no longer requiredto pay Savient royalties on the sale of Mircette.  Barr introduced its generic product in 2002, which has adverselyaffected sales of Mircette and, therefore, royalties to Savient.

 

We are aware of patent applications filed by, orpatents issued to, other entities with respect to technology potentially usefulto us and, in some cases, related to products and processes being developed byus.  We cannot presently assess theeffect, if any, that these patents may have on our operations.  The extent to which efforts by otherresearchers have resulted or will result in patents and the extent to which theissuance of patents to others would have a materially adverse effect on Savientor would force Savient to obtain licenses from others is currentlyunknown.  See “Item 1.  Business—Risk Factors—If our intellectualproperty positions are challenged, invalidated or circumvented, or if we failto prevail in present and future intellectual property litigation, our businesscould be adversely affected.”

 

Non-Patent Related Litigation

 

On December 20, 2002, a purported shareholder classaction was filed against Savient and three of its officers.  The action is pending under the caption A.F.I.K.Holding SPRL v. Fass, No. 02-6048 (HAA) in the U.S. District Courtfor the District of New Jersey and alleges violations of Sections 10(b) and20(a) of the Securities Exchange Act of 1934. Plaintiff purports to represent a class of shareholders who purchasedSavient shares between April 19, 1999 and August 2, 2002.  The complaint asserts that Savient’sfinancial statements were materially false and misleading because Savientrestated its earnings and financial statements for the years ended 1999, 2000and 2001, as reflected in its Form 8-K and accompanying press release issuedAugust 2, 2002.  Five virtuallyidentical actions were filed in January and February 2003.  In September 2003, the actions wereconsolidated and co-lead plaintiffs and co-lead counsel were appointed inaccordance with the Private Securities Litigation Reform Act.  The parties have entered into a stipulationwhich provides for the lead plaintiff to file an amended consolidatedcomplaint. This amended complaint has not yet been filed.

 

On January 23, 2003, a purported shareholderderivative action was filed on behalf of Savient against nine of its officersand directors, its former auditors, Arthur Andersen LLP, and Savient as anominal defendant.  The allegations inthe derivative action are substantially similar to the allegations in

 

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the purported shareholder class actions.  The derivative action was pending under thecaption Nelson v. Conrad, No. 7-794-03, in the Superior Court ofNew Jersey, Middlesex County.  A secondpurported shareholder derivative action, Millet v. Conrad, No.L-1275-03, was filed on February 14, 2003 and was consolidated with the firstaction.  This consolidated action wasdismissed without prejudice in November 2003. No appeal was taken and the time to file an appeal has expired.

 

On October 27, 2003, Savient received a letteraddressed to the Board of Directors from attorneys for a purported stockholderdemanding that Savient commence legal proceedings to recover its damagesagainst directors who served on Savient’s board immediately prior to the June2003 Annual Meeting of Stockholders, Fulbright & Jaworski L.L.P., Arthur AndersenLLP, the partners of Arthur Andersen responsible for the audit of Savient’sfinancial statements for 1999, 2000 and 2001, as well as all other officers anddirectors responsible for the alleged wrongdoing.  The letter claims that some or all of these persons wereresponsible for the material overstatement of Savient’s assets, earnings andnet worth, and that these persons caused Savient to disseminate false andmisleading press releases and filings with the SEC.  An advisory committee to the Board, consisting of directors whowere not directors of Savient prior to the June 2003 Annual Meeting ofStockholders, is currently investigating the demand.

 

Savient intends to vigorously defend against allallegations of wrongdoing.  Savient hasreferred these claims to its directors and officers insurance carrier, whichhas reserved its rights as to coverage with respect to these actions.

 

As disclosed in Savient’s Form 8-K dated June 23,2003, Savient received an informal request for documents from a regional officeof the Securities and Exchange Commission relating to the restatement ofSavient’s financial statements for the years 1999, 2000, 2001 and the firsthalf of 2002.  We have provided allmaterials requested by the SEC.

 

**ITEM 4.**     **SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None.

 

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# **PARTII**

# ** **

**ITEM 5.**     **MARKET FOR REGISTRANT’S COMMONEQUITY AND RELATED STOCKHOLDER MATTERS**

 

Savient’s common stock is quoted on the NationalAssociation of Securities Dealers Automated Quotation System (“Nasdaq”)National Market under the symbol “SVNT”; prior to June 23, 2003, it was quotedunder the symbol “BTGC”.  The followingtable sets forth, for the periods indicated, the high and low sale prices pershare of Savient’s common stock from January 1, 2002 through December 31, 2003as reported by the Nasdaq National Market.

 
|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
|           |   |     |   |    |   |
| **2002**       |   |     |   |    |   |
| First Quarter  |   | $        | 9.00   |    | $      | 4.65 |   |
| Second Quarter |   | 6.26     |   | 4.10    |   |
| Third Quarter  |   | 6.05     |   | 2.50    |   |
| Fourth Quarter |   | 4.88     |   | 1.95    |   |
|           |   |     |   |    |   |
| **2003**       |   |     |   |    |   |
| First Quarter  |   | $        | 3.34   |    | $      | 2.51 |   |
| Second Quarter |   | 4.86     |   | 2.92    |   |
| Third Quarter  |   | 5.70     |   | 3.93    |   |
| Fourth Quarter |   | 6.17     |   | 4.61    |   |

 

The number of stockholders of record of our commonstock on March 5, 2004 was approximately 1,174.

 

We have never declared or paid a cash dividend onour common stock, and we do not expect that cash dividends will be paid to theholders of our common stock in the foreseeable future.

 

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**ITEM6.**     **SELECTEDCONSOLIDATED FINANCIAL DATA**

** **
|                                                                      |   | **Year ended  December 31,**              |   |
|---------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                      |   | **1999**                                  |   | **2000(1)** |   | **2001(2)** |   | **2002(3)** |   | **2003(3)** |   |
|                                                                      |   | **(in  thousands except per share data)** |   |
| **Statement of Operations Data:**                                         |   |                                      |   |   |   |   |   |   |   |   |   |
|                                                                      |   |                                      |   |   |   |   |   |   |   |   |   |
| Product sales, net                                                        |   | $                                         | 60,332 |   | $ | 62,149 |   | $ | 87,106 |   | $ | 96,107 |   | $ | 124,846 |   |
| Total revenues                                                            |   | 78,687                                    |   | 72,761 |   | 94,774 |   | 102,966 |   | 132,525 |   |
| Write-off of in-process research and  development acquired                |   | —                                    |   | — |   | 45,600 |   | — |   | — |   |
| Total expenses                                                            |   | 64,903                                    |   | 67,396 |   | 115,038 |   | 89,828 |   | 116,077 |   |
| Operating income (loss)                                                   |   | 13,784                                    |   | 5,365 |   | (20,264 | ) | 13,138 |   | 16,448 |   |
| Other income (expense), net                                               |   | 4,445                                     |   | 7,376 |   | (4,929 | ) | 1,642 |   | 3,635 |   |
| Income tax expense                                                        |   | 4,821                                     |   | 3,798 |   | 4,733 |   | 5,063 |   | 6,161 |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | 13,408                                    |   | 8,943 |   | (29,926 | ) | 9,717 |   | 13,922 |   |
| Cumulative effect of change in accounting  principle                      |   | —                                    |   | (8,178 | ) | — |   | — |   | — |   |
| Net income (loss)                                                         |   | $                                         | 13,408 |   | $ | 765 |   | $ | (29,926 | ) | $ | 9,717 |   | $ | 13,922 |   |
| Earnings (loss) per common share:                                         |   |                                      |   |   |   |   |   |   |   |   |   |
| Basic:                                                                    |   |                                      |   |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | $                                         | 0.26   |   | $ | 0.16 |   | $ | (0.52 | ) | $ | 0.17 |   | $ | 0.24 |   |
| Cumulative effect of change in accounting  principle                      |   | —                                    |   | (0.15 | ) | — |   | — |   | — |   |
| Net income (loss)                                                         |   | $                                         | 0.26   |   | $ | 0.01 |   | $ | (0.52 | ) | $ | 0.17 |   | $ | 0.24 |   |
| Diluted:                                                                  |   |                                      |   |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | $                                         | 0.25   |   | $ | 0.15 |   | $ | (0.52 | ) | $ | 0.17 |   | $ | 0.23 |   |
| Cumulative effect of change in accounting  principle                      |   | —                                    |   | (0.14 | ) | — |   | — |   | — |   |
| Net income (loss)                                                         |   | $                                         | 0.25   |   | $ | 0.01 |   | $ | (0.52 | ) | $ | 0.17 |   | $ | 0.23 |   |
| Weighted average shares outstanding:                                      |   |                                      |   |   |   |   |   |   |   |   |   |
| Basic                                                                     |   | 52,348                                    |   | 54,320 |   | 57,230 |   | 58,480 |   | 59,194 |   |
| Diluted                                                                   |   | 54,191                                    |   | 56,885 |   | 57,230 |   | 58,659 |   | 59,798 |   |

 
|                      |   | **As of  December 31,** |       |
|---------------------------|--------|-------------------------|------------|
|                      |   | **1999**                | ** ** | **2000** |   | **2001(2)** |   | **2002** | ** ** | **2003** |   |
|                      |   | **(in  thousands)**     |       |
| **Balance Sheet Data:**   |   |                    |       |   |   |   |   |   |   |   |   |
|                      |   |                    |       |   |   |   |   |   |   |   |   |
| Working capital           |   | $                       | 120,587    |   | $ | 154,089 |   | $ | 139,472 |   | $ | 29,059 |   | $ | 38,913 |   |
| Total assets              |   | 162,538                 |       | 209,960 |   | 235,086 |   | 285,431 |   | 290,540 |   |
| Long-term liabilities     |   | 4,333                   |       | 24,593 |   | 24,125 |   | 17,895 |   | 11,754 |   |
| Stockholders’ equity |   | 140,534                 |       | 152,645 |   | 157,540 |   | 169,075 |   | 187,430 |   |
|                           |        |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                                  Effective January 1, 2000, Savient adopted Staff Accounting Bulletin No.101, *“RevenueRecognition in Financial Statements”* (“SAB 101”) issued by theSecurities and Exchange Commission in

 

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December1999.  As a result of adopting SAB 101,Savient changed the way it recognizes revenue from contract fees for thelicense of marketing and distribution rights where the consideration is aone-time nonrefundable payment.  Priorto the issuance of SAB 101, Savient recorded revenue from the license ofmarketing and distribution rights when the rights were licensed and/or whenthese payments were received. Effective January 1, 2000, Savient recorded acumulative effect of a change in accounting principle related to contractrevenues recognized in prior years in the amount of $12,558,000, net of incometaxes of $4,380,000, of which $853,000, $1,156,000, $1,146,000 and $971,000 wasrecognized as contract fee revenue in 2000, 2001, 2002 and 2003,respectively.  Contract revenues are nowbeing recognized over the term of the related agreements.

 

(2)                                  In connection with our acquisition of Myelos and based on an independentvaluation, Savient allocated $45,600,000 to in-process research and developmentprojects of Myelos, representing the estimated fair value based onrisk-adjusted cash flows of the acquired technology.  At the date of the acquisition the technology acquired in theacquisition was not fully commercially developed and had no alternative futureuses. Accordingly, the value was expensed as of the acquisition date.  Savient recorded negative goodwill of $18,989,000on its balance sheet, primarily because the amount written off as in-processresearch and development acquired exceeded the purchase price for accountingpurposes.  This negative goodwill wasbeing amortized over its expected useful life of five years, and had the effectof reducing reported expenses by $2,961,000 during 2001.  In accordance with Statement of FinancialAccounting Standards No. 142, *“Goodwill and Other Intangible Assets,”*amortization of the negative goodwill ceased beginning January 1, 2002, and thebalance remaining will be maintained as a deferred credit until it is eithernetted against the contingent payments or reflected in net income as anextraordinary item should the contingent payments not become due because thetechnology did not meet the milestones which trigger payment.

 

(3)                                  On September 25, 2003, Savient and DePuy Orthopaedics, Inc. (“DePuy”)signed a Termination Agreement that effectively terminated a DistributionAgreement dated May 1, 2000, previously entered into by the two parties.  The Distribution Agreement provided DePuywith distribution rights to Savient HA. Upon execution of the Distribution Agreement, DePuy paid Savient a $5million nonrefundable up front license fee, which fee Savient was recognizingas contract fee revenue over the term of the agreement in accordance with SAB101.  As a result of the TerminationAgreement, Savient recognized as other income the remaining deferred fees paidby DePuy of $3,354,000 (on a pre-tax basis) that had been previously deferredin accordance with SAB 101.

 

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**ITEM7.       MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Statementsin this Annual Report on Form 10-K concerning Savient’s business outlook orfuture economic performance; anticipated profitability, revenues, expenses orother financial items; introductions and advancements in development ofproducts, and plans and objectives related thereto; and statements concerningassumptions made or expectations as to any future events, conditions,performance or other matters, are “forward-looking statements” as that term isdefined under the Federal Securities Laws. Forward-looking statements aresubject to risks, uncertainties and other factors that could cause actual resultsto differ materially from those stated in such statements.  Such risks, uncertainties and factorsinclude, but are not limited to, the timing of the introduction of a genericversion of Oxandrin, changes and delays in product development plans and schedules,changes and delays in product approval and introduction, customer acceptance ofnew products, development, introduction or consumer acceptance of competingproducts, changes in pricing or other actions by competitors, patents owned bySavient and its competitors, changes in healthcare reimbursement, risk ofoperations in Israel, risk of product liability, governmental regulation,dependence on third parties to manufacture products and commercialize productsand general economic conditions, as well as other risks detailed in our filingswith the Securities and Exchange Commission, including this Annual Report onForm 10-K.*

 

Overview

 

We are engaged in the research, development,manufacture and marketing of pharmaceutical products that address unmet medicalneeds in both niche and larger market segments.  We distribute our products on a worldwide basis primarily througha direct sales force in the United States (including both Savient employees andrepresentatives of a contract sales organization), the United Kingdom (for ouroral liquid products) and Israel and primarily through third-party license anddistribution relationships elsewhere. Through a combination of internal research and development,acquisitions, collaborative relationships and licensing arrangements, Savienthas assembled a diverse portfolio of therapeutic products, many of which arecurrently being marketed, several of which are in registration or clinicaltrials and one of which is in pre-clinical development.

 

Savient, formerly known as Bio-Technology GeneralCorp., was founded in 1980 to develop, manufacture and market novel therapeuticproducts.  In September 2002, weacquired Rosemont Pharmaceuticals Limited (“Rosemont”), a specialty pharmaceuticalcompany located in the United Kingdom that develops, manufactures and marketspharmaceutical products in oral liquid form. Savient’s overall administration, finance, business development, humanclinical studies, U.S. sales and marketing activities, quality assurance andregulatory affairs are primarily coordinated at our headquarters in EastBrunswick, New Jersey.  Pre-clinicalstudies, research and development activities and manufacturing of ourbiotechnology-derived products are primarily carried out through Bio-TechnologyGeneral (Israel) Ltd. (“BTG-Israel”), our wholly owned subsidiary inIsrael.  Development, manufacture,distribution and sale of our oral liquid products are carried out throughRosemont in the United Kingdom.

 

Our financial results have been heavily dependenton Oxandrin since we introduced it in December 1995.  Sales of Oxandrin accounted for 54%, 48% and 46% of our totalproduct sales in 2001, 2002 and 2003, respectively, with the 2002 amount beingadversely affected by our change to selling directly to wholesalers rather thanthrough a third-party distributor.  In connectionwith our focus on increasing market acceptance of Oxandrin for the treatment ofdisease-related weight loss conditions and our commitment to pharmacovigilance,we sponsored a clinical study to investigate the interaction between Oxandrinand warfarin, the active ingredient in many widely-used anti-coagulant drugs.Warfarin is a narrow therapeutic index drug. Therefore, careful titration is required in order to prevent excessiveanti-coagulation, which could cause uncontrolled bleeding, or inadequateanti-coagulation, with the risk of failing to prevent the consequences ofthromboembolic events such as life-threatening blood clots.  The study demonstrated that when warfarinwas co-administered with oxandrolone, the usual dose of warfarin necessary toachieve appropriate therapeutic effect should be decreased by 80-85% at themaximum Oxandrin dosage level of 20mg. We submitted the results of this study to the United States Food and Drug Administration (“FDA”), amended theOxandrin package insert prescribing information and communicated the packageinsert change to healthcare professionals in a “Dear Healthcare Professional”letter in accordance with FDA instructions to ensure that patient safety wouldnot be compromised.  In February 2004 wefiled a Citizens Petition with the FDA requesting that, in the interest ofpublic health, the FDA establish specific bio-equivalence requirements for oralproducts containing oxandrolone,the

 

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active pharmaceuticalingredient of Oxandrin, because of several unique aspects of such product,including serious safety issues regarding interactions between oxandrolone andanti-coagulant drugs containing the active ingredient warfarin.  Given the likely variability inbioavailability of other potential oxandrolone drugs and the careful dosetitration required for warfarin in order to prevent excessive anti-coagulationor inadequate anti-coagulation, and their respective risks, we requested in ourpetition that any company wishing to introduce an oxandrolone product into theU.S. market should, prior to the issuance of marketing approval, be required toalso conduct a clinical study to investigate the interaction between theirproduct and warfarin and demonstrate that it is identical to the interactionbetween Oxandrin and warfarin.  Severalcompanies have filed drug master files with the FDA relating to a genericoxandrolone product, and while we cannot predict when generic competition forOxandrin will begin, it is possible the FDA may approve one or more genericversions of Oxandrin as early as mid-2004. The introduction of generic oxandrolone products would materiallyadversely affect our Oxandrin sales, could materially adversely affect ourresults of operations, cash flows, financial condition and profitability andmay require us to scale back our business activities in certain areas.

 

We expect that sales of our human growth hormone(hGH) product to our Japanese distributor will continue to decrease due tocontinuing pricing pressure from the Japanese Ministry of Health.  We expect sales of Delatestryl to decreaseas a result of the FDA's allowance of the reintroduction of a generic versionof Delatestryl into the market in March 2004. We expect cost of sales as a percentage of product sales to increase in2004 as we begin to depreciate our new manufacturing facility, which weestimate will aggregate approximately $3,500,000 to $4,000,000 annually.  In order to remain profitable in light ofthe possible reduction in our revenues due to the foregoing, we have reducedour research and development activities, which could adversely affect ourfuture prospects as our product pipeline is more limited.  We currently intend only to pursue thedevelopment of Prosaptide through the completion of Phase II trials, at whichpoint we will look to license commercialization rights to one or more thirdparties, and the development of Puricase. In addition, the amount of resources we will have available to dedicateto our launch of sodium hyaluronate for osteoarthritis product (“Savient HA”)will depend on our level of revenues.

 

Rosemont, which we acquired on September 30, 2002,accounted for 22% of our 2003 product sales and 42% of our net income in2003.  Our 2003 net income and earningsper share were favorably affected by our recognition of deferred contractrevenue of $3,354,000 (on a pre-tax basis) resulting from our reacquisition ofSavient HA.

 

Acquisition of Rosemont Pharmaceuticals Limited

 

On September 30, 2002, Savient, through itswholly-owned subsidiary Acacia Biopharma Limited, completed the acquisition ofall of the stock of Rosemont Pharmaceuticals Limited, a subsidiary of AkzoNobel N.V.  Rosemont is a leader in theUnited Kingdom market for oral liquid formulations of branded non-proprietarydrugs.  The purchase price (includingacquisition costs of approximately $5,462,000) for Rosemont, which was fundedfrom our cash on hand, was approximately $104,585,000, excluding Rosemont’scash balances.

 

The acquisition has been accounted for under thepurchase method of accounting.  Theaggregate purchase price of $104,585,000 has been allocated based on theestimates of the fair value of the tangible and intangible assets acquired andliabilities assumed, as follows (in thousands):

 
| Assets Acquired:                                    |   |    |    |
|-----------------------------------------------------|--------|---------|---------|
| Current assets (including cash acquired of  $5,268) |   | $       | 10,924  |   |
| Fixed assets                                        |   | 1,708   |    |
| Intangibles                                         |   | 80,800  |    |
| Goodwill                                            |   | 40,121  |    |
|                                                |   |    |    |
| Liabilities Assumed:                                |   |    |    |
| Current liabilities                                 |   | (4,728  | )       |
| Deferred tax liabilities                            |   | (24,240 | )       |
|                                                |   |    |    |
| Total Purchase Price                                |   | $       | 104,585 |   |

 

The estimation of the fair value of assetsacquired and liabilities assumed was determined by Savient’s management basedon an independent appraisal and information available at the time.  Intangible assets consist primarily ofdeveloped products, as well as trademarks and several patents, and are beingamortized, using the straight-line method, over the estimated useful life ofapproximately 20 years.  The estimationof the useful life of the intangible assets was determined by Savient’smanagement based on an independent appraisal and information available at thetime.

 

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In connection with the acquisition, we entered intoa forward contract for the delivery of the £64,000,000 purchase price onSeptember 30, 2002 at a cost of $99,123,200 (representing an exchange rate of$1.5488 per £1).  The exchange rate atthe acquisition closing date was $1.5614 per £1.  In accordance with Statement of Financial Accounting Standards(“SFAS”) No. 133 “*Accounting for Derivative Instruments and Hedging Activities”*,which prohibits hedge accounting for a hedge of an anticipated businesscombination, we recorded a gain of approximately $800,000 on the forwardcontract during the year ended December 31, 2002.

 

Acquisition of Myelos Corporation

 

On March 19, 2001, Savient acquired MyelosCorporation, a privately-held biopharmaceutical company focused on thedevelopment of Prosaptide, a therapeutic to treat neuropathic pain associatedwith nerve injury.  Under the terms ofthe acquisition agreement, Savient paid Myelos shareholders $35 million in acombination of cash and stock ($14 million in cash and $21 million through theissuance of approximately 2,344,700 shares of Savient common stock (based on aper share value of $8.9564, representing the average closing price of Savient’scommon stock for the 20 trading day period ending one day prior to the February21, 2001 date the acquisition agreement was executed)).

 

In the event that (i) Savient publicly announcesthat it will file a New Drug Application (“NDA”) related to the use ofProsaptide to treat neuropathic pain or neuropathy, (ii) Savient receives FDAminutes stating that the clinical data possessed by Savient is sufficient foran NDA filing for the use of Prosaptide to treat neuropathic pain or neuropathywithout requiring any further testing or (iii) Savient initiates preparation ofan NDA for Prosaptide for the treatment of neuropathic pain or neuropathy (thedate the earliest of the foregoing occurs being the “Payment Trigger Date”),then Savient will pay to the Myelos shareholders an additional $30 million, atleast approximately $14 million of which must be paid in shares of Savientcommon stock, valued at the average of the closing prices of Savient commonstock during the 20 trading days ending on the Payment Trigger Date, and theremainder can be paid in cash, shares of Savient common stock, or a combinationthereof, as determined by Savient in its sole discretion.

 

In addition, in the event that the FDA approves thesale of Prosaptide for the treatment of neuropathic pain or neuropathy, Savientwill pay the Myelos shareholders 15% of the net sales of Prosaptide for thetreatment of neuropathic pain or neuropathy during the 12 month periodbeginning on the earlier of (i) the 25th full month after commercialintroduction of Prosaptide in the United States for the treatment ofneuropathic pain or neuropathy and (ii) April 1, 2010.  At least 50% of this payment must be paid inshares of Savient common stock, valued at the average of the closing prices ofSavient common stock during the 20 days ending one day prior to the payment,and the remainder can be paid in cash, shares of Savient common stock, or acombination thereof, as determined by Savient in its sole discretion.

 

In no event will Savient be obligated to issue inaggregate to the Myelos shareholders more than 10,962,000 shares of Savientcommon stock.  Any amount of the contingentpayments that cannot be paid in shares of Savient common stock shall instead bepaid in shares of Savient’s preferred stock. The preferred stock will be non-voting, non-convertible,non-transferable, non-dividend paying (except to the extent a cash dividend ispaid on the Savient common stock), with no mandatory redemption for a period of20 years and one day from the March 19, 2001 closing date of the acquisition,and a right to share in proceeds in liquidation, up to the liquidation amount.

 

The transaction was treated as a “purchase” foraccounting purposes.  The purchase pricefor accounting purposes was approximately $34,387,000 (including acquisitioncosts of $1,387,000), based on a value per share for the approximately2,344,700 shares of Savient common stock issued in the acquisition of $8.1172,representing the average closing price of Savient’s common stock for the fourday period preceding February 21, 2001, the date the terms of the acquisitionwere agreed. In connection with the merger and based on an independentvaluation, Savient allocated $45,600,000 to in-process research and developmentprojects of Myelos, representing the estimated fair value based onrisk-adjusted cash flows of the acquired technology. At the date of the merger thetechnology acquired in the acquisition was not fully commercially developed andhad no alternative future uses. Accordingly, the value was expensed as of the acquisition date.  Savient recorded negative goodwill of$18,989,000 on its balance sheet, primarily because the amount written off asin-process research and development acquired exceeded the purchase price foraccounting purposes.  During 2001 thisnegative goodwill was being amortized over its expected useful life of fiveyears.  In accordance with SFAS No. 142,amortization of the negative goodwill ceased beginning January 1, 2002, and thebalance remaining will be maintained as a deferred credit until it is eithernetted against the contingent payments or reflected in net income as anextraordinary item should the contingent payments not become due because thetechnology did not meet the milestones that trigger payment.

 

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Savient allocated values to the in-process researchand development based on an independent valuation of the research anddevelopment project.  The value assignedto these assets was determined by estimating the costs to develop the acquiredtechnology into a commercially viable product, estimating the resulting netcash flows from the product, and discounting the net cash flows to theirpresent value.  The revenue projectionused to value the in-process research and development was based on estimates ofrelevant market size and growth factors, expected trends in technology, and thenature and expected timing of new product introductions by Savient and itscompetitors.  The resulting net cashflows from such product are based on management’s estimates of cost of sales,operating expenses and income taxes from such product.  Savient believes that the assumptions usedin the forecasts were reasonable at the time of the merger.  No assurance can be given, however, that theunderlying assumptions used to estimate sales, development costs or profitability,or the events associated with such product, will transpire as estimated.  For these reasons, actual results may varyfrom projected results.  The mostsignificant and uncertain assumptions relating to the in-process research anddevelopment relate to the ability to successfully develop a product and theprojected timing of completion of, and revenues attributable to, that product.

 

Investment in Omrix Biopharmaceuticals, Inc.

 

In January 2001, in order to obtain a period ofexclusivity to negotiate a possible strategic relationship with OmrixBiopharmaceuticals, Inc. (“Omrix”), Savient loaned $2,500,000 to Omrix andagreed to convert the loan into, and to purchase an additional $2,500,000 of,shares of Omrix preferred stock if it did not pursue a strategic relationship.  Savient determined not to pursue a strategicrelationship with Omrix, and on March 31, 2001 converted the existing loaninto, and purchased an additional $2,500,000 of, shares of Omrix preferredstock, which is convertible into approximately 4.2% of Omrix common stock (on afully-diluted basis).  Omrix is aprivately-held company that develops and markets a unique surgical sealant anda number of immunology products based on blood plasma processing technology.  Omrix currently sells its products inEurope, South America and the Middle East. During the fourth quarter of 2001, Savient determined that the declinein the value of its investment in Omrix was other than temporary and,accordingly, wrote-down the value of this investment by $3,000,000 based onmanagement’s evaluation of current market conditions and Omrix’s operations andforecasts.  The write-down is includedas a component of other income (expense), net in 2001. Based on the currentinformation available regarding Omrix, management believes the current carryingvalue of its investment in Omrix is appropriate.

 

Reacquisition of Savient HA DistributionRights

 

On September 25, 2003, Savient and DePuyOrthopaedics, Inc. (“DePuy”) signed a Termination Agreement that effectivelyterminated a Distribution Agreement dated May 1, 2000, previously entered intoby the two parties. The Distribution Agreement provided DePuy with distributionrights to Savient’s sodium hyaluronate for osteoarthritis product.  Upon execution of the DistributionAgreement, DePuy paid Savient a $5 million nonrefundable up front license fee,which fee Savient was recognizing as contract fee revenue over the term of theagreement in accordance with Staff Accounting Bulletin No. 101 (“SAB101”).  As a result of the TerminationAgreement, Savient recognized as other income in 2003 the remaining deferredfees paid by DePuy of $3,354,000 that had been previously deferred inaccordance with SAB 101.

 

Critical Accounting Policies and the Use ofEstimates

 

The preparation of our consolidated financial statementsin conformity with accounting principles generally accepted in the U.S.requires management to make estimates and assumptions that affect the amountsreported in our consolidated financial statements and accompanying notes.  Future events and their effects cannot bedetermined with absolute certainty. Therefore, the determination of estimates requires the exercise ofjudgment. Actual results inevitably will differ from those estimates, and suchdifferences may be material to the financial statements.  Management believes the following criticalaccounting policies affect its more significant judgments and estimates used inthe preparation of its consolidated financial statements:

 

•                  *Revenuerecognition.*  Product sales are recognized when theproduct is shipped and collectability is probable, net of discounts, salesincentives, sales allowances and freight out. Contract fees, which consist mainly of license of marketing anddistribution rights and research and development projects, are being recognizedover the estimated term of the related agreements.  Revenues related to performance milestones are recognized basedupon the achievement of the milestone, as defined in the respective agreements,and when collectability is probable. Advance payments received in excess of amounts earned are

 

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included in deferred revenue.  Royalties are recognized once agreementexists, the sale is made and the royalty is earned.  Other revenues represent funds received by Savient for researchand development projects that are partially funded by the Chief Scientist ofthe State of Israel.  Savient recognizesrevenue upon performance of such funded research.

 

•                  *Intangibleassets acquired.*  On September 30, 2002, we acquiredRosemont.  The aggregate purchase priceof $104,585,000 has been allocated based on the estimates of the fair value ofthe intangible assets acquired, which was based on an independent appraisal andinformation available at the time. Intangible assets consist of developed products, trademarks and severalpatents and are being amortized, using the straight-line method, over theestimated useful life of approximately 20 years**.**

 

•                  *Goodwill*.  In connection with theacquisition of Rosemont, we recorded a material amount of goodwill.  Under the accounting rules for goodwill,this intangible asset is not amortized. Instead, we evaluate our goodwill annually for impairment, or earlier ifindicators of potential impairment exist, based on a two-step accounting test.  The first step is to compare the estimatedfair value of Rosemont with the recorded net book value (including thegoodwill) of Rosemont.  If the estimatedfair value of Rosemont is higher than the recorded net book value, noimpairment is deemed to exist and no further testing is required thatyear.  If, however, the estimated fairvalue of Rosemont is below the recorded net book value, then a second step mustbe performed to determine the amount of the goodwill impairment to record, ifany.  In this second step, the estimatedfair value from the first step is used as the purchase price in a hypotheticalnew acquisition of Rosemont. The various purchase business combination rulesare followed to determine a hypothetical purchase price allocation for Rosemont’sassets and liabilities.  The residualamount of goodwill that results from this hypothetical purchase priceallocation is compared with the recorded amount of goodwill for Rosemont, andthe recorded amount is written down to the hypothetical amount if lower.  The determination of whether or not goodwillor other intangible assets have become impaired involves a significant level ofjudgment in the assumptions underlying the approach used to determine the valueof Rosemont.  Changes in our strategy andor market conditions could significantly impact these judgments and requireadjustments to recorded amounts of goodwill. We have adopted a policy to review Rosemont for impairment using adiscounted cash flow approach that uses forward-looking information regardingmarket share, revenues and costs as well as appropriate discount rates.  As a result, changes in these assumptionsand current working capital could materially change the outcome of Rosemont’sfair value determinations in future periods, which could require a permanentwrite-down of goodwill.

 

•                  *Investments*.  From time to time we invest innonmarketable equity securities for strategic purposes.  These investments are carried at cost.  We periodically monitor the liquidity,progress and financing activities of these entities to determine if impairmentwrite-downs are required.  In 2001, wewrote-down our investment in Omrix by $3,000,000.

 

•                  *In-processresearch and development acquired*.  In connection with our acquisition of MyelosCorporation in 2001, we allocated $45,600,000 to in-process research anddevelopment projects of Myelos, representing the estimated fair value based onrisk-adjusted cash flows of the acquired technology.  We expensed this value as of the acquisition date because the technologywas not fully commercially developed and had no alternative future uses.

 

•                  *Incometaxes*. Deferred income taxes reflect the net tax effects of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and their basis for income tax purposes and thetax effects of capital loss, net operating loss and tax creditcarryforwards.  We record valuationallowances to reduce deferred tax assets to the amounts that are more likelythan not to be realized.  We haveconsidered future taxable income and ongoing prudent and feasible tax planningstrategies, such as making one or more of our products under developmentavailable for sale to a third party, subject to board approval, in assessingthe need for valuation allowances, and at December 31, 2003, did not record avaluation allowance against our deferred tax asset.  If we determine in the future that we will not be able to realizeall or part of our net deferred tax assets, adjustments will be charged to incomein the period that we make such a determination.

 

•                  *AccountsReceivable*.  Credit to customers is extended based onevaluation of a customers’ financial condition and, generally, collateral isnot required.  Accounts receivable areusually due within 30 days and are stated at amounts due from customers net ofan allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms areconsidered past due.  Savient determinesits allowance by considering a number of factors, including the length of timetrade accounts receivable are past due, Savient’s previous loss

 

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history, the customer’s current ability topay its obligation to Savient and the condition of the general economy and theindustry as a whole.  We write offaccounts receivable when they become uncollectible, and payments subsequentlyreceived on such receivables are credited to the allowance for doubtfulaccounts.

 

•                  *Litigation*.  We are currently involved incertain legal proceedings referred to in Note 8 (Commitments and ContingentLiabilities) of the notes to our consolidated financial statements. We do notbelieve these legal proceedings will have a material adverse effect on ourconsolidated financial position, results of operations or cash flows.  However, were an unfavorable ruling tooccur, there exists the possibility of a material impact on the operatingresults.

 

•                  *Impairmentof long-lived assets*.  We periodically assess impairments of ourlong-lived assets in accordance with the provisions of SFAS No. 144, *“Accountingfor the Impairment or Disposal of Long-lived Assets”*.  An impairment review is performed wheneverevents or changes in circumstances indicate that the carrying value may not berecoverable.  Factors considered by usinclude, but are not limited to, significant underperformance relative toexpected historical or projected future operating results; significant changesin the manner of use of the acquired assets or the strategy for our overall business;and significant negative industry or economic trends.  When we determine that the carrying value of a long-lived assetmay not be recoverable based upon the existence of one or more of the aboveimpairment indicators, we estimate the future undiscounted cash flows expectedto result from the use of the asset and its eventual disposition.  If the sum of these expected futureundiscounted cash flows and eventual disposition is less than the carryingamount of the asset, we calculate an impairment loss.  An impairment loss is equal to the difference between the fairvalue of the asset and its carrying value. Fair value is generally determined using a discounted cash flow methodology.

 

•                  *Capitalizationand Depreciation of Cost of New Production Facility*.  We have constructed a newmanufacturing facility in Israel.  Allcosts associated with design, construction and qualification activities,including labor, outside contractors and consultants, materials, utilities,other indirect costs and interest costs on funds borrowed to fund construction,have been capitalized.  Costs associatedwith process validation, which involves the transfer of product manufacturingprocesses to the new facility and verification that product manufacture isreproducible, are being expensed.  Wedetermined that qualification was substantially completed as of September 1,2003 and that no further costs will be capitalized.  We will begin to depreciate the facility when it is completed andready for its intended use, which we expect will occur during 2004.  We currently anticipate this depreciationwill aggregate approximately $3,500,000 to $4,000,000 annually.

 

The above listing is not intended to be acomprehensive list of all of our accounting policies.  In many cases, the accounting treatment of a particulartransaction is specifically dictated by generally accepted accountingprinciples, with no need for management’s judgment in their application.  There are also areas in which management’sjudgment in selecting any available alternative would not produce a materiallydifferent result.  See our auditedconsolidated financial statements and notes thereto which begin on page 59 ofthis Annual Report on Form 10-K, which contain accounting policies and otherdisclosures required by generally accepted accounting principles.

 

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Results of Operations

 

The following table sets forth for the fiscalperiods indicated the dollar amount and the percentage of our revenuesrepresented by the items reflected on our consolidated statements of operations(dollars in thousands):

 
|                                                                            |   | **Year Ended  December 31,** |    |
|---------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                            |   | **2001**                     |    | **2002** |   | **2003** |   |
| Revenues:                                                                       |   |                         |    |   |   |   |   |   |   |   |   |   |   |
| Product sales                                                                   |   | $                            | 87,106  |   | 91.9 | % | $ | 96,107 |   | 93.3 | % | $ | 124,846 |   | 94.2 | % |
| Contract fees                                                                   |   | 1,656                        |    | 1.8 |   | 1,804 |   | 1.8 |   | 1,340 |   | 1.0 |   |
| Royalties                                                                       |   | 3,817                        |    | 4.0 |   | 3,891 |   | 3.8 |   | 3,227 |   | 2.4 |   |
| Other revenues                                                                  |   | 2,195                        |    | 2.3 |   | 1,164 |   | 1.1 |   | 3,112 |   | 2.4 |   |
| Total revenues                                                                  |   | 94,774                       |    | 100.0 | % | 102,966 |   | 100.0 | % | 132,525 |   | 100.0 | % |
| Expenses:                                                                       |   |                         |    |   |   |   |   |   |   |   |   |   |   |
| Research and development                                                        |   | 27,778                       |    | 29.3 | % | 32,783 |   | 31.8 | % | 31,797 |   | 24.0 | % |
| Marketing and sales                                                             |   | 17,006                       |    | 17.9 |   | 22,143 |   | 21.5 |   | 23,303 |   | 17.6 |   |
| General and administrative                                                      |   | 13,252                       |    | 14.0 |   | 17,582 |   | 17.1 |   | 26,744 |   | 20.2 |   |
| Cost of sales                                                                   |   | 12,388                       |    | 13.1 |   | 14,148 |   | 13.7 |   | 24,745 |   | 18.7 |   |
| Amortization of intangibles and negative  goodwill associated with acquisitions |   | (2,961                       | )       | (3.1 | ) | 1,013 |   | 1.0 |   | 4,050 |   | 3.0 |   |
| Commissions and royalties                                                       |   | 1,975                        |    | 2.1 |   | 2,159 |   | 2.1 |   | 5,438 |   | 4.1 |   |
| Write-off of in-process research and development  acquired                      |   | 45,600                       |    | 48.1 |   | — |   | — |   | — |   | — |   |
| Total expenses                                                                  |   | 115,038                      |    | 121.4 |   | 89,828 |   | 87.2 |   | 116,077 |   | 87.6 |   |
|                                                                            |   |                         |    |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                                         |   | (20,264                      | )       | (21.4 | ) | 13,138 |   | 12.8 |   | 16,448 |   | 12.4 |   |
| Other income (expense), net                                                     |   | (4,929                       | )       | (5.2 | ) | 1,642 |   | 1.6 |   | 3,635 |   | 2.7 |   |
| Income (loss) before income taxes                                               |   | (25,193                      | )       | (26.6 | ) | 14,780 |   | 14.4 |   | 20,083 |   | 15.1 |   |
| Income tax expense                                                              |   | 4,733                        |    | 5.0 |   | 5,063 |   | 4.9 |   | 6,161 |   | 4.6 |   |
| Net income (loss)                                                               |   | $                            | (29,926 | ) | (31.6 | )% | $ | 9,717 |   | 9.5 | % | $ | 13,922 |   | 10.5 | % |

 

Savient has historically derived its revenues fromproduct sales as well as from collaborative arrangements with third parties,under which Savient may earn up-front contract fees, may receive funding foradditional research (including funding from the Office of the Chief Scientistof the State of Israel (“Chief Scientist”)), is reimbursed for producingcertain experimental materials, may be entitled to certain milestone payments,may sell product at specified prices and may receive royalties on sales ofproduct.  We anticipate that productsales will constitute the majority of our revenues in the future.  Revenues have in the past displayed and willin the immediate future continue to display significant variations due tochanges in demand for our products, new product introductions by Savient andits competitors, the obtaining of new research and development contracts andlicensing arrangements, the completion or termination of such contracts andarrangements, the timing and amounts of milestone payments, and the timing ofregulatory approvals of products.

 

The following table summarizes, for the fiscalperiods indicated, Savient’s sales of its commercialized products and theirpercentage of total product sales (dollars in thousands):

 
|                                |   | **Year ended  December 31,** |   |
|-------------------------------------|--------|------------------------------|--------|
|                                |   | **2001**                     |   | **2002** |   | **2003** |   |
| Oxandrin                            |   | $                            | 47,150 |   | 54 | % | $ | 45,861 |   | 48 | % | $ | 57,641 |   | 46 | % |
| Bio-Tropin                          |   | 23,863                       |   | 27 |   | 20,564 |   | 21 |   | 20,490 |   | 16 |   |
| BioLon                              |   | 8,227                        |   | 10 |   | 6,696 |   | 7 |   | 5,964 |   | 5 |   |
| Delatestryl                         |   | 7,253                        |   | 8 |   | 15,595 |   | 16 |   | 12,343 |   | 10 |   |
| Oral Liquid Pharmaceutical Products |   | —                       |   | — |   | 6,346 | (*) | 7 |   | 27,146 |   | 22 |   |
| Other                               |   | 613                          |   | 1 |   | 1,045 |   | 1 |   | 1,262 |   | 1 |   |
| Total                               |   | $                            | 87,106 |   | 100 | % | $ | 96,107 |   | 100 | % | $ | 124,846 |   | 100 | % |

 

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(*) Reflects sales in the fourth quarter of 2002 following our acquisitionof Rosemont on September 30, 2002.

 

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We believe that our product mix will vary fromperiod to period based on the purchasing patterns of our customers,introductions of competing products and our focus on: (i) increasing marketpenetration of our existing products; (ii) expanding into new markets; and(iii) commercializing additional products.

 

Sales of Oxandrin have constituted a significantportion of our total revenues for each year since we introduced it in December1995.  Several companies have filed drugmaster files with the FDA relating to a generic oxandrolone product, and whilewe cannot predict when generic competition for Oxandrin will begin, it ispossible the FDA may approve one or more generic versions of Oxandrin as earlyas mid-2004.  The introduction ofgeneric oxandrolone products would materially adversely affect our Oxandrinsales, could materially adversely affect our results of operations, cash flows,financial condition and profitability and may require us to scale back ourbusiness activities in certain areas. Quarterly fluctuations in sales of Oxandrin have had a significantimpact on our quarterly results of operations. Quarterly sales of Oxandrin in 2001, 2002 and 2003 are set forth in the followingtable:

 
|   |   | **First Quarter** |   | **Second Quarter** |   | **Third Quarter** |   | **Fourth Quarter** |   | **Total** |   |
|--------|--------|-------------------|--------|--------------------|--------|-------------------|--------|--------------------|--------|-----------|--------|
| 2001   |   | $                 | 16,692 |               | $      | 17,887            |   | $                  | 4,575  |      | $      | 7,996 |   | $ | 47,150 |   |
| 2002   |   | 9,555             |   | 12,329             |   | 13,661            |   | 10,316             |   | 45,861    |   |
| 2003   |   | 11,863            |   | 14,121             |   | 16,867            |   | 14,790             |   | 57,641    |   |
|        |        |                   |        |                    |        |                   |        |                    |        |           |        |  |  |  |  |  |

 

Until the fourth quarter of 2002, our sales ofOxandrin consisted solely of sales to Nova Factor, Inc., a subsidiary ofAccredo Health Services, Inc., formerly known as Gentiva Health Services, Inc.(collectively, “Accredo”), our wholesale and retail distributor of Oxandrin inthe United States, and, beginning in the third quarter of 2000, the RossProducts Division of Abbott Laboratories (“Ross”), which is co-promotingOxandrin in the long-term care market. In the fourth quarter of 2002 Savientrenegotiated its agreement with Accredo, and Savient now sells Oxandrindirectly to wholesalers and Accredo distributes Oxandrin for Savient on afee-for-service basis, although we are transitioning these services fromAccredo to Integrated Commercialization Solutions, Inc.  The services provided consist primarily ofwarehousing and shipping of product. The transition to the new arrangement,which was completed in March 2003 when Accredo finished liquidating itsOxandrin inventory and ceased to act as distributor of the 2.5mg Oxandrintablets, resulted in sales of Oxandrin decreasing by $3,345,000 in the fourthquarter of 2002 compared to the third quarter of 2002, as Accredo began toreduce its inventory of the 2.5mg Oxandrin tablet.  Savient’s sales of Oxandrin in the first quarter of 2003 wereadversely affected by Accredo’s inventory reduction of the 2.5mg tablets.

 

Oxandrin sales during the first half of 2001 werefavorably affected by: (i) the commencement, in September 2000, of sales byRoss for the long-term care market for the treatment of patients withinvoluntary weight loss, including stocking activity by wholesalers inconnection with the launch of this product in the long-term care market; (ii)stocking by certain wholesalers in anticipation of a price increase; (iii)increased purchases by Accredo following its completion, in May 2000, of areduction in the amount of Oxandrin inventory it carried, which reduction beganin April 1999; and (iv) increased wholesaler sales of Oxandrin by Accredo.  The increase in Oxandrin sales in 2003largely reflects higher end user purchases, as well as the fact that until thefourth quarter of 2002 Savient sold its Oxandrin to Accredo, which then resoldthe product to wholesalers.  The decreasein Oxandrin sales in the fourth quarter of 2003 from the third quarter of 2003was due to higher purchases in the third quarter in anticipation of a priceincrease in the fourth quarter of 2003. Oxandrin sales in the fourth quarter of 2003 include a payment of$841,000 by Ross, representing the margin that we would have earned on thedifference between the actual sales and the specified sales level Ross wasrequired to meet to retain the right to co-promote Oxandrin in the long-termcare market through at least the end of 2005.

 

Upon completion of its inventory reduction in May2000, Accredo began to purchase, on a monthly basis, an amount of Oxandrinequal to the average end-user (*i.e.*, wholesaler) sales during thepreceding three months.  However,because of the significant increase in Oxandrin purchases by wholesalers in thefirst quarter of 2001 in anticipation of a price increase and in connectionwith the launch of Oxandrin into the long-term care market, Accredo’s purchasesof Oxandrin in the second quarter were higher than the levels of its sales ofOxandrin to wholesalers in that period. As a result, Accredo’s inventory of Oxandrin increased beyond thedesired level.  Accordingly, Savient andAccredo amended their distribution arrangement effective August 2001 to providefor reduced purchases of Oxandrin until Accredo’s inventory was reduced todesired levels and thereafter to ensure that sales of Oxandrin by Savient toAccredo more accurately reflected end-user demand.  As a result, sales of Oxandrin in the second half of 2001 and thefirst half of 2002 were $22,008,000 and $12,695,000 lower, respectively, thanin the first half of 2001.

 

Since Savient’s launch of Oxandrin, in December1995, through December 2000, a significant portion of Oxandrin sales has beenfor treatment of patients suffering from AIDS-related weight loss.

 

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However, the rate of growth inthe AIDS-related weight loss market has slowed substantially, and there can beno assurance that it will continue to grow in the future.  In addition, three states with budget crises– New York, California and Florida – have, beginning in the second quarter of2003, eliminated or limited reimbursement of prescription drugs for HIV and AIDS,including Oxandrin, under their AIDS Drug Assistance Programs (“ADAP”), whichhas and is expected to continue to adversely impact sales of Oxandrin in thosestates.  Efforts and discussions areongoing with these state agencies, and while we hope to succeed in reversingthese recent state ADAP changes, we cannot predict whether we will besuccessful.  If we are not successful,our Oxandrin sales in this HIV/AIDS related involuntary weight loss market willcontinue to be adversely impacted.  Ourinability to continue to increase our sales in the AIDS-related weight lossmarket or to expand into other markets could have a material adverse effect onour business.

 

Oxandrin sales experienced rapid growth in December2000 and the first half of 2001 in large part as a result of the commencementby Ross of the marketing of Oxandrin for the treatment of involuntary weightloss in the long-term care market, which, according to IMS Health Incorporateddata, represented approximately 14% of Oxandrin wholesaler to end-user sales inboth 2001 and 2002 and 16% of Oxandrin wholesaler to end-user sales in2003.  Although Oxandrin prescriptionsincreased significantly in 2001 and 2002, they decreased 1.1% in 2003 comparedto 2002, and prescriptions in the long-term care market in 2003 decreased 16.4%compared to 2002.  To date the averageprescription written for the long-term care market involves a lower dose ofOxandrin than the average prescription written for the AIDS market and,therefore, the rate of growth in Oxandrin sales will be less than the rate ofgrowth in prescriptions.  Ross has theright to terminate our Oxandrin co-promotion agreement at any time upon sixmonths notice.  If Ross elects to do so,our Oxandrin sales could be adversely affected until we are able to replace theRoss sales force, which we may not be able to do successfully.  Savient has the right to terminate theagreement at the end of 2005 if Ross does not meet specified sales levels,although Ross can elect to retain the agreement if it does not meet thespecified sales levels by paying to us the margin that we would have earned onthe difference between the specified sales levels and the actual Ross sales.There can be no assurance that demand for Oxandrin will continue to increase.

 

Reductions in wholesaler purchases of Oxandrin fromAccredo in the second, third and fourth quarters of 2001 and significantlyreduced purchases of Oxandrin by Accredo in the second half of 2001 adverselyaffected the growth in Savient’s product sales and revenues and Savient’sresults of operations in the second half of 2001.  Because purchases by wholesalers fluctuate from month to monthand quarter to quarter based on their own operating strategies (includingdesired levels of inventories, purchases by their customers and stocking inadvance of anticipated price increases), Savient’s sales will fluctuate fromquarter to quarter.

 

The following table summarizes, for the fiscalperiods indicated, Savient’s United States and international product sales andtheir percentage of total product sales (dollars in thousands):

 
|                |   | **Year ended  December 31,** |   |
|---------------------|--------|------------------------------|--------|
|                |   | **2001**                     |   | **2002** |   | **2003** |   |
| United States       |   | $                            | 55,441 |   | 64 | % | $ | 63,382 |   | 66 | % | $ | 70,229 |   | 56 | % |
| United Kingdom      |   | —                       |   | — |   | 6,829 |   | 7 |   | 25,646 |   | 21 |   |
| Other International |   | 31,665                       |   | 36 |   | 25,896 |   | 27 |   | 28,971 |   | 23 |   |
| Total               |   | $                            | 87,106 |   | 100 | % | $ | 96,107 |   | 100 | % | $ | 124,846 |   | 100 | % |

 

Domestic sales as a percentage of total productsales decreased in 2003 compared to 2001 and 2002 due to the increased sales byRosemont, which was acquired on September 30, 2002.

 

Our results of operations in 2003 benefited fromthe decrease in value of the U.S. dollar against the British pound sterling andeuro as compared with the comparable period in 2002.

 

*Comparisonof Years Ended December 31, 2001, 2002 and 2003*

 

*Revenues. *Revenuesin 2003 increased 29% to $132,525,000 from $102,966,000 in 2002, whichrepresented a 9% increase from $94,774,000 in 2001.  Product sales, net of discounts, sales incentives and salesallowances, increased 30% in 2003 to $124,846,000 from $96,107,000 in 2002,which itself was a 10% increase from 2001 product sales of $87,106,000. Thechanges in revenues between 2001, 2002 and 2003 were primarily driven bychanges in product sales, principally the addition of oral liquidpharmaceutical products beginning in the fourth quarter of 2002 as well as achange in the method of distributing Oxandrin beginning in the fourth quarterof 2002.  Product sales in 2002 and 2003

 

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include $6,346,000 and$27,146,000, respectively, of sales of oral liquid pharmaceutical productsresulting from our acquisition of Rosemont on September 30, 2002.  Excluding Rosemont sales, product saleswould have increased by $7,939,000, or 9%.

 

Sales of Oxandrin in 2003, 2002 and 2001 were$57,641,000, $45,861,000 and $47,150,000, respectively, representing 46%, 48%and 54%, respectively, of Savient’s total product sales in those periods.  Oxandrin sales in 2003 increased by$11,780,000, or 26%, due to an increase in end user demand, the cost savingseffect of our transition to a direct to wholesaler business model rather thanselling to Accredo, which would then resell to distributors, and the impact ofa price increase in the fourth quarter of 2003.  Sales of Oxandrin in 2002 decreased by $1,289,000, or 3%, from 2001sales as a result of our transition to a direct to wholesaler businessmodel.  Of Savient’s $47,150,000 ofOxandrin sales in 2001, $34,579,000, or 73%, occurred in the first half of 2001due to: (i) the commencement, in September 2000, of sales by Ross for thelong-term care market for the treatment of patients with involuntary weightloss, including stocking activity by wholesalers in connection with the launchof this product in the long-term care market; (ii) stocking by certainwholesalers in anticipation of a price increase; (iii) increased purchases byAccredo following its completion, in May 2000, of a reduction in the amount ofOxandrin inventory it carried, which reduction began in April 1999; and (iv)increased wholesaler sales of Oxandrin by Accredo.  Sales of Oxandrin decreased significantly in the second half of2001 as Accredo decreased purchases in the second half of 2001 to reduceinventory.  Sales of Oxandrin to Accredoin 2002 and 2001 were $30,030,000 and $38,775,000, net, respectively,representing 65% and 82%, respectively, of Savient’s total sales ofOxandrin.  The decrease in sales ofOxandrin to Accredo in 2002 was due to our transition, beginning in the fourthquarter of 2002, to a direct to wholesaler business model rather than sellingto Accredo, which would then resell to distributors.

 

Sales of oral liquid pharmaceutical products in2003 increased approximately $4,672,000, or 21%, over 2002 sales of$22,474,000, of which $6,346,000 was recognized by us in fourth quarter of 2002following our acquisition of Rosemont. A portion of the increase in sales in 2003 was due to the decrease inthe value of the U.S. dollar against the British pound sterling.  Measured in pounds sterling, Rosemont salesin 2003 increased 9% over 2002.

 

Sales of human growth hormone in 2003, 2002 and2001 were $20,490,000, $20,564,000 and $23,863,000, respectively, representing16%, 21% and 27%, respectively, of Savient’s total product sales in thoseperiods.  Sales of hGH decreasedslightly in 2003, as increased sales to Ferring, our European distributor, wereoffset by decreases in sales to JCR, our Japanese distributor, due to pricingpressures in Japan, and our other distributors.  Our sales to Ferring were favorably impacted due to the decreasein the value of the U.S. dollar against the euro.  Sales of hGH in 2002 decreased by $3,299,000, or 14%, from 2001sales due to pricing pressures in Japan, partially offset by an initial sale toTeva.  Sales of hGH to JCR in 2003, 2002and 2001 were $9,330,000, $12,331,000 and $16,292,000, respectively,representing 7%, 13% and 19%, respectively, of Savient’s total product sales inthose periods and 46%, 60% and 68%, respectively, of Savient’s total hGH salesin those periods.  Sales of hGH toFerring were $9,342,000, $5,453,000 and $5,889,000 in 2003, 2002 and 2001,respectively, representing 7%, 6% and 7%, respectively, of Savient’s totalproduct sales in those periods and 46%, 27% and 25%, respectively, of Savient’stotal hGH sales in those periods.

 

Sales of Delatestryl in 2003 decreased by$3,252,000, or 21%, from 2002 levels. The decrease in Delatestryl sales in 2003 resulted from our managementof our Delatestryl inventory while we obtained a new contract manufacturer.  Sales of Delatestryl in 2002 increased by$8,342,000, or 115%, over 2001 sales. The increase in Delatestryl sales was due to the FDA stopping theproduction of a competing generic injectable testosterone product used to treatmen with hypogonadism (testosterone deficiency) in 1998. In March 2004, the FDAallowed the reintroduction of this product into the market, and we expect thereintroduction of this generic product will adversely affect our sales ofDelatestryl.

 

Sales of BioLon in 2003 decreased by $732,000, or11%, from 2002 levels.  BioLon sales in2002 decreased $1,531,000, or 19%, from 2001 levels.  In the first quarter of 2000 we halted product shipments ofBioLon to the U.S. pending FDA approval of a supplemental application relatingto an upgrade in Savient’s manufacturing process to conform it to a higherstandard of quality implemented by Savient. Savient resumed shipments to the U.S. in the first quarter of 2001,although shipments again stopped in the fourth quarter of 2001 as the FDA was notable to inspect the new manufacturing facility of Savient’s contract sterilizerfor BioLon until July 2002 due to the violence in Israel at the time.  Shipments sterilized at the facility resumedin September 2002 following FDA approval. Sales in 2003 decreased due to decreased sales in the U.S. and thetermination of our agreement with our distributor in France, Turkey and severalother countries.

 

*Contractfees*, which consist of licensing and option tolicense fees, were $1,340,000 in 2003, including $1,304,000 of contract feesreceived in prior periods but recognized in 2003 in accordance with SAB101.  Contract fees for 2002 were$1,804,000, which includes $1,646,000 of contract fees received in priorperiods but recognized in 2002 in accordance with SAB 101.  For the year ended December 31,

 

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2001 contract fees were$1,656,000, which represent contract fees received in prior periods butrecognized in 2001 in accordance with SAB 101.

 

*Royalties* in 2003, 2002 and 2001 in the amount of $3,227,000, $3,891,000 and$3,817,000, respectively, consist mainly of net royalties in respect of theMircette product.

 

*Otherrevenues* consist primarily offunding from the Chief Scientist, which represented 85%, 90% and 100% of otherrevenues in the years ended December 31, 2003, 2002 and 2001, respectively.

 

*Researchand development expense* was $31,797,000,$32,783,000 and $27,778,000 for the years ended December 31, 2003, 2002 and2001, respectively.  The decrease inresearch and development expenses in 2003 resulted primarily from a reductionin research and pre-clinical activities and associated compensation costs,partially offset by increases in clinical trial expenses related to Prosaptideand Puricase.  The increase in researchand development expenditures in 2002 compared to 2001 resulted primarily fromthe addition of research and development activities for Prosaptide followingthe acquisition of Myelos in March 2001, increased patent related expenses,increased clinical activities and Rosemont’s development expenses following theacquisition.

 

*Marketingand sales expense* was $23,303,000,$22,143,000 and $17,006,000 in the years ended December 31, 2003, 2002 and2001, respectively.  These expensesprimarily related to the activities of the sales and marketing force in theUnited States that Savient established principally in the second half of 1995and during 1996 to promote distribution of Oxandrin in the United States and,beginning with the fourth quarter of 2002, Rosemont’s sales and marketing forcein the United Kingdom.  The increase inmarketing and sales expenses in 2003 resulted mainly from the effect of a fullyear of Rosemont’s operations, partially offset by lower promotion andmarketing and sales compensation costs. The significant increase in marketing and sales expense in 2002 was dueto increased promotion and marketing costs, as well as increased compensationand training costs due to Savient’s expansion of its field force, as Savientsought to maximize Oxandrin’s potential and growth, and the inclusion of$1,339,000 of Rosemont’s expenses, partially offset by decreased incentivecompensation costs.

 

*Generaland administrative expense*was $26,744,000, $17,582,000 and $13,252,000 in the years ended December 31,2003, 2002 and 2001, respectively.  The increase ingeneral and administrative expenses in 2003 was primarily due to increasedlegal expenses, primarily related to our hGH patent litigation with NovoNordisk and the class action lawsuits (approximately $3,250,000), increasedcompensation costs (approximately $3,000,000), including approximately$1,010,000 of accrued severance compensation owed to a former senior executiveofficer, the costs associated with the potential acquisition transaction withTeva Pharmaceutical Industries Ltd., higher insurance premiums and increasedoccupancy and maintenance expenses at Savient’s new headquarters.  The increase in general andadministrative expense in 2002 compared to 2001 was principally due toincreased compensation costs, substantial audit fees incurred in 2002 inconnection with the reaudit of Savient’s financial statements and inclusion ofRosemont’s expenses following the acquisition, partially offset by decreasedmerger and acquisition activities in 2002 and higher consulting fees in2001.  General and administrativeexpenses for 2002 includes a $1,100,000 non-recurring pension expense incurredin connection with the acquisition of Rosemont.

 

*Cost ofsales* was $24,745,000, $14,148,000 and$12,388,000 in the years ended December 31, 2003, 2002 and 2001,respectively.  Cost of sales as apercentage of product sales was 20%, 15% and 14% in 2003, 2002 and 2001,respectively.  Cost of salesin 2003 increased in absolute terms and as a percentage of product sales wasmainly a function of the addition of a full year of sales of oral liquidpharmaceutical products increased sales, a change in the mix of products andcosts associated with the validation of Savient’s new manufacturingfacility.  Prior to September 1, 2003,all costs associated with this facility were being capitalized; beginningSeptember 1, 2003, all such costs are being expensed as incurred.  As a result of expensing these costs, costof sales as a percentage of product sales was approximately 27% in the fourthquarter of 2003.  Cost of sales in 2002 increased in absoluteterms and as a percentage of product sales due to increased sales, a change inthe mix of products as compared to 2001 and the addition of Rosemont’sproducts, which have a higher cost of goods than most of the other Savientproducts, in the fourth quarter of 2002. Cost of sales for 2002 include $1,272,000 of costs related to theRosemont products.  Oxandrin andBio-Tropin have a relatively low cost of manufacture as a percentage of productsales, while BioLon and our oral liquid pharmaceutical products have thehighest cost to manufacture as a percentage of product sales.  Cost of sales as a percentage of productsales varies from year to year and quarter to quarter depending on the quantityand mix of products sold.  We expectcost of sales as a percentage of product sales to increase in 2004 as we beginto depreciate our new manufacturing facility. We currently anticipate this depreciation will aggregate approximately$3,500,000 to $4,000,000 annually.

 

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*Amortizationof Intangibles and Negative Goodwill Associated with Acquisitions*.  In connection with theacquisition of Myelos, Savient recorded negative goodwill of $18,989,000 on itsbalance sheet, primarily because the amount written off as in-process researchand development acquired exceeded the purchase price for accounting purposes.During 2001 this negative goodwill was being amortized over its expected usefullife of five years.  In accordance withSFAS No. 142, amortization of the negative goodwill ceased beginning January 1,2002, and the balance remaining will be maintained as a deferred credit untilit is either netted against the contingent payments or reflected in net incomeas an extraordinary item should the contingent payments not become due becausethe technology did not meet the milestones that trigger payment.  In connection with the acquisition ofRosemont, we recorded intangibles of $80,800,000, consisting of trademarks,patents and developed products.  Theseintangibles are being amortized, using the straight-line method, over theestimated useful life of approximately 20 years.  We recorded $1,013,000 and $4,050,000 of amortization of theseintangibles in the fourth quarter of 2002 and the year ended December 31, 2003,and expect that we will record $4,050,000 of annual amortization of theseintangibles.

 

*Commissionsand royalties* were $5,438,000,$2,159,000 and $1,975,000 in the years ended December 31, 2003, 2002 and 2001,respectively.  The increase incommission and royalties expenses in 2003 is principally due to commissionspaid to Ross on the purchases of Oxandrin in the long-term care market.  Prior to March 31, 2003, Ross had insteadbeen able, under its agreement with Savient, to purchase Oxandrin at a discount(with the discount being classified as a sales allowance) from Savient and sellit to Accredo for resale to Accredo’s customers.  The remainder of commission and royalties expenses in 2003 androyalties and commission expenses in 2002 and 2001consist primarily of royalties to entities from which Savient licensed certainof its products and to the Chief Scientist.

 

*Write-offof In-Process Research and Development Acquired*.  In 2001, Savient wrote-off $45,600,000 asin-process research and development acquired relating to the acquisition ofMyelos Corporation.  In connection withthe acquisition Savient allocated $45,600,000 to in-process research anddevelopment projects of Myelos, representing the estimated fair value based onrisk-adjusted cash flows of the acquired technology based on an independentvaluation.  At the date of the mergerthe technology acquired in the acquisition was not fully commercially developedand had no alternative future uses.  Accordingly,the value was expensed as of the acquisition date.

 

*Otherincome (expense), net*, was $3,635,000,$1,642,000 and ($4,929,000) in the years ended December 31, 2003, 2002 and2001, respectively.  In 2003 otherincome includes $3,354,000 of unamortized contract fees recognized in the thirdquarter as a result of our termination of a distribution agreement relating toour sodium hyaluronate for osteoarthritis product and reacquisition ofdistribution rights.  Upon execution ofthe distribution agreement in 2000, we received a $5,000,000 nonrefundableup-front license fee, which fee we were recognizing as contract fee revenueover the term of the agreement in accordance with Staff Accounting Bulletin101.  See “- Reacquisition of Savient HADistribution Rights.”  Investment income, net was $210,000, $2,023,000 and $7,302,000 in theyears ended December 31, 2003, 2002 and 2001, respectively.  In 2003 investment income decreased due tolower cash, cash equivalents and short-term investment balances due to the useof a substantial portion of these balances in 2002 to purchase Rosemont onSeptember 30, 2002.  In 2002 investmentincome, net decreased mainly due to lower yields and lower cash and short-terminvestment balances in 2002 resulting from the acquisition of Rosemont,partially off-set by an $800,000 realized gain from the forward contract forthe delivery of £64,000,000 entered into in connection with the Rosemontacquisition.  SFAS 133 prohibits hedgeaccounting for a hedge of an anticipated business combination.  We recognized realized and unrealized losseson investment, net of $1,181,000 in 2002. In 2001 we recognized realized and unrealized capital losses of$9,231,000 on short-term investments that were liquidated during December 2001and early 2002.  During the fourthquarter of 2001, we determined that the decline in the value of our investmentin Omrix was other than temporary and, accordingly, wrote-down the value ofthis $5,000,000 investment by $3,000,000 based on management’s evaluation ofcurrent market conditions and Omrix’s operations and forecasts.

 

*IncomeTaxes*.  Provision for income taxes for the years ended December 31, 2003,2002 and 2001 was $6,161,000, $5,063,000 and $4,733,000, respectively,representing approximately 30.7%, 34.3% and 27.1% (on a pro forma basis excludingthe write-off of in-process research and development acquired and amortizationof negative goodwill, which are not taken into account in computing incometaxes) of income before income taxes. Savient’s consolidated tax rate differs from the statutory rate becauseof Israeli tax benefits, reduced income tax rates in the U.K., research andexperimental tax credits, state and local taxes and similar items that affectthe tax rate.  In 2001 Savient recordeda provision for additional taxes of $1,530,000 as a result of a tax audit thatBTG-Israel was undergoing covering the 1997 through 2000 tax years.  The tax audit was settled in the secondquarter of 2002, and an additional $519,000 of tax was accrued at that time.

 

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*Earningsper Common Share*.  Savient had approximately 0.7 millionadditional basic weighted average shares outstanding for the year endedDecember 31, 2003 as compared to the same period in 2002, and had approximately1.2 million additional basic weighted average shares outstanding for the yearended December 31, 2002 as compared to the same period in 2001.  The increased number of basic shares in both2002 and 2003 was primarily the result of the issuance throughout 2001 and 2003of shares upon the exercise of options, the issuance throughout 2001, 2002 and2003 of shares pursuant to our employee stock purchase plan and the issuance ofapproximately 2.3 million shares to the former shareholders of Myelos in March2001.  For 2001 diluted weighted averageshares outstanding does not include dilutive securities because the effectwould be anti-dilutive.

 

**Liquidity and Capital Resources**

 

At December 31, 2003, our working capital was$38,913,000 as compared to $29,059,000 at December 31, 2002.  The increase in working capital at December 31,2003 was primarily due to increases in cash and cash equivalents and inventoryand a decrease in accounts payable.

 

Our cash flows have fluctuated significantly due tothe impact of net income, capital spending, working capital requirements, theissuance of common stock and other financing activities.  Savient expects that cash flows in the nearfuture will be primarily determined by the levels of net income, workingcapital requirements and financings, if any, undertaken by Savient.  Cash, excluding short-term investments,increased (decreased) by $5,008,000, $(63,240,000) and $49,098,000 in the yearsended December 31, 2003, 2002 and 2001, respectively.  Cash provided by operating activities was $17,359,000, $9,194,000and $37,760,000 in the years ended December 31, 2003, 2002 and 2001,respectively.  Net income (loss) was$13,922,000, $9,717,000 and $(29,926,000) in the same periods, respectively.

 

In 2003 net cash provided by operating activitieswas higher than net income mainly due to a decrease in accounts receivable of$2,389,000, an increase in other current liabilities of $2,826,000 and deferredincome tax of $2,722,000 and depreciation and amortization and amortization ofintangible assets associated with acquisition in the amounts of $4,623,000 and$4,050,000, respectively, partially offset by an increase in inventories of$3,994,000 and a decrease in prepaid expenses and other current assets andaccounts payable of $1,334,000 and $4,013,000, respectively, and deferredrevenue of $4,501,000.

 

In 2002 net cash provided by operating activitieswas less than net income primarily as a result of increased accountsreceivable, inventories, prepaid expenses and other current assets and deferredincome taxes of $8,265,000, $1,202,000, $1,284,000, and $837,000, respectively,and deferred revenues of $1,553,000, partially offset by increased accountspayable in the amount of $7,541,000, depreciation and amortization,amortization of intangible assets associated with acquisitions and a provisionfor inventory reduction in connection with the validation of a newmanufacturing site in the U.S. in the amounts of $2,701,000, $1,013,000 and$976,000, respectively.

 

In 2001 we had net cash provided by operatingactivities, despite the net loss, mainly due to the write-off of in-processresearch and development acquired of $45,600,000, a decrease in accountsreceivable of $14,572,000, an unrealized loss on investments, net of$8,963,000, an increase in accounts payable of $5,178,000, depreciation andamortization of $2,937,000, a realized loss on the sale of short-terminvestments, net of $1,735,000, and compensation expense of $1,024,000resulting from the modification of options previously granted, partially offsetby an increase in inventories of $3,875,000, an increase in deferred income taxof $3,957,000, amortization of negative goodwill associated with acquisitionsof $2,961,000 and deferred revenues of $1,656,000.

 

Net cash (used in) provided by investing activitieswas $(9,059,000), $(73,228,000) and $3,651,000 in the years ended December 31,2003, 2002 and 2001, respectively.  Netcash (used in) provided by investing activities included capital expendituresof $7,978,000, $15,546,000 and $23,974,000 in these periods, respectively,consisting of approximately $4,927,000, $12,138,000 and $21,758,000,respectively, for the purchase and construction of a new manufacturingfacility, with the remainder in all periods primarily for laboratory andmanufacturing equipment and infrastructure. In 2002 net cash used in investing activities also includes the$95,954,000, net used to acquire Rosemont. In 2001, net cash used in investing activities also includes the$5,000,000 investment in Omrix and $15,603,000, net used in connection with theacquisition of Myelos.  The remainder ofthe net cash used in investing activities, in all periods, was primarily forpurchases and sales of short-term investments.

 

Net cash (used in) provided by financing activitieswas $(4,728,000), $517,000 and $7,687,000 in the years ended December 31, 2003,2002 and 2001, respectively.  Cash fromfinancing activities in 2003, 2002 and 2001 consisted of net proceeds fromissuances of common stock of $2,307,000, $1,751,000 and $7,687,000,respectively.  Net proceeds from thesale of common stock resulted mainly from option

 

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exercises in 2001 and in bothperiods the issuances of stock pursuant to our employee stock purchaseplan.  In 2002 and 2003, we repaid$1,234,000 and $7,035,000, respectively, of long-term debt, principallyborrowings under our credit facility that we used to finance a portion of theconstruction of our new manufacturing facility in Israel.

 

In April 1999, BTG-Israel purchased a manufacturingfacility in Israel for approximately $6,500,000 (including local taxes andlegal fees).  Basic construction of amodern biologics production facility designed to meet FDA cGMP requirements forbiologics and devices was completed at the end of 2001.  Facility qualification activities conductedduring 2002 and 2003 were substantially completed by the end of 2003.  Manufacture of sodium hyalurunate for ourBioLon and Savient HA products and the filling of our BioLon and Savient HAsyringes have been transferred to the new facility, and process validation forBio-Hep-B manufacture in the new facility is in progress.  Production of products cannot be relocatedto the new facility until the new facility has received all necessaryregulatory approvals, which Savient anticipates will continue through 2005,depending on product and territory. Through December 31, 2003, Savient has spent approximately $42,000,000to complete construction of the production facility (including capitalizedinterest but excluding the cost of purchasing the facility and post-completionvalidation), and approximately $12,300,000 for qualification activities.  Of the $8,279,000 spent on qualificationactivities in 2003, $4,789,000****wascapitalized through August 31, 2003 and the remaining $3,490,000 was expensedbeginning September 1, 2003. Depreciation of this facility is expected to begin in 2004 once itreceives the necessary regulatory approvals and the asset is ready for itsintended use.  In June 2000 BTG-Israelentered into a $20,000,000 credit facility with Bank Hapoalim B.M. to finance aportion of the cost of completing its new manufacturing facility.  Loans under the facility bear interest atthe rate of LIBOR plus 1%.  The creditfacility is secured by the assets of BTG-Israel and has been guaranteed bySavient.  At December 31, 2003, Savienthad outstanding long-term borrowings of $12,222,000 under the facility, ofwhich $6,667,000 is due in 2004 and the remaining $5,555,000 is due in2005.  Borrowings are repaid monthly inequal installments.

 

In June 2003, Rosemont commenced an upgrade of itsmanufacturing facility in order to obtain FDA approval to enable Rosemont tomanufacture oral liquid products for supply into the U.S. market. The totalcapital cost for this project is estimated to be approximately $2,000,000, ofwhich approximately $780,000 was expended in 2003 and an additionalapproximately $589,000 was committed at December 31, 2003.  The remaining amount will be spent during2004.

 

We believe that our cash resources as of December31, 2003, together with anticipated product sales, will be sufficient to fundour ongoing operations for the foreseeable future.  There can, however, be no assurance that product sales will occuras anticipated, that current agreements with third party distributors of ourproducts will not be canceled, that the Chief Scientist will continue toprovide funding at current levels or at all, that we will not use a substantialportion of our cash resources to acquire businesses, products and/ortechnologies, or that unanticipated events requiring the expenditure of fundswill not occur.  The satisfaction ofSavient’s future cash requirements will depend in large part on the timing andeffect of the introduction of generic version(s) of Oxandrin into the market,the status of commercialization of Savient’s products, Savient’s ability toenter into additional research and development and licensing arrangements, andSavient’s ability to obtain additional equity and debt financing, ifnecessary.  There can be no assurancethat Savient will be able to obtain additional funds or, if such funds areavailable, that such funding will be on favorable terms.  Savient continues to seek additionalcollaborative research and development and licensing arrangements in order toprovide revenue from sales of certain products and funding for a portion of theresearch and development expenses relating to the products covered, althoughthere can be no assurance that it will be able to obtain such agreements.  See “Item 1.  Business—Risk Factors —We may be unable to obtain any additionalcapital needed to operate and grow our business” and “—We expect our quarterlyresults to fluctuate, which may cause volatility in our stock price.”

 

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Below is a table that presents our contractualobligations and commitments at December 31, 2003:

 

**PaymentsDue by Period (in thousands)**

 
| **Contractual Obligations**                                     |   | **Total** |   | **Less than   One Year** |   | **1-3 years** |   | **4-5 years** |   | **After 5 years** |   | **Undetermined(1)** |   |
|-----------------------------------------------------------------|--------|-----------|--------|--------------------------|--------|---------------|--------|---------------|--------|-------------------|--------|---------------------|--------|
|                                                            |   |      |   |                     |   |          |   |          |   |              |   |                |   |
| Long-term debt obligations                                      |   | $         | 12,222 |                     | $      | 6,667         |   | $             | 5,555  |              | — |                | — |   | — |   |
| Capital lease obligations(1)                                    |   | 755       |   | 394                      |   | 361           |   | —        |   | —            |   | —              |   |
| Operating lease obligations                                     |   | 20,363    |   | 3,201                    |   | 5,237         |   | $             | 4,267  |              | $      | 7,658               |   | — |   |
| Purchase obligations (2)                                        |   | 11,755    |   | 9,857                    |   | 1,898         |   | —        |   | —            |   | —              |   |
| Other long-term liabilities reflected on  our balance sheet (3) |   | 3,191     |   | —                   |   | —        |   | —        |   | —            |   | $                   | 3,191  |   |
| Total                                                           |   | $         | 48,286 |                     | $      | 20,119        |   | $             | 13,051 |              | $      | 4,267               |   | $ | 7,658 |   | $ | 3,191 |   |

 

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(1) Includes interest expense of $41,000 in 2004 and $13,000 in 2005.

 

(2) Consists of $589,000 of commitments related to the upgrade of ourRosemont manufacturing facility, all of which is expected to be spent in 2004,and purchase commitments for Oxandrin and Delatestryl in 2004 and Oxandrin in2005.

 

(3) Consists of severance benefits payable under Israeli law.  Because these benefits are paid only upontermination of employment, it is not possible to allocate the liability acrossfuture years.

 

InJuly 2003 we entered into an agreement with Marco Hi-Tech JV Ltd. pursuant towhich we agreed to invest an aggregate of $1,500,000 in Marco preferred stock,representing approximately 9% of Marco’s fully-diluted outstanding commonstock, and acquired an option to exclusively market in the United States andEurope Huperzine-A, a product for the treatment of Alzheimer’s disease.  The option is exercisable followingcompletion of Phase II trials, which are expected to commence in March 2004with partial funding by the National Institutes of Health.  If we exercise the option, we are obligatedin invest an additional $3,000,000 in Marco preferred stock, representing anadditional approximately 9% of Marco’s fully-diluted outstanding common stock,and to conduct and fund Phase III clinical trials and obtain regulatoryapproval.  If regulatory approval of theproduct is obtained in Europe, we will also be required to pay an additional$1,500,000 to retain exclusive rights in Europe following approval ofHuperzine-A in a second major European country.  We are obligated to use commercially reasonable efforts tocommercialize the product following approval, and must pay Marco a royalty of8% of net sales while patents are in effect and 4% of net salesthereafter.  We invested $500,000 of ourinitial investment in Marco in July 2003, invested an additional $500,000 inMarch 2004 and are scheduled to make the remaining $500,000 investment in July2004.  The $500,000 investment made inMarch 2004 and the $500,000 investment scheduled to be made in July 2004 arenot included in the above table.  One ofour directors owns common stock representing less than 1% of Marco’sfully-diluted outstanding common stock.

 

Wedo not have any off-balance sheet arrangements that have or are reasonablylikely to have a current or future effect on our financial condition, changesin financial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that are material to investors.

 

Savient applies to the Office of the ChiefScientist of the State of Israel annually for research and development fundingfor its various projects for the coming year. The projects and amount funded each year are within the sole discretionof the Chief Scientist.  We have appliedfor Chief Scientist funding for a portion of our 2004 research and developmentactivities, but we cannot assure you that the Chief Scientist will continue toprovide funding to us at the same levels or at all.  Savient is obligated to pay royalties to the Chief Scientist onall revenues derived from products and know-how (including transfer ofproduction rights) resulting from such research and development programspartially funded by the Chief Scientist. These royalties range from 3% to 5% of such revenue, if any, if theseproducts are produced in Israel, up to a ceiling equivalent to the amountfunded, subject to adjustment as described below.  If these products are produced outside Israel by a third-partyother than Savient, the royalties on such revenue, if any, are at a rate thatis equal to the ratio of the amount of the funding provided by the ChiefScientist divided by the sum of the amounts of the Chief Scientist funding plusour total investment in the project, up to an increased ceiling of 120%, 150%or 300% of amount funded by the Chief Scientist, subject to adjustment asdescribed below.  The ceiling isdependent on the portion of production of this product that is intended tooccur outside Israel.  Our total

 

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investment in the project isverified by an independent accountant appointed by the Chief Scientist.  The ceilings and the amount of investmentare adjusted for changes in the in the U.S. Dollar/Israeli Shekel exchange rateand, in case of products produced in Israel, for interest.  Savient has received aggregate funding fromthe Chief Scientist of $26,687,000 through December 31, 2003 (includingparticipation for projects that will not have future sales), and has paidaggregate royalties to the Chief Scientist totaling $4,151,000 through December31, 2003.  As of December 31, 2003, weare obligated to repay to the Chief Scientist, out of revenue from futureproduct sales, a minimum of $5,102,000 of research and development funding forproducts that are currently being sold and a minimum of $9,966,000 of researchand development funding for products currently under development if theseproducts are sold.

 

At December 31, 2003, we had employment agreementswith five senior officers.  Under theseagreements, we have committed to total aggregate base compensation per year ofapproximately $1,625,000 plus other normal customary fringe benefits andbonuses.  These employment agreementsgenerally have a term of three years and are automatically renewed forsuccessive one-year periods unless either party gives the other notice ofnon-renewal.

 

The United States Internal Revenue Service isconducting an audit of our tax return for the year ended December 31,2002.  Savient is also subject to otherongoing tax audits by the City of New York and the State of New Jersey.  Although there can be no assurances, webelieve any adjustments that may arise as a result of these audits will nothave a material adverse effect on our financial position.

 

**New Accounting Pronouncements**

 

In June 2002, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 146, *“Accounting for Exit or Disposal Activities”*.  SFAS No. 146 requires that the liability forcosts associated with an exit or disposal activity be recognized at their fairvalues when the liabilities are incurred. Under previous guidance, liabilities for certain exit costs wererecognized at the date that management committed to an exit plan, which isgenerally before the actual liabilities are incurred.  As SFAS No. 146 is effective only for exit or disposal activitiesinitiated after December 31, 2002, the adoption of this statement did not havea material effect on our financial statements.

 

In April 2003, the FASB issued SFAS No. 149, *“Amendmentof Statement 133 on Derivative Instruments and Hedging Activities”*,which amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities under SFAS No. 133.  SFAS No. 149 is effective for contractsentered into or modified after June 30, 2003 except for the provisions thatwere cleared by the FASB in prior pronouncements. The adoption of SFAS No. 149did not have a material effect on our financial position or results ofoperations.

 

In May 2003, the FASB issued SFAS No. 150, *“Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”*.  SFAS No. 150establishes standards for how an issuer classifies and measures in itsstatement of financial position certain financial instruments withcharacteristics of both liabilities and equity.  In accordance with the standard, financial instruments thatembody such obligations for the issuer are required to be classified asliabilities.  SFAS No. 150 is effectivefor financial instruments entered into or modified after May 31, 2003.  The adoption of SFAS No. 150 did not have amaterial effect on our financial position or results of operations.

 

In November 2002, the FASB issued FASBInterpretation No. 45 *“Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others”*(“FIN 45”).  FIN 45 requires theguarantor to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee.  It also elaborates on the disclosure to bemade by a guarantor in its financial statements about its obligations undercertain guarantees that it has issued and to be made in regard of productwarranties.  Disclosures required underFIN 45 are effective for interim or annual periods ending after December 15,2002.  Initial recognition and initialmeasurement provisions of FIN 45 are applicable on a prospective basis toguarantees issued or modified after December 31, 2002.  The adoption of FIN 45 did not have amaterial effect on our financial position or results of operations.

 

In January 2003, the FASB issued FASBInterpretation 46, *“Consolidation of Variable Interest Entities”*(“FIN 46”).  FIN 46 interprets ARB No.51, Consolidated Financial Statements, as amended by FASB Statement No. 94,Consolidation of All Majority-Owned Subsidiaries, which requires thepreparation of consolidated financial statements when one entity has acontrolling financial interest in a second entity. Usually a controlling financialinterest is created when an investor owns a majority of the voting interests inan investee.  However, in somecircumstances, an entity is created solely to fulfill a specific purpose andvoting interests do not provide a substantive indicator of a controllingfinancial

 

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interest because there aretypically limited matters on which investors may vote.  FIN 46 refers to those entities as variableinterest entities (VIEs) and creates a model for consolidation based on aninvestor’s ownership of variable interests. The provisions of FIN 46 are effective immediately for interestsacquired in VIEs after January 31, 2003, and at the beginning of the firstinterim or annual period beginning after June 15, 2003 for interests acquiredin VIEs before February 1, 2003.  Theadoption of FIN 46 did not have a material effect on our financial position orresults of operations.

 

**ITEM 7A.               QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Market risk is the exposure to loss resulting fromchanges in interest rates, foreign currency exchange rates, commodity pricesand equity prices.  To date our exposureto market risk has been limited.  We donot currently hedge any market risk, although we may do so in the future.  We do not hold or issue any derivativefinancial instruments for trading or other speculative purposes.

 

Borrowings under our $20,000,000 credit facilitybear interest at a floating rate and, therefore, we are impacted by changes inprevailing interest rates.  A 100 basispoint increase in market interest rates on the $12,222,000 outstanding underthis facility at December 31, 2003 would result in an increase in our annualinterest payable of $122,222.  Becausethese borrowings relate to the construction of our new facility, interestexpense was capitalized until August 31, 2003. See Note 1(g) of notes to our consolidated financial statements.

 

Our interest bearing assets consist of cash andcash equivalents, which currently consist of money market funds, commercialpaper and other liquid short-term debt instruments, and short-terminvestments, which currently consist primarily of investments mutual funds,corporate bonds and short-term certificates of deposit.  Our interest income is sensitive to changesin the general level of interest rates, primarily U.S. interest rates and othermarket conditions.

 

As a result of our operations in Israel and theUnited Kingdom, we are subject to currency exchange rate fluctuations that canaffect our results of operations.  Ourresults of operations in 2003 benefited from the decrease in value of the U.S.dollar against the British pound sterling and euro.****We manage our Israelioperations with the objective of protecting against any material net financialloss in U.S. dollars from the impact of Israeli inflation and currencydevaluations on its non-U.S. dollar assets and liabilities.  The cost of our operations in Israel, asexpressed in dollars, is influenced by the extent to which any increase in therate of inflation in Israel is not offset (or is offset on a lagging basis) bya devaluation of the Israeli Shekel in relation to the U.S. dollar.  To the extent that expenses in Shekelsexceed BTG-Israel’s revenues in Shekels (which to date have consisted primarilyof research funding from the Chief Scientist and product sales in Israel), thedevaluations of Israeli currency have been and will continue to be a benefit toSavient’s financial condition.  However,should BTG-Israel’s revenues in Shekels exceed its expenses in Shekels in anymaterial respect, the devaluation of the Shekel will adversely affect Savient’sfinancial condition.  Further, to theextent the devaluation of the Shekel with respect to the U.S. dollar does notsubstantially offset the increase in the costs of local goods and services inIsrael, Savient’s financial results will be adversely affected as localexpenses measured in U.S. dollars will increase.

 

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**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

Index to Consolidated Financial Statements

 
| Independent Auditors’  Reports                                                                                    |   |
|------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                   |   |
| Consolidated  Financial Statements:                                                                                    |   |
|                                                                                                                   |   |
| Consolidated  Balance Sheets as of December 31, 2002 and 2003                                                          |   |
|                                                                                                                   |   |
| Consolidated  Statements of Operations for the years ended December 31, 2001, 2002 and 2003                            |   |
|                                                                                                                   |   |
| Consolidated  Statements of Changes in Stockholders’ Equity for the years ended December  31, 2001, 2002 and 2003 |   |
|                                                                                                                   |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003                            |   |
|                                                                                                                   |   |
| Notes to Consolidated  Financial Statements                                                                            |   |

 

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**REPORT OF INDEPENDENT CERTIFIED PUBLICACCOUNTANTS**

 

 

To the Board of Directors and Stockholdersof

**Savient Pharmaceuticals, Inc.**

 

We have audited the accompanyingconsolidated balance sheets of Savient Pharmaceuticals, Inc. (formerly known asBio-Technology General Corp.) and subsidiaries as of December 31, 2002 and2003, and the related consolidated statements of operations, changes instockholders’ equity, and cash flows for each of the years then ended.  These consolidated financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on the consolidatedfinancial statements based on our audits.

 

We conducted our audits in accordance withauditing standards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects theconsolidated financial position of Savient Pharmaceuticals, Inc. andsubsidiaries as of December 31, 2002 and 2003, and the consolidated results oftheir operations and their cash flows for the years then ended, in conformitywith accounting principles generally accepted in the United States of America.

 

As discussed in Note 1(i) to theconsolidated financial statements, the Company adopted Statement of FinancialAccounting Standards No. 142, *“Goodwill and Other Intangible Assets”*(SFAS No. 142) on January 1, 2002.

 

 

GRANT THORNTON LLP

 

 

New York, New YorkFebruary 16, 2004

 

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Independent Auditors’ Report

 

To the Board of Directors and StockholdersSavient Pharmaceuticals, Inc.

 

We have audited the accompanyingconsolidated statements of operations, changes in stockholders’ equity and cashflows of Savient Pharmaceuticals, Inc. (formerly known as Bio-TechnologyGeneral Corp.) and subsidiaries for the year ended December 31, 2001. Theseconsolidated financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudit.

 

We conducted our audit in accordance withauditing standards generally accepted in the United States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, theresults of operations and the cash flows of Savient Pharmaceuticals, Inc. andsubsidiaries for the year ended December 31, 2001, in conformity withaccounting principles generally accepted in the United States of America.

 
|                   | KPMG LLP |
|------------------------|----------|
|                   |     |
|                   |     |
| Princeton, New  Jersey |     |
| September 20,  2002    |     |

 

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**SAVIENT PHARMACEUTICALS, INC.CONSOLIDATED BALANCE SHEETS**

 

(in thousands, except share data)

 
|                                                                                                          |   | **December  31,** |    |
|---------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                          |   | **2002**          |    | **2003** |   |
| ASSETS                                                                                                        |   |              |    |   |   |
| Current Assets:                                                                                               |   |              |    |   |   |
| Cash and cash equivalents                                                                                     |   | $                 | 12,211  |   | $ | 17,219 |   |
| Short-term investments                                                                                        |   | 4,336             |    | 5,582 |   |
| Accounts receivable, net                                                                                      |   | 35,764            |    | 33,375 |   |
| Inventories                                                                                                   |   | 16,612            |    | 20,216 |   |
| Deferred income taxes                                                                                         |   | 4,176             |    | 2,888 |   |
| Prepaid expenses and other current assets                                                                     |   | 2,829             |    | 4,163 |   |
| Total current assets                                                                                          |   | 75,928            |    | 83,443 |   |
|                                                                                                          |   |              |    |   |   |
| Property and equipment, net                                                                                   |   | 66,596            |    | 70,426 |   |
| Intangible assets, net                                                                                        |   | 79,878            |    | 75,743 |   |
| Goodwill                                                                                                      |   | 40,080            |    | 40,121 |   |
| Deferred income taxes                                                                                         |   | 16,380            |    | 13,767 |   |
| Severance pay funded                                                                                          |   | 2,783             |    | 2,660 |   |
| Other assets (including restricted cash of  $1,280 in 2002 and 2003)                                          |   | 3,786             |    | 4,380 |   |
| Total assets                                                                                                  |   | $                 | 285,431 |   | $ | 290,540 |   |
|                                                                                                          |   |              |    |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                     |   |              |    |   |   |
| Current Liabilities:                                                                                          |   |              |    |   |   |
| Accounts payable (including income tax  payable of $5,464 in 2002 and $4,774 in 2003)                         |   | $                 | 21,618  |   | $ | 16,816 |   |
| Deferred revenues                                                                                             |   | 1,557             |    | 848 |   |
| Current portion of long-term debt                                                                             |   | 6,674             |    | 7,020 |   |
| Other current liabilities                                                                                     |   | 17,020            |    | 19,846 |   |
| Total current liabilities                                                                                     |   | 46,869            |    | 44,530 |   |
|                                                                                                          |   |              |    |   |   |
| Long-term debt                                                                                                |   | 12,222            |    | 5,903 |   |
| Deferred revenues                                                                                             |   | 11,628            |    | 7,836 |   |
| Severance pay                                                                                                 |   | 5,673             |    | 5,851 |   |
| Negative goodwill                                                                                             |   | 16,028            |    | 16,028 |   |
| Deferred income taxes                                                                                         |   | 23,936            |    | 22,962 |   |
|                                                                                                          |   |              |    |   |   |
| Commitments and contingent liabilities  (Note 8)                                                              |   |              |    |   |   |
|                                                                                                          |   |              |    |   |   |
| Stockholders’ Equity:                                                                                    |   |              |    |   |   |
| Preferred stock - $.01 par value; 4,000,000  shares authorized; no shares issued                              |   | —            |    | — |   |
| Common stock - $.01 par value; 150,000,000  shares authorized; issued: 58,733,000 in 2002, 59,618,000 in 2003 |   | 587               |    | 595 |   |
| Additional paid in capital                                                                                    |   | 214,224           |    | 216,706 |   |
| Accumulated deficit                                                                                           |   | (45,853           | )       | (31,931 | ) |
| Accumulated other comprehensive income                                                                        |   | 117               |    | 2,060 |   |
| Total stockholders’ equity                                                                               |   | 169,075           |    | 187,430 |   |
|                                                                                                          |   |              |    |   |   |
| Total liabilities and stockholders’ equity                                                               |   | $                 | 285,431 |   | $ | 290,540 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

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**SAVIENT PHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS**

(in thousands, except per share data)

 
|                                                                            |   | **Year Ended December 31,** |    |
|---------------------------------------------------------------------------------|--------|-----------------------------|---------|
|                                                                            |   | **2001**                    |    | **2002** |   | **2003** |   |
| Revenues:                                                                       |   |                        |    |   |   |   |   |
| Product sales, net                                                              |   | $                           | 87,106  |   | $ | 96,107 |   | $ | 124,846 |   |
| Contract fees                                                                   |   | 1,656                       |    | 1,804 |   | 1,340 |   |
| Royalties                                                                       |   | 3,817                       |    | 3,891 |   | 3,227 |   |
| Other revenues                                                                  |   | 2,195                       |    | 1,164 |   | 3,112 |   |
|                                                                            |   | 94,774                      |    | 102,966 |   | 132,525 |   |
| Expenses:                                                                       |   |                        |    |   |   |   |   |
| Research and development                                                        |   | 27,778                      |    | 32,783 |   | 31,797 |   |
| Marketing and sales                                                             |   | 17,006                      |    | 22,143 |   | 23,303 |   |
| General and administrative                                                      |   | 13,252                      |    | 17,582 |   | 26,744 |   |
| Cost of sales                                                                   |   | 12,388                      |    | 14,148 |   | 24,745 |   |
| Amortization of intangibles and negative  goodwill associated with acquisitions |   | (2,961                      | )       | 1,013 |   | 4,050 |   |
| Commissions and royalties                                                       |   | 1,975                       |    | 2,159 |   | 5,438 |   |
| Write-off of in-process research and  development acquired                      |   | 45,600                      |    | — |   | — |   |
|                                                                            |   | 115,038                     |    | 89,828 |   | 116,077 |   |
|                                                                            |   |                        |    |   |   |   |   |
| Operating income (loss)                                                         |   | (20,264                     | )       | 13,138 |   | 16,448 |   |
| Other income (expense), net                                                     |   | (4,929                      | )       | 1,642 |   | 3,635 |   |
| Income (loss) before income taxes                                               |   | (25,193                     | )       | 14,780 |   | 20,083 |   |
| Income tax expense                                                              |   | 4,733                       |    | 5,063 |   | 6,161 |   |
| Net income (loss)                                                               |   | $                           | (29,926 | ) | $ | 9,717 |   | $ | 13,922 |   |
|                                                                            |   |                        |    |   |   |   |   |
| Earnings (loss) per common share:                                               |   |                        |    |   |   |   |   |
| Basic:                                                                          |   |                        |    |   |   |   |   |
| Net income (loss)                                                               |   | $                           | (0.52   | ) | $ | 0.17 |   | $ | 0.24 |   |
| Diluted:                                                                        |   |                        |    |   |   |   |   |
| Net income (loss)                                                               |   | $                           | (0.52   | ) | $ | 0.17 |   | $ | 0.23 |   |
| Weighted average number of common and  common equivalent shares:                |   |                        |    |   |   |   |   |
| Basic                                                                           |   | 57,230                      |    | 58,480 |   | 59,194 |   |
| Diluted                                                                         |   | 57,230                      |    | 58,659 |   | 59,798 |   |

 

The accompanying notes are an integral part ofthese consolidated financial statements.

 

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**SAVIENTPHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY**(in thousands)

 
|                                                                |   | **Common  Stock** |   |          |   |                             |   |                     |   |
|---------------------------------------------------------------------|--------|-------------------|--------|---------------|--------|----------------------------------|--------|--------------------------|--------|
|                                                                |   | **Shares**        |   | **Par Value** |   | **Additional  Paid In  Capital** |   | **Accumulated  Deficit** |   | **Accumulated  other  comprehensive  income (loss)** |   | **Total  Stockholders’  Equity** |   |
|                                                                |   |              |   |          |   |                             |   |                     |   |   |   |   |   |
| **Balance, December 31, 2000**                                      |   | 54,765            |   | $             | 547    |                             | $      | 183,705                  |   | $ | (25,644 | ) | $ | (5,963 | ) | $ | 152,645 |   |
| Comprehensive  income:                                              |   |              |   |          |   |                             |   |                     |   |   |   |   |   |
| Net loss                                                            |   |              |   |          |   |                             |   | (29,926                  | )      |   |   | (29,926 | ) |
| Unrealized loss on marketable securities,  net                      |   |              |   |          |   |                             |   |                     |   | (1,110 | ) | (1,110 | ) |
| Reclassification adjustment for realized  loss included in net loss |   |              |   |          |   |                             |   |                     |   | 7,193 |   | 7,193 |   |
| Total comprehensive loss                                            |   |              |   |          |   |                             |   |                     |   |   |   | (23,843 | ) |
| Issuance of common stock in Myelos  acquisition                     |   | 2,345             |   | 23            |   | 19,009                           |   |                     |   |   |   | 19,032 |   |
| Issuance of common stock                                            |   | 277               |   | 3             |   | 1,994                            |   |                     |   |   |   | 1,997 |   |
| Tax benefit derived from exercise of stock  options                 |   |              |   |          |   | 925                              |   |                     |   |   |   | 925 |   |
| Compensation expense in connection with  options modification       |   |              |   |          |   | 1,024                            |   |                     |   |   |   | 1,024 |   |
| Exercise of stock options                                           |   | 873               |   | 9             |   | 5,751                            |   |                     |   |   |   | 5,760 |   |
| **Balance, December 31, 2001**                                      |   | 58,260            |   | 582           |   | 212,408                          |   | (55,570                  | )      | 120 |   | 157,540 |   |
| Comprehensive income:                                               |   |              |   |          |   |                             |   |                     |   |   |   |   |   |
| Net income                                                          |   |              |   |          |   |                             |   | 9,717                    |   |   |   | 9,717 |   |
| Unrealized loss on marketable securities,  net                      |   |              |   |          |   |                             |   |                     |   | (280 | ) | (280 | ) |
| Currency translation adjustment                                     |   |              |   |          |   |                             |   |                     |   | 277 |   | 277 |   |
| Total comprehensive income                                          |   |              |   |          |   |                             |   |                     |   |   |   | 9,714 |   |
| Issuance of common stock                                            |   | 469               |   | 5             |   | 1,792                            |   |                     |   |   |   | 1,797 |   |
| Exercise of stock options                                           |   | 4                 |   |          |   | 24                               |   |                     |   |   |   | 24 |   |
| **Balance, December 31, 2002**                                      |   | 58,733            |   | 587           |   | 214,224                          |   | (45,853                  | )      | 117 |   | 169,075 |   |
| Comprehensive income:                                               |   |              |   |          |   |                             |   |                     |   |   |   |   |   |
| Net income                                                          |   |              |   |          |   |                             |   | 13,922                   |   |   |   | 13,922 |   |
| Unrealized gain on marketable securities,  net                      |   |              |   |          |   |                             |   |                     |   | 507 |   | 507 |   |
| Currency translation adjustment                                     |   |              |   |          |   |                             |   |                     |   | 1,436 |   | 1,436 |   |
| Total comprehensive income                                          |   |              |   |          |   |                             |   |                     |   |   |   | 15,865 |   |
| Issuance of common stock                                            |   | 640               |   | 6             |   | 1,485                            |   |                     |   |   |   | 1,491 |   |
| Exercise of stock options                                           |   | 245               |   | 2             |   | 997                              |   |                     |   |   |   | 999 |   |
| **Balance, December 31, 2003**                                      |   | 59,618            |   | $             | 595    |                             | $      | 216,706                  |   | $ | (31,931 | ) | $ | 2,060 |   | $ | 187,430 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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**SAVIENTPHARMACEUTICALS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

(in thousands)

 
|                                                                                      |                                      | **Year Ended  December 31,** |    |
|-------------------------------------------------------------------------------------------|-------------------------------------------|------------------------------|---------|
|                                                                                      |                                      | **2001**                     |    | **2002** |   | **2003** |   |
| **Cash flows from operating activities**:                                                 |                                      |                         |    |   |   |   |   |
| Net income (loss)                                                                         |                                      | $                            | (29,926 | ) | $ | 9,717 |   | $ | 13,922 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |                                      |                         |    |   |   |   |   |
| Deferred income tax                                                                       |                                      | (3,957                       | )       | (837 | ) | 2,722 |   |
| Depreciation and amortization                                                             |                                      | 2,937                        |    | 2,701 |   | 4,623 |   |
| Write-off of in-process research and  development acquired                                |                                      | 45,600                       |    | — |   | — |   |
| Compensation expense in connection with  option modification                              |                                      | 1,024                        |    |   |   | — |   |
| Amortization of negative goodwill and  intangible assets associated with acquisitions     |                                      | (2,961                       | )       | 1,013 |   | 4,050 |   |
| Unrealized loss on investments, net                                                       |                                      | 8,963                        |    | — |   | — |   |
| Provision for inventory reduction                                                         |                                      | —                       |    | 976 |   | 390 |   |
| Provision for severance pay                                                               |                                      | 636                          |    | 444 |   | 178 |   |
| Deferred revenues                                                                         |                                      | (1,656                       | )       | (1,553 | ) | (4,501 | ) |
| (Gain) loss on disposal of property and  equipment                                        |                                      | 10                           |    | 354 |   | (1 | ) |
| Gain from forward contract                                                                |                                      | —                       |    | (800 | ) | — |   |
| Realized loss (gain) on sales of short-  term investments, net                            |                                      | 1,735                        |    | 14 |   | (81 | ) |
| Issuance of common stock as payment for  services                                         |                                      | 70                           |    | 70 |   | 183 |   |
| Changes in:                                                                               | accounts receivable                       |                         | 14,572  |   | (8,265 | ) | 2,389 |   |
|                                                                                      | inventories                               |                         | (3,875  | ) | (1,202 | ) | (3,994 | ) |
|                                                                                      | prepaid expenses and other current assets |                         | (405    | ) | (1,284 | ) | (1,334 | ) |
|                                                                                      | accounts payable                          |                         | 5,178   |   | 7,541 |   | (4,013 | ) |
|                                                                                      | other current liabilities                 |                         | (185    | ) | 305 |   | 2,826 |   |
| Net cash provided by operating activities                                                 |                                      | 37,760                       |    | 9,194 |   | 17,359 |   |
| **Cash flows from investing activities:**                                                 |                                      |                         |    |   |   |   |   |
| Purchases of short-term investments                                                       |                                      | (10,407                      | )       | (4,706 | ) | (1,651 | ) |
| Capital expenditures                                                                      |                                      | (23,974                      | )       | (15,546 | ) | (7,978 | ) |
| Severance pay (funded) utilized                                                           |                                      | (64                          | )       | (398 | ) | 123 |   |
| Other investments                                                                         |                                      | (5,000                       | )       | — |   | (500 | ) |
| Net proceeds from forward contract                                                        |                                      | —                       |    | 800 |   | — |   |
| Restricted cash                                                                           |                                      | —                       |    | (1,280 | ) | — |   |
| Other assets                                                                              |                                      | 69                           |    | (86 | ) | (310 | ) |
| Proceeds from sales of short-term  investments                                            |                                      | 58,416                       |    | 43,919 |   | 1,198 |   |
| Net cash paid in acquisition                                                              |                                      | (15,603                      | )       | (95,954 | ) | — |   |
| Proceeds from sales of property and  equipment                                            |                                      | 214                          |    | 23 |   | 59 |   |
| Net cash (used in) provided by investing  activities                                      |                                      | 3,651                        |    | (73,228 | ) | (9,059 | ) |
| **Cash flows from financing activities:**                                                 |                                      |                         |    |   |   |   |   |
| Proceeds from issuances of common stock                                                   |                                      | 7,687                        |    | 1,751 |   | 2,307 |   |
| Repayment of long-term debt                                                               |                                      | —                       |    | (1,234 | ) | (7,035 | ) |
| Net cash provided by (used in) financing  activities                                      |                                      | 7,687                        |    | 517 |   | (4,728 | ) |
| Effect of exchange rate changes                                                           |                                      | —                       |    | 277 |   | 1,436 |   |
| Net increase (decrease) in cash and cash  equivalents                                     |                                      | 49,098                       |    | (63,240 | ) | 5,008 |   |
| Cash and cash equivalents at beginning of  year                                           |                                      | 26,353                       |    | 75,451 |   | 12,211 |   |
| Cash and cash equivalents at end of year                                                  |                                      | $                            | 75,451  |   | $ | 12,211 |   | $ | 17,219 |   |

 

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|                                                                               |   | **Year Ended  December 31,** |   |
|------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                               |   | **2001**                     |   | **2002** |   | **2003** |   |
| **Supplementary information:**                                                     |   |                         |   |   |   |   |   |
| Other information:                                                                 |   |                         |   |   |   |   |   |
| Interest paid                                                                      |   | $                            | 1,044  |   | $ | 587 |   | $ | 449 |   |
| Income taxes paid                                                                  |   | $                            | 3,937  |   | $ | 6,777 |   | $ | 7,054 |   |
| Tax benefit derived from exercise of stock  options                                |   | $                            | 925    |   | — |   | — |   |
|                                                                               |   |                         |   |   |   |   |   |
| **Acquisitions:**                                                                  |   |                         |   |   |   |   |   |
| Assets acquired                                                                    |   | $                            | 9,141  |   | $ | 12,632 |   | — |   |
| Liabilities assumed                                                                |   | (1,125                       | )      | (28,968 | ) | — |   |
| Goodwill                                                                           |   | (18,914                      | )      | 40,080 |   | — |   |
| Intangible assets                                                                  |   | —                       |   | 80,800 |   | — |   |
| Equity issued                                                                      |   | (19,032                      | )      | — |   | — |   |
| In process research and development  acquired                                      |   | 45,600                       |   | — |   | — |   |
| Purchase price (including acquisition costs  of $1,387 in 2001 and $5,421 in 2002) |   | 15,670                       |   | 104,544 |   | — |   |
| Less –accrued acquisition costs                                               |   | —                       |   | (3,322 | ) | — |   |
| Less -cash acquired                                                                |   | (67                          | )      | (5,268 | ) | — |   |
|                                                                               |   |                         |   |   |   |   |   |
| Net cash paid                                                                      |   | $                            | 15,603 |   | $ | 95,954 |   | $ | — |   |
|                                                                               |   |                         |   |   |   |   |   |
| **Non-cash activities:**                                                           |   |                         |   |   |   |   |   |
| Capital expenditures unpaid as of December  31                                     |   | $                            | 899    |   | $ | 1,134 |   | $ | 273 |   |
| Refinancing of fixed assets                                                        |   | $                            | — |   | $ | — |   | $ | 1,062 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

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# **SAVIENT PHARMACEUTICALS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

 

Savient Pharmaceuticals, Inc. (“Savient”), formerlyknown as Bio-Technology General Corp., and its wholly-owned subsidiaries(collectively, the “Company”) are engaged in the research, development,manufacture and marketing of pharmaceutical products that address unmet medicalneeds in both niche and larger market segments. The Company distributes itsproducts on a worldwide basis primarily through a direct sales force in theUnited States (including Savient employees and representatives of a contractsales organization), the United Kingdom (for the Rosemont products) and Israeland primarily through third-party license and distribution relationshipselsewhere.  Through a combination ofinternal research and development, acquisitions, collaborative relationshipsand licensing arrangements, the Company has assembled a diverse portfolio oftherapeutic products, many of which are currently being marketed, several ofwhich are in registration or clinical trials and one of which is inpre-clinical development.

 

Savient and its wholly-owned subsidiary,Bio-Technology General (Israel) Ltd. (“BTG-Israel”), were formed in 1980 toresearch, develop, manufacture and market products through the application ofgenetic engineering and related biotechnologies.  On March 19, 2001, Savient acquired Myelos Corporation(“Myelos”), a privately-held biopharmaceutical company focused on thedevelopment of novel therapeutics to treat diseases of the nervous system.  On September 30, 2002 Savient, through itswholly-owned subsidiary Acacia Biopharma Limited (“Acacia”), acquired RosemontPharmaceuticals Limited (“Rosemont”), a specialty pharmaceutical companylocated in the United Kingdom that develops, manufactures and marketspharmaceutical products in oral liquid form.

 

a.             Basisof consolidation:

 

The consolidated financial statements include theaccounts of Savient, BTG-Israel, Myelos, Acacia and Rosemont.  Results of operations and cash flows ofMyelos and Rosemont are included in the consolidated financial statements sinceMarch 19, 2001 and September 30, 2002, their respective dates ofacquisition.  All material intercompanytransactions and balances have been eliminated.

 

b.             Translationof foreign currency:

 

The functional currency of BTG-Israel is the U.S.dollar.  Accordingly, its transactionsand balances are remeasured in dollars, and translation gains and losses (whichare immaterial for all periods presented) are included in the statements ofoperations. The functional currency of Rosemont is the British pound sterlingand its translation gains and losses are included in accumulated othercomprehensive income.

 

c.             Cashand cash equivalents:

 

At December 31, 2002 and 2003, cash and cashequivalents included cash of $10,411,000 and $6,484,000, respectively, andmoney market funds, commercial paper and other liquid short-term debtinstruments (with maturities at date of purchase of ninety days or less) of$1,800,000 and $10,735,000, respectively. Cash and cash equivalents at December 31, 2002 and 2003 include$6,295,000 and $10,778,000, respectively, denominated in currencies other thanthe U.S. dollar.

 

d.             Short-terminvestments:

 

(i) Short-term investments, which are carried at fair value, consistprimarily of investments in mutual funds, corporate bonds and short-termcertificates of deposit with original maturity greater than 90 days that havebeen classified as “available-for-sale securities” pursuant to Statement ofFinancial Accounting Standards (“SFAS”) No. 115 ,*”Accounting for Certain Investments inDebt and Equity Securities.”* Unrealized holding gains and losses, which are deemed to be temporary,on available-for-sale securities are excluded from earnings and are reported asa separate component of other

 

66

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comprehensive income.  Realized gains and losses from the sale ofavailable-for-sale securities are determined on a specific identificationbasis.  A decline in the market value ofan available-for-sale security below cost that is deemed to be other thantemporary is recognized as a charge in the consolidated statement of operationsand a new cost basis for the security is established.

 

At December 31, 2002, management determined thatthe decline in the value of certain investments was other than temporary and,accordingly, cost was adjusted to reflect market value and a loss on impairmentof investment of $1,168,000 was recognized and included in the statement ofoperations in other income (expense), net.

 

At December 31, 2002 and 2003, the adjusted cost ofthe securities available for sale was $4,563,000 and $3,444,000, respectively,and the fair market value was $4,336,000 and $3,930,000, respectively.  Total realized and unrealized losses (gains),net, included in other income (expense), net, for the years ended December 31,2002 and 2003 were $1,181,000 and $(71,000), respectively.

 

(ii)  Costbasis investments included within other assets at December 31, 2002 and 2003represent equity investments of less than 20% in private entities.  Changes in the value of these investmentsare not recognized unless an impairment is deemed to be other than temporary(see Note 2c).

 

e.             AccountsReceivable:

 

Credit to customers is extended based on evaluationof a customers’ financial condition and, generally, collateral is notrequired.  Accounts receivable areusually due within 30 days and are stated at amounts due from customers net ofan allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms areconsidered past due.  The Companydetermines its allowance by considering a number of factors, including thelength of time trade accounts receivable are past due, the Company’s previousloss history, the customer’s current ability to pay its obligation to the Companyand the condition of the general economy and the industry as a whole.  The Company writes-off accounts receivablewhen they become uncollectible, and payments subsequently received on suchreceivables are credited to the allowance for doubtful accounts.

 

f.              Inventories:

 

Inventories are stated at the lower of cost ormarket.  Cost is determined by using theweighted average method.  At December31, 2002 and 2003, inventories included raw materials of $2,214,000 and$6,635,000, work-in-process of $3,018,000 and $1,720,000, and finished goods of$11,380,000 and $11,860,000, respectively. An allowance is established when management determines that certaininventories may not be saleable.

 

g.             Propertyand equipment, net of accumulated depreciation and amortization:

 

Property and equipment are stated at cost.  Depreciation has been calculated using thestraight-line method over the estimated useful lives of the assets,ranging from 3 to 17 years.  Leaseholdimprovements are amortized over the lives of the respective leases, which areshorter than the useful life.  The costof maintenance and repairs is expensed as incurred.

 

Land, building and construction in progressrepresents BTG-Israel’s new manufacturing facility and is stated at cost.  This includes cost of construction under theconstruction contracts, plant and equipment, capitalized interest, labor andother direct costs, all of which were capitalized through August 31, 2003.  Interest was capitalized through August 31,2003 under the provision of SFAS No. 34 *“Capitalization of Interest Cost”*.  Interest capitalized during the years endedDecember 31, 2001, 2002 and 2003 was $1,039,000, $577,000 and $266,000,respectively, and totaled $1,955,000 and $2,221,000 at December 31, 2002 and2003, respectively.  The basicconstruction of the building was completed in 2001.  Facility qualification activities conducted during 2002 and 2003were substantially completed by the end of 2003. Relocation of productproduction will continue through 2005, depending on product and territory.  Construction in progress is not depreciateduntil such time as the relevant assets are completed and ready for theirintended use.

 

67

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h.             Intangibleassets:

 

At December 31, 2002 and 2003, intangible assetsconsist mainly of developed products, trademarks and several patents acquiredin the Rosemont acquisition and are being amortized, using the straight-linemethod, over the estimated useful life of approximately 20 years.  The estimation of the useful life of theintangible assets was determined by Savient’s management based on anindependent appraisal and available information.

 

Goodwill and negative goodwill recorded inconnection with the acquisition of Rosemont and Myelos, respectively, is notbeing amortized in accordance with the provisions of Statement of FinancialAccounting Standards No. 142.

 

i.              Long-livedassets:

 

The Company’s long-lived assets include propertyand equipment, intangible assets and goodwill.

 

As of January 1, 2002 the Company adopted SFAS No.142, *“Goodwilland Other Intangible Assets”*, which eliminated the amortization ofpurchased goodwill.  As a result, theCompany is no longer amortizing the negative goodwill resulting from the Myelosacquisition.  Under SFAS No. 142, thenegative goodwill balance of $16,028,000 remaining at December 31, 2002 will bemaintained on the balance sheet as a deferred credit until it is either nettedagainst the contingent payments, if any, made to the former Myelos shareholdersor reflected in net income as an extraordinary item should the contingentpayments not become due.  Under SFAS No.142, goodwill is tested annually and more frequently if an event occurs whichindicates the goodwill may be impaired. SFAS No. 142 requires companies to use a fair value approach todetermine whether there is an impairment event.

 

The following table presents a reconciliation ofnet income and earnings per share amounts, as reported in the financialstatements, to those amounts adjusted for negative goodwill amortization,determined in accordance with SFAS No. 142.

 
|                                          |   | **Year Ended December 31,**               |    |
|-----------------------------------------------|--------|-------------------------------------------|---------|
|                                          |   | **2001**                                  |    | **2002** |   | **2003** |   |
|                                          |   | **(in thousands except per share  data)** |    |
| Reported net income (loss)                    |   | $                                         | (29,926 | ) | $ | 9,717 |   | $ | 13,922 |   |
| Deduct:   negative goodwill amortization |   | (2,961                                    | )       | — |   | — |   |
| Adjusted net income (loss)                    |   | $                                         | (32,887 | ) | $ | 9,717 |   | $ | 13,922 |   |
| Basic earnings (loss) per common share:       |   |                                      |    |   |   |   |   |
| As reported                                   |   | $                                         | (0.52   | ) | $ | 0.17 |   | $ | 0.24 |   |
| Negative goodwill amortization                |   | (0.05                                     | )       | — |   | — |   |
| Adjusted                                      |   | $                                         | (0.57   | ) | $ | 0.17 |   | $ | 0.24 |   |
| Diluted earnings (loss) per common share:     |   |                                      |    |   |   |   |   |
| As reported                                   |   | $                                         | (0.52   | ) | $ | 0.17 |   | $ | 0.23 |   |
| Negative goodwill amortization                |   | (0.05                                     | )       | — |   | — |   |
| Adjusted                                      |   | $                                         | (0.57   | ) | $ | 0.17 |   | $ | 0.23 |   |

 

As of January 1, 2002, the Company adopted SFAS No.144, *“Accountingfor the Impairment or Disposal of Long-lived Assets”* whichsupersedes SFAS No. 121, *“Accounting for the Impairment of Long-lived Assetsto be Disposed Of”*.  UnderSFAS No. 144, intangible assets other than goodwill are reviewed on a periodicbasis for impairment whenever events or changes in circumstances indicate thatthe carrying amounts of the assets may not be recoverable.  Such events or changes in circumstancesinclude, but are not limited to:  (a) asignificant decrease in the market price of a long-lived asset (or assetgroup); (b) a significant adverse change in the extent or manner in which along-lived asset (or asset group) is being used or in its physical condition;(c) a significant adverse change in legal factors or in the business climatethat could affect the value of a long-lived asset (or asset group), includingan adverse action or assessment by a regulator; (d) an accumulation of costssignificantly in excess of the amount originally expected for the acquisitionor construction of a long-lived asset (or asset group); (e) a current-periodoperating or cash flow loss combined with a history of operating or cash flowlosses or a projection or forecast that demonstrates continuing lossesassociated with the use of a long-lived asset (or asset

 

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group); and (f) a currentexpectation that, more likely than not, a long-lived asset (or asset group)will be sold or otherwise disposed of significantly before the end of itspreviously estimated useful life. Recoverability of assets to be held and used is measured by a comparisonof the carrying amount of an asset to future undiscounted net cash flowsexpected to be generated by the asset. If such assets are considered to be impaired, the impairment to berecognized is measured by the amount by which the carrying amount of the assetsexceeds the fair value of the assets. The Company’s management believes that no such event or change hasoccurred.

 

j.              Revenuerecognition:

 

Product sales are recognized when the product isshipped and collectability is probable, net of discounts, sales incentives andsales allowances.

 

Contract fees consist mainly of license ofmarketing and distribution rights and research and development projects.  In accordance with Staff Accounting Bulletin101, *“RevenueRecognition in Financial Statements”* (“SAB 101”), issued by theSecurities and Exchange Commission in December 1999, contract fee revenues arerecognized over the estimated term of the related agreements, which range fromfive to 16 years.

 

Revenue related to performance milestones isrecognized based upon the achievement of the milestone, as defined in therespective agreements, and when collectability is probable.  Advance payments received in excess ofamounts earned are included in deferred revenue.

 

Royalties are recognized once agreement exists, thesale is made and the royalty is earned.

 

Other revenues represent funds received by theCompany for research and development projects that are partially funded bycollaborative partners and the Chief Scientist of the State of Israel.  The Company recognizes revenues uponperformance of such funded research.  Ingeneral, these contracts are cancelable by the Company’s collaborative partnersat any time.

 

k.             Stock-basedcompensation:

 

At December 31, 2003, the Company has stock-basedcompensation plans, which are described more fully in Notes 10 and 11.  As permitted by SFAS No. 123, *“Accountingfor Stock Based Compensation”*, the Company accounts for stock-basedcompensation arrangements with employees in accordance with provisions ofAccounting Principles Board (“APB”) Opinion No. 25, *“Accounting for Stock Issued toEmployees”*.  Compensationexpense for stock options issued to employees is based on the difference on thedate of grant between the fair value of the Company’s stock and the exerciseprice of the option.  No stock-basedemployee compensation cost is reflected in net income upon option grant, as alloptions granted under those plans had an exercise price equal to the marketvalue of the underlying common stock at the date of grant.  The Company accounts for equity instrumentsissued to nonemployees in accordance with the provisions of SFAS No. 123 andEmerging Issues Task Force (“EITF”) Issue No. 96-18, “*Accounting for Equity Instruments ThatAre Issued to Other Than Employees for Acquiring, or in Conjunction WithSelling, Goods or Services*”. All transactions in which goods or services are the considerationreceived for the issuance of equity instruments are accounted for based on thefair value of the consideration received or the fair value of the equityinstrument issued, whichever is more reliably measurable.

 

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The following table illustrates the effect on netincome and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based compensation:

 
|                                                                                                                                  |   | **Year ended December 31,**              |    |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                                                                                                  |   | **2001**                                 |    | **2002** |   | **2003** |   |
|                                                                                                                                  |   | **(in thousands except per share data)** |    |
| Net income  (loss)                                                                                                                    |   |                                     |    |   |   |   |   |
| As reported                                                                                                                           |   | $                                        | (29,926 | ) | $ | 9,717 |   | $ | 13,922 |   |
| Deduct:                                                                                                                               |   |                                     |    |   |   |   |   |
| Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | 13,731                                   |    | 13,853 |   | 10,152 |   |
| Pro forma                                                                                                                             |   | $                                        | (43,657 | ) | $ | (4,136 | ) | $ | 3,770 |   |
| Basic  earnings (loss) per common share                                                                                               |   |                                     |    |   |   |   |   |
| As reported                                                                                                                           |   | $                                        | (0.52   | ) | $ | 0.17 |   | $ | 0.24 |   |
| Pro forma                                                                                                                             |   | $                                        | (0.76   | ) | $ | (0.07 | ) | $ | 0.06 |   |
| Diluted  earnings (loss) per common share                                                                                             |   |                                     |    |   |   |   |   |
| As reported                                                                                                                           |   | $                                        | (0.52   | ) | $ | 0.17 |   | $ | 0.23 |   |
| Pro forma                                                                                                                             |   | $                                        | (0.76   | ) | $ | (0.07 | ) | $ | 0.06 |   |

 

l.              Researchand development:

 

All research and development costs are expensed asincurred.

 

m.            Incometaxes:

 

Deferred income taxes are recognized for the taxconsequences of temporary differences by applying the enacted statutory taxrates to differences between the financial statement carrying amounts and thetax bases of existing assets and liabilities and for capital and net operatinglosses and tax credits carry forward. When it is not considered more likelythan not that a part or the entire deferred tax asset will be realized, avaluation allowance is recognized.

 

BTG-Israel and Rosemont file separate income taxreturns and provide for taxes under local laws.

 

n.             Othercomprehensive income (loss):

 

Other comprehensive income (loss) consists ofunrealized gains (losses) on available for sale marketable securities andcurrency translation adjustments from the translation of Rosemont’s financialstatements from British pound sterling to U.S. dollars.

 

o.             Earningsper common share:

 

Net earnings per common share amounts (“basic EPS”)are computed by dividing net earnings by the weighted average number of commonshares outstanding and exclude any potential dilution.  Net earnings per common share amounts assumingdilution (“diluted EPS”) are computed by reflecting potential dilution from theexercise of stock options.

 

A reconciliation between the numerators anddenominators of the basic and diluted EPS computations for net earnings is asfollows:

 

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|                                                                           |   | **Year Ended  December 31, 2001** |    | **Year Ended  December 31, 2002** |   | **Year Ended  December 31, 2003** |   |
|--------------------------------------------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|-----------------------------------|--------|
| **(In  thousands, except per share data)**                                     |   | **Income  (Numerator)**      |    | **Shares  (Denominator)**         |   | **Per  Share   Amounts**          |   | **Income  (Numerator)** |   | **Shares  (Denominator)** |   | **Per  Share   Amounts** |   | **Income   (Numerator)** |   | **Shares  (Denominator)** |   | **Per  Share  Amounts** |   |
|                                                                           |   |                              |    |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Earnings (Loss)**                                                        |   | $                                 | (29,926 | )                                 |   |                              |   |   | $ | 9,717 |   |   |   |   |   | $ | 13,922 |   |   |   |   |   |
|                                                                           |   |                              |    |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Basic EPS**                                                                  |   |                              |    |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss) attributable to common stock                               |   | (29,926                           | )       | 57,230                            |   | $                                 | (0.52  | ) | 9,717 |   | 58,480 |   | $ | 0.17 |   | 13,922 |   | 59,194 |   | $ | 0.24 |   |
|                                                                           |   |                              |    |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Effect of Dilutive Securities**                                              |   |                              |    |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options                                                                  |   |                              |    | —                            |   |                              |   |   |   | 179 |   |   |   |   |   | 604 |   |   |   |
|                                                                           |   |                              |    |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                                                                |   |                              |    |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss) attributable to common stock  and assumed option exercises |   | $                                 | (29,926 | )                                 | 57,230 |                              | $      | (0.52 | ) | $ | 9,717 |   | 58,659 |   | $ | 0.17 |   | $ | 13,922 |   | 59,798 |   | $ | 0.23 |   |

 

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Options to purchase 6,989,000 and 6,459,000 sharesof common stock out of the total number of options outstanding as of December31, 2002 and 2003, respectively, are not included in the computation of dilutedEPS because of their anti-dilutive effect. In 2001 all options outstanding as of December 31, 2001 are excludedfrom the computation of diluted EPS because of their anti-dilutive effect.

 

p.             Useof estimates in preparation of financial statements:

 

The preparation of financial statements inconformity with generally accepted accounting principles in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  On an ongoing basis, we evaluate our estimates, including thoserelated to investments, accounts receivable, inventories, property andequipment, intangible assets and income taxes. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valueof assets and liabilities that are not readily apparent from othersources.  Results may differ from theseestimates due to actual outcomes being different from those on which we basedour assumptions.

 

q.             Fairvalue of financial instruments:

 

The carrying amounts of accounts receivable andaccounts payable approximate fair value due to the short-term maturity of theseinstruments.  The carrying amount of thelong-term debt approximates fair value as the borrowing rates arevariable and are currently available for debt with similar terms andmaturities.

 

The carrying value of long-term investments innon-marketable securities cannot be determined since the fair market value ofsuch investments is not available and therefore it is not practical to estimateit.

 

r.              Concentrationof credit risk:

 

Financial instruments that potentially subject theCompany to concentrations of credit risk consist principally of cash and cashequivalents, short-term investments and accounts receivable.  The Company places its cash and cashequivalents and short-term investments with high quality financial institutionsand limits the amount of credit exposure to any one institution.  Concentration of credit risk with respect toaccounts receivable is discussed in Note 13. Generally, the Company does not require collateral from its customers;however, collateral or other security for accounts receivable may be obtainedin certain circumstances when considered necessary.

 

s.             Newaccounting pronouncements:

 

In June 2002, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 146, *“Accounting for Exit or Disposal Activities”*.  SFAS No. 146 requires that the liability forcosts associated with an exit or disposal activity be recognized at their fairvalues when the liabilities are incurred. Under previous guidance, liabilities for certain exit costs wererecognized at the date that management committed to an exit plan, which isgenerally before the actual liabilities are incurred.  As SFAS No. 146 is effective only for exit or disposal activitiesinitiated after December 31, 2002, the adoption of this statement did not havea material effect on the Company’s financial statements.

 

In April 2003, the FASB issued SFAS No. 149, *“Amendmentof Statement 133 on Derivative Instruments and Hedging Activities”*,which amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities under SFAS No. 133.  SFAS No. 149 is effective for contractsentered into or modified after June 30, 2003 except for the provisions thatwere cleared by the FASB in prior pronouncements.  The adoption of SFAS No. 149 did not have a material effect onthe Company’s financial position or results of operations.

 

In May 2003, the FASB issued SFAS No. 150, *“Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity”*.  SFAS No. 150establishes standards for how an issuer classifies and measures in itsstatement of financial position certain financial instruments with

 

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characteristics of bothliabilities and equity.  In accordancewith the standard, financial instruments that embody such obligations for theissuer are required to be classified as liabilities.  SFAS No. 150 is effective for financial instruments entered intoor modified after May 31, 2003. The adoption of SFAS No. 150 did not have amaterial effect on the Company’s financial position or results of operations.

 

In November 2002, the FASB issued FASBInterpretation No. 45 *“Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others”*(“FIN 45”).  FIN 45 requires theguarantor to recognize, at the inception of a guarantee, a liability for thefair value of the obligation undertaken in issuing the guarantee.  It also elaborates on the disclosure to bemade by a guarantor in its financial statements about its obligations undercertain guarantees that it has issued and to be made in regard of productwarranties.  Disclosures required underFIN 45 are effective for interim or annual periods ending after December 15,2002.  Initial recognition and initialmeasurement provisions of FIN 45 are applicable on a prospective basis toguarantees issued or modified after December 31, 2002.  The adoption of FIN 45 did not have amaterial effect on the Company’s financial position or results of operations.

 

In January 2003, the FASB issued FASBInterpretation 46, *“Consolidation of Variable Interest Entities”*(“FIN 46”).  FIN 46 interprets ARB No.51, Consolidated Financial Statements, as amended by FASB Statement No. 94,Consolidation of All Majority-Owned Subsidiaries, which requires thepreparation of consolidated financial statements when one entity has acontrolling financial interest in a second entity. Usually a controllingfinancial interest is created when an investor owns a majority of the votinginterests in an investee.  However, insome circumstances, an entity is created solely to fulfill a specific purposeand voting interests do not provide a substantive indicator of a controllingfinancial interest because there are typically limited matters on whichinvestors may vote.  FIN 46 refers tothose entities as variable interest entities (VIEs) and creates a model forconsolidation based on an investor’s ownership of variable interests.  The provisions of FIN 46 are effectiveimmediately for interests acquired in VIEs after January 31, 2003, and at thebeginning of the first interim or annual period beginning after June 15, 2003for interests acquired in VIEs before February 1, 2003.  The adoption of FIN 46 did not have amaterial effect on the Company’s financial position or results of operations.

 

NOTE 2 –ACQUISITIONS AND INVESTMENTS

 

(a)           Acquisitionof Rosemont Pharmaceuticals Limited

 

On September 30, 2002, Savient, through itswholly-owned subsidiary Acacia Biopharma Limited, completed the acquisition ofall of the stock of Rosemont, a subsidiary of Akzo Nobel N.V.  Rosemont is a leader in the United Kingdommarket for oral liquid formulations of branded non-proprietary drugs.  The purchase price (including acquisitioncosts of approximately $5,462,000) for Rosemont, which was funded fromSavient’s cash on hand, was approximately $104,585,000, excluding Rosemont’scash balances.

 

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The acquisition has been accounted for under thepurchase method of accounting.  Theaggregate purchase price of $104,585,000 has been allocated based on theestimates of the fair value of the tangible and intangible assets acquired andliabilities assumed as follows (in thousands):

 

| Assets Acquired:                                    |   |    |    |
|-----------------------------------------------------|--------|---------|---------|
| Current assets (including cash acquired of  $5,268) |   | $       | 10,924  |   |
| Fixed assets                                        |   | 1,708   |    |
| Intangibles                                         |   | 80,800  |    |
| Goodwill                                            |   | 40,121  |    |
|                                                |   |    |    |
| Liabilities Assumed:                                |   |    |    |
| Current liabilities                                 |   | (4,728  | )       |
| Deferred tax liabilities                            |   | (24,240 | )       |
|                                                |   |    |    |
| Total Purchase Price                                |   | $       | 104,585 |   |

 

The estimation of the fair value of assetsacquired and liabilities assumed was determined by Savient’s management basedon an independent appraisal and information available at the time.  Intangible assets consist primarily ofdeveloped products, as well as trademarks and several patents, and are beingamortized, using the straight-line method, over the estimated useful life ofapproximately 20 years.  The estimationof the useful life of the intangible assets was determined by Savient’smanagement based on an independent appraisal and information available at thetime.

 

The accompanying consolidated financial statementsinclude the assets and liabilities of Rosemont as of December 31, 2002 and 2003and its results of operations for the three months ended December 31, 2002 andthe year ended December 31, 2003 but exclude the results of Rosemont for allother periods presented.  The followingunaudited pro forma consolidated results of operations for the years ended December31, 2001 and 2002 was prepared assuming the acquisition of Rosemont occurred onJanuary 1, 2001.  The pro forma resultsof operations are not necessarily indicative of the consolidated results thatactually would have occurred if the acquisition had been consummated at January1, 2001, nor do they purport to represent the results of operations for futureperiods.

 

|                              |   | **Year Ended  December 31,**              |   |
|-----------------------------------|--------|-------------------------------------------|--------|
|                              |   | **(Unaudited)**                           |   |
|                              |   | **(in  thousands except per share data)** |   |
|                              |   | **2001**                                  |   | **2002** |   |
|                              |   | **As  Reported**                          |   | **Pro Forma** |   | **As  Reported** |   | **Pro Forma** |   |
| Total revenues                    |   | $                                         | 94,774 |   | $ | 113,272 |   | $ | 102,966 |   | $ | 119,094 |   |
| Net income (loss)                 |   | (29,926                                   | )      | (27,442 | ) | 9,717 |   | 13,059 |   |
| Earnings (loss) per common share: |   |                                      |   |   |   |   |   |   |   |
| Basic                             |   | $                                         | (0.52  | ) | $ | (0.48 | ) | $ | 0.17 |   | $ | 0.22 |   |
| Diluted                           |   | $                                         | (0.52  | ) | $ | (0.48 | ) | $ | 0.17 |   | $ | 0.22 |   |

 

In connection with the acquisition, Savient enteredinto a forward contract for the delivery of the £64,000,000 purchase price onSeptember 30, 2002 at a cost of $99,123,200 (representing an exchange rate of$1.5488 per £1).  The exchange rate atthe acquisition closing date was $1.5614 per £1.  In accordance with SFAS No. 133 “*Accounting for Derivative Instrumentsand Hedging Activities*”, which prohibits hedge accounting for ahedge of an anticipated business combination, Savient recorded a gain ofapproximately $800,000 on the forward contract in the year ended December 31,2002, which gain is included in other income (expense), net.

 

(b)           Acquisitionof Myelos Corporation

 

On March 19, 2001, the Company acquired Myelos, aprivately-held biopharmaceutical company focused on the development of noveltherapeutics to treat diseases of the nervous system.  Under the terms of the acquisition agreement, the Company paidMyelos shareholders $35,000,000 in a combination of cash and stock ($14,000,000in cash and $21,000,000 through the issuance of approximately 2,344,700 sharesof the Company’s common stock (based on a per share value of $8.9564,representing the average closing price of the Company’s common stock for the 20trading day period ending one day prior to

 

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February 21, 2001, the date theacquisition agreement was executed)). In addition, the Company has agreed to pay the Myelos shareholders anadditional $30,000,000 if the Company is able to file a New Drug Applicationwith respect to Prosaptide to treat neuropathic pain or neuropathy, of which atleast $14,000,000 will be paid through the issuance of shares of Company commonstock.  The remaining $16,000,000 can bepaid, at the Company’s option, in cash, shares of Company common stock or acombination thereof.  The Company hasalso agreed that if Prosaptide is approved by the United States Food and DrugAdministration for the treatment of neuropathic pain or neuropathy, the Companywill pay the Myelos shareholders 15% of net sales of Prosaptide during the 12month period beginning on the earlier of (i) the 25th full monthafter commercial introduction of Prosaptide in the United States for thetreatment of neuropathic pain or neuropathy and (ii) April 1, 2010.  At least 50% of this payment must be inshares of Company common stock, with the remainder payable, at the Company’soption, in cash, shares of Company common stock or a combination thereof.  In no event is the Company required to issuemore than 10,962,000 shares of its common stock; any equity required to beissued in excess of that amount will be issued in shares of Company preferredstock.  The preferred stock would benon-voting, non-convertible, non-transferable, non-dividend paying (except tothe extent a cash dividend is paid on the Company common stock), with nomandatory redemption for a period of 20 years and one day from the closing dateof the acquisition, and a right to share in proceeds in liquidation, up to theliquidation amount.

 

The transaction was treated as a “purchase” foraccounting purposes.  The purchase pricefor accounting purposes was approximately $34,387,000 (including acquisitioncosts of $1,387,000), based on a value for the approximately 2,344,700 sharesof Company common stock issued in the acquisition of $8.1172, representing theaverage closing price of the Company’s common stock for the four day periodpreceding February 21, 2001, the date the terms of the acquisition were agreedto.  In connection with the merger andbased on an independent valuation, the Company allocated $45,600,000 toin-process research and development projects of Myelos, representing theestimated fair value based on risk-adjusted cash flows of the acquiredtechnology.  At the date of the merger,the technology acquired in the acquisition was not fully commercially developedand had no alternative future uses. Accordingly, the value was expensed as of the acquisition date.  The Company recorded negative goodwill of$18,989,000 on its balance sheet, primarily because the amount written off asin-process research and development acquired exceeded the purchase price foraccounting purposes.  During 2001 thisnegative goodwill was being amortized over its expected useful life of fiveyears.  In accordance with SFAS No. 142,amortization of the negative goodwill ceased beginning January 1, 2002, and thebalance remaining will be maintained as a deferred credit until it is eithernetted against the contingent payments or reflected in net income as anextraordinary item should the contingent payments not become due because thetechnology did not meet the milestones that trigger payment.

 

The Company allocated values to the in-processresearch and development based on an independent valuation of the research anddevelopment project.  The value assignedto these assets was determined by estimating the costs to develop the acquiredtechnology into a commercially viable product, estimating the resulting netcash flows from the product, and discounting the net cash flows to their presentvalue.  The revenue projection used tovalue the in-process research and development was based on estimates ofrelevant market size and growth factors, expected trends in technology, and thenature and expected timing of new product introductions by the Company and itscompetitors.  The resulting net cashflows from such product are based on management’s estimates of cost of sales,operating expenses and income taxes from such product.  The Company believes that the assumptionsused in the forecasts were reasonable at the time of the merger.  No assurance can be given, however, that theunderlying assumptions used to estimate sales, development costs orprofitability, or the events associated with such product, will transpire asestimated.  For these reasons, actualresults may vary from projected results. The most significant and uncertain assumptions relating to thein-process research and development relate to the ability to successfullydevelop a product and the projected timing of completion of, and revenuesattributable to, that product.

 

(c)           Investmentin Omrix Biopharmaceuticals, Inc.

 

In January2001, in order to obtain a period of exclusivity to negotiate a possiblestrategic relationship with Omrix Biopharmaceuticals, Inc., the Company loaned$2,500,000 to Omrix and agreed to convert the loan into, and to purchase anadditional $2,500,000 of, shares of Omrix preferred stock if it did not pursuea strategic relationship.  The Companydetermined not to pursue a strategic relationship with Omrix, and on March 31,2001 converted the existing loan into, and purchased an additional $2,500,000of, shares of Omrix preferred stock, which are convertible into approximately4.2% of Omrix common stock (on a fully-diluted basis) as of December 31, 2003.  This investment is carried at cost and

 

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is included as a component of other long-term assets. Omrix is aprivately-held company that develops and markets a unique surgical sealant anda number of immunology products based on blood plasma processingtechnology.  Omrix currently sells itsproducts in Europe, South America and the Middle East.

 

During the fourth quarter of 2001, the Company determined that thedecline in the value of its investment in Omrix was other than temporary and,accordingly, wrote down the value of this investment by $3,000,000 based onmanagement’s evaluation of current market conditions and Omrix’s operations andforecasts. The write-down is included in the year ended December 31, 2001 as acomponent of other income (expense), net. Based on the current information available regarding Omrix, managementbelieves the current carrying value of its investment in Omrix is appropriate.

 

NOTE 3 - PROPERTY AND EQUIPMENT, NET

 
|                                            |   | **December 31,**   |   |
|-------------------------------------------------|--------|--------------------|--------|
|                                            |   | **2002***          |   | **2003** |   |
|                                            |   | **(in thousands)** |   |
| Laboratory and manufacturing equipment(1)       |   | $                  | 37,482 |   | $ | 39,406 |   |
| Office equipment(2)                             |   | 7,108              |   | 8,387 |   |
| Air conditioning and other                      |   | 2,135              |   | 2,030 |   |
| Leasehold improvements                          |   | 10,026             |   | 10,042 |   |
|                                            |   | 56,751             |   | 59,865 |   |
| Land, building and construction in progress (3) |   | 41,751             |   | 46,640 |   |
|                                            |   | 98,502             |   | 106,505 |   |
| Accumulated depreciation and amortization       |   | (31,906            | )      | (36,079 | ) |
| Total                                           |   | $                  | 66,596 |   | $ | 70,426 |   |

 

----

(*)                                 Reclassified.

(1)                                  Includes$10,984,000 and $11,023,000 of equipment (located at the new productionfacility in Israel) not placed in use at December 31, 2002 and 2003,respectively, and therefore no depreciation and amortization has beenaccumulated.

(2)                                  Includes$1,062,000 of equipment financed under capital leases.

(3)                                  The relatedasset, which is a production facility in Israel intended to meet FDA GMPrequirements, is not ready for its intended use and therefore no depreciationand amortization has been accumulated as of December 31, 2003.  Includes $9,837,000 and $14,891,000 ofcapitalized interest, labor and other costs as of December 31, 2002 and 2003,respectively. This balance includes $6,500,000 of land and building costs(including local taxes and legal fees) associated with this facility.

 

Certain assets of BTG-Israel are pledged to secure long-term debt.  (See Note 7).

 

The manufacture of each product at the new Israeli manufacturingfacility must be approved by applicable regulatory authorities, including theFDA for products shipped to the U.S., prior to the resumption of manufacturingof that product at the new facility.  Asa result of the violence in Israel in recent years, the FDA has from time totime suspended its inspections in Israel.

 

Depreciation expense was approximately $2,295,000, $2,474,000 and$4,358,000 for the years ended December 31, 2001, 2002 and 2003, respectively.

 

NOTE 4 - ACQUIRED INTANGIBLE ASSETS

 

Thefollowing summarizes the carrying amounts of acquired intangible assets andrelated amortization.

 

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|                            |   | **As of December 31,** |   |
|---------------------------------|--------|------------------------|--------|
|                            |   | **2002**               |   | **2003** |   |
|                            |   | **(in thousands)**     |   |
| Amortized intangible assets:    |   |                   |   |   |   |
| Developed products              |   | $                      | 76,700 |   | $ | 76,700 |   |
| Trademarks                      |   | 3,300                  |   | 3,300 |   |
| Patents                         |   | 1,559                  |   | 1,559 |   |
| Total gross carrying  amount    |   | 81,559                 |   | 81,559 |   |
| Accumulated amortization        |   | 1,681                  |   | 5,816 |   |
| Net                             |   | $                      | 79,878 |   | $ | 75,743 |   |
| Unamortized intangible assets:  |   |                   |   |   |   |
| Goodwill                        |   | $                      | 40,080 |   | $ | 40,121 |   |
|                            |   |                   |   |   |   |
| Amortization expense:           |   |                   |   |   |   |
| For year ended December 31,     |   | $                      | 1,098  |   | $ | 4,135 |   |
|                            |   |                   |   |   |   |
| Estimated amortization expense: |   |                   |   |   |   |
| For year ending 12/31/04        |   |                   |   | $ | 4,055 |   |
| For year ending 12/31/05        |   |                   |   | $ | 4,050 |   |
| For year ending 12/31/06        |   |                   |   | $ | 4,050 |   |
| For year ending 12/31/07        |   |                   |   | $ | 4,050 |   |
| For year ending 12/31/08        |   |                   |   | $ | 4,050 |   |

 

NOTE 5 - OTHER CURRENT LIABILITIES

 
|                            |   | **December  31,**   |   |
|---------------------------------|--------|---------------------|--------|
|                            |   | **2002**            |   | **2003** |   |
|                            |   | **(in  thousands)** |   |
| Salaries and related expenses   |   | $                   | 5,639  |   | $ | 7,321 |   |
| Accrued subcontracting payable  |   | 5,235               |   | 1,856 |   |
| Governmental and state agencies |   | 4,133               |   | 5,667 |   |
| Legal and professional fees     |   | 720                 |   | 1,624 |   |
| Royalties and commissions       |   | 932                 |   | 2,147 |   |
| Other                           |   | 361                 |   | 1,231 |   |
|                            |   | $                   | 17,020 |   | $ | 19,846 |   |

 

NOTE 6 - SEVERANCE PAY

 

BTG-Israel participates in a defined contribution pension plan and makesregular deposits with a pension fund to secure pension rights on behalf of someof its employees.  The custody andmanagement of the amounts so deposited are independent of the Company andaccordingly such amounts funded (included in expenses on an accrual basis) andrelated liabilities are not reflected in the balance sheets.  The Company’s obligation for severance pay,in addition to the amount funded, is included within long-term liabilities inthe accompanying consolidated balance sheets.

 

In respect of its other employees, BTG-Israel purchases individualinsurance policies intended to cover its severance obligations.  The amount funded in the insurance policyand its obligation for severance pay to those employees are reflected in theconsolidated balance sheets as severance pay funded and severance pay,respectively.

 

The liability of the Company for severance pay is calculated on thebasis of the latest salary paid to its employees and the length of time theyhave worked for the Company.  Theliability is covered by the amounts deposited, including accumulated incomethereon, as well as by the unfunded liability.

 

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Expense related to severance and pension pay for the years endedDecember 31, 2001, 2002 and 2003 were $1,648,000, $1,297,000 and $2,091,000,respectively.

 

NOTE 7 - LONG-TERM DEBT

 

a.             In June 2000BTG-Israel entered into a $20,000,000 credit facility with Bank Hapoalim B.M.to finance a portion of the cost of completing its new productionfacility.  Loans under the creditfacility, which is secured by the assets of BTG-Israel and has been guaranteedby Savient, bear interest at the rate of LIBOR plus 1%.  At December 31, 2002 and 2003 the Companyhad long-term borrowings of $18,889,000 and $12,222,000, respectively,outstanding under this credit facility, of which $6,667,000 is included incurrent portion of long-term debt in both periods.  At December 31, 2003, the loans are at an average interest rateof approximately 2.25% and the principal is payable as follows: in 2004 -$6,667,000; and in 2005 - $5,555,000.

 

b.             In January 2003Savient entered into two capital leases totaling $1,062,000 with FleetwoodFinancial Corporation to finance certain furniture and fixtures purchased inconnection with the Company’s relocation to its new headquarters.  These leases bear interest at 7.5% and arerepaid in equal monthly installments through November 2005.  At December 31, 2003, $353,000 is includedin current portion of long-term debt and $348,000 is included in long-termdebt.  The future annual total paymentsare as follows:

 

|                                |   | **Year  Ended  December 31,** |   | **Total** |   |
|-------------------------------------|--------|-------------------------------|--------|-----------|--------|
|                                |   | **2004**                      |   | **2005**  |   |   |   |
|                                |   | **(in  thousands)**           |   |      |   |
| Total payments                      |   | $                             | 394    |      | $      | 361 |   | $ | 755 |   |
| Less:  total interest included |   |                          |   |      |   | 54 |   |
| Net principal payment               |   |                          |   |      |   | $ | 701 |   |
|                                     |        |                               |        |           |        |  |  |  |  |  |

 

NOTE 8- COMMITMENTS AND CONTINGENT LIABILITIES

 

a.             Savient’sadministrative offices are located in East Brunswick, New Jersey, where it hasleased approximately 53,000 square feet of office space.  The lease has a base average annual rentalexpense of approximately $1,728,000 and expires in March 2013.  There are two five year renewaloptions.  In connection with this leasearrangement, the Company was required to provide a security deposit by way ofan irrevocable letter of credit for $1,280,000, which is secured by a cashdeposit of $1,280,000, which amount is reflected in other assets (as restrictedcash) on the balance sheet at December 31, 2002 and 2003. In addition, Savientleases approximately 2,000 square feet in New York City for its businessactivities, including its investor and public relations activities.  This lease expires in February 2009.  Savient also leases approximately 10,000square feet of space in San Diego, California, where its Prosaptide research isbeing conducted.  This lease expires inOctober 2004.

 

Savient has a research, development and manufacturing facility locatedin Rehovot, Israel, where BTG-Israel leases approximately 77,000 square feet atan annual rental of approximately $970,000. This lease expires in December 2005. There is also a bank guarantee outstanding in favor of the lessor of theIsraeli facility for $483,000 secured by the assets of BTG-Israel.

 

Rosemont’s development and manufacturing facility is located in Leeds,U.K., where it leases approximately 41,000 square feet at an annual rental ofapproximately $298,000.  The leaseexpires in December 2019, although Rosemont has the option to terminate thislease in December 2009.

 

The Company is also obligated to pay its share of operating maintenanceand real estate taxes with respect to its leased properties.

 

Rent expense was approximately $1,830,000, $2,223,000 and $3,628,000 forthe years ended December 31, 2001, 2002 and 2003, respectively.

 

The future annual minimum rentals (exclusive of amounts for real estatetaxes, maintenance, etc.) for each of the following years are: 2004-$3,201,000;2005-$3,104,000; 2006-$2,134,000; 2007-$2,133,000; 2008-$2,134,000; and 2009until 2013-$7,658,000.

 

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b.             The Company isobligated to pay royalties to the Chief Scientist on all revenues derived fromproducts and know-how (including transfer of production rights) resulting fromsuch research and development programs partially funded by the ChiefScientist.  These royalties range from3% to 5% of such revenue, if any, if these products are produced in Israel, upto a ceiling equivalent to the amount funded, subject to adjustment asdescribed below.  If these products areproduced outside Israel by a third-party other than the Company, the royaltieson such revenue, if any, are at a rate that is equal to the ratio of the amountof the funding provided by the Chief Scientist divided by the sum of theamounts of the Chief Scientist funding plus the Company’s total investment inthe project, up to an increased ceiling of 120%, 150% or 300% of amount fundedby the Chief Scientist, subject to adjustment as described below.  The ceiling is dependent on the portion ofproduction of this product that is intended to occur outside Israel.  The Company’s total investment in theproject is verified by an independent accountant appointed by the Chief Scientist.  The ceilings and the amount of investmentare adjusted for changes in the U.S. Dollar/Israeli Shekel exchange rate and,in the case of products produced in Israel, for interest.  As of December 31, 2003, the Company isobligated to repay to the Chief Scientist, out of revenue from future productsales, a minimum of $5,102,000 of research and development funding for productsthat are currently being sold and a minimum of $9,966,000 of research anddevelopment funding for products currently under development if these productswill be sold.  During the years endedDecember 31, 2001, 2002 and 2003, the Company recorded approximately $304,000,$258,000 and $75,000, respectively, as royalties to the Chief Scientist.

 

The Company is also committed to pay royalties on future sales, if any,of certain of its products to licensees from which the Company licensed theseproducts.

 

c.             At December 31,2003, the Company had employment agreements with five senior officers.  Under these agreements, the Company hascommitted to total aggregate base compensation per year of approximately$1,625,000 plus other normal customary fringe benefits and bonuses.  These employment agreements generally havean initial term of three years and are thereafter automatically renewed forsuccessive one-year periods unless either party gives the other notice ofnon-renewal.

 

d.             The Company hasreceived notification of claims filed that certain of its products may infringecertain third-party patents in the normal course of operations.  Management believes that these claims have nomerit, and the Company intends to defend them vigorously and does not expectsignificant adverse impact on its financial position, results of operations orcash flows as a result of the outcome. However, were an unfavorable ruling to occur in any subsequent period,there exists the possibility of a material adverse impact on the Company’sfinancial position and operating results. No accrual can be determined at this time.

 

e.             On December 20, 2002, a purportedshareholder class action was filed against the Company and three of itsofficers.  The action is pending underthe caption A.F.I.K. Holding SPRL v. Fass, No. 02-6048 (HAA) inthe U.S. District Court for the District of New Jersey and alleges violationsof Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  Plaintiff purports to represent a class ofshareholders who purchased shares of the Company between April 19, 1999 andAugust 2, 2002.  The complaint assertsthat the Company’s financial statements were materially false and misleadingbecause the Company restated its earnings and financial statements for theyears ended 1999, 2000 and 2001, as reflected in the Company’s Form 8-K andaccompanying press release issued August 2, 2002.  Five virtually identical actions were filed in January andFebruary 2003.  In September2003, the actions were consolidated and co-lead plaintiffs and co-lead counselwere appointed in accordance with the Private Securities Litigation ReformAct.  The parties have entered into astipulation which provides for the lead plaintiff to file an amendedconsolidated complaint. This amended complaint has not yet been filed.

 

On January 23,2003, a purported shareholder derivative action was filed on behalf of theCompany against nine of the Company’s officers and directors, the Company’sformer auditor, Arthur Andersen, and the Company as a nominal defendant.  The allegations in the derivative action aresubstantially similar to the allegations in the purported shareholder classactions.  The derivative action was pendingunder the caption Nelson v. Conrad, No. 7-794-03, in the SuperiorCourt of New Jersey, Middlesex County. A second purported shareholder derivative action, Millet v. Conrad,No. L-1275-03, was filed on February 14, 2003 in the same court and was consolidatedwith the first action.  Thisconsolidated action was dismissed without prejudice in November 2003.  No appeal was taken and the time to file anappeal has expired.

 

On October 27,2003, the Company received a letter addressed to the Board of Directors fromattorneys for a purported stockholder of the Company demanding that Savientcommence legal proceedings to recover its damages against directors who servedon the Company’s board immediately prior to the June 2003 Annual Meeting ofStockholders, Fulbright & Jaworski L.L.P., Arthur Andersen LLP, thepartners of Arthur Andersen responsible for the audit of Savient’s financialstatements for 1999,

 

79

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2000 and 2001, aswell as all other officers and directors responsible for the allegedwrongdoing.  The letter claims that someor all of these persons were responsible for the material overstatement ofSavient’s assets, earnings and net worth, and that these persons caused Savientto disseminate false and misleading press releases and filings with theSEC.  An advisory committee to theBoard, consisting of directors who were not directors prior to the June 2003Annual Meeting of Stockholders, is currently investigating the demand.

 

The Companyintends to vigorously defend against all allegations of wrongdoing.  The Company has referred these claims to itsdirectors and officers insurance carrier, which has reserved its rights as tocoverage with respect to these actions.

 

f.              The Company isobligated under certain circumstances to indemnify certain customers forcertain or all expenses incurred and damages suffered by them as a result ofany infringement of third-party patents. In addition the Company is obligated to indemnify its officers anddirectors against all reasonable costs and expenses related to stockholder andother claims pertaining to actions taken in their capacity as officers anddirectors which are not covered by the Company’s directors and officers’insurance policy.  These indemnificationobligations are in the regular course of business and in most cases do notinclude a limit on a maximum potential future payments, nor are there anyrecourse provisions or collateral that may offset the cost.  As of December 31, 2003, the Company has notrecorded a liability for any obligations arising as a result of theseindemnification obligations.

 

g.             At December 31, 2003Rosemont had commitments aggregating $589,000 related to the upgrade of itsmanufacturing facility.

 

h.             At December 31,2003, the Company had purchase commitments of $9,268,000 for Oxandrin andDelatestryl in 2004 and $1,898,000 for Oxandrin in 2005.

 

i.              In July 2003Savient entered into an agreement with Marco Hi-Tech JV Ltd. pursuant to whichSavient agreed to invest an aggregate of $1,500,000 in Marco preferred stock,representing approximately 9% of Marco’s fully-diluted outstanding commonstock, and acquired an option to exclusively market in the United States andEurope Huperzine-A, a product for the treatment of Alzheimer’s disease.  The option is exercisable followingcompletion of Phase II trials, which are expected to commence in March 2004with partial funding by the National Institutes of Health.  If Savient exercises the option, it isobligated in invest an additional $3,000,000 in Marco preferred stock,representing an additional approximately 9% of Marco’s fully-dilutedoutstanding common stock, and to conduct and fund Phase III clinical trials andobtain regulatory approval.  If regulatoryapproval of the product is obtained in Europe, we will also be required to payan additional $1,500,000 to retain exclusive rights in Europe followingapproval of Huperzine-A in a second major European country.  Savient is obligated to use commerciallyreasonable efforts to commercialize the product following approval, and mustpay Marco a royalty of 8% of net sales while patents are in effect and 4% ofnet sales thereafter. Savient invested $500,000 of its initial investment inMarco in July 2003 and is scheduled to invest the remaining $1,000,000 initialinvestment in two installments of $500,000 each during 2004.  A Savient director owns common stockrepresenting less than 1% of Marco’s fully-diluted outstanding common stock.

 

NOTE 9 - STOCKHOLDERS’ EQUITY

 

In 1998 the Company adopted a stockholder rights plan intended to deterhostile or coercive attempts to acquire the Company.  Under the plan, if any person or group acquires more than 20% ofthe Company’s common stock without approval of the Board of Directors underspecified circumstances, the Company’s other stockholders have the right topurchase shares of the Company’s common stock, or shares of the acquiringcompany, at a substantial discount to the public market price.  The stockholder rights plan is intended toensure fair value to all stockholders in the event of an unsolicited takeoveroffer.

 

As discussed in Note 2(b), Savient may be obligated to issue additionalshares of common stock to the former shareholders of Myelos.

 

NOTE 10 - STOCK OPTIONS

 

In the years ended December 31, 2001, 2002 and 2003, the Company issued873,000 shares, 4,000 shares and 245,000 shares, respectively, of the Company’scommon stock upon the exercise of outstanding stock options and receivedproceeds of $5,760,000, $24,000 and $999,000, respectively.

 

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In 1992 the Company adopted the Bio-Technology General Corp. 1992 StockOption Plan (the “1992 Stock Option Plan”). The 1992 Stock Option Plan permits the granting of options to purchaseup to an aggregate of 12,000,000 shares of the Company’s common stock to keyemployees (including employees who are directors) and consultants of theCompany.  Under the 1992 Stock OptionPlan, the Company may grant either incentive stock options, at an exerciseprice of not less than 100% of the fair market value of the underlying shareson the date of grant, or non-qualified stock options, at an exercise price notless than the par value of the common stock on the date of grant.  Options generally become exercisable ratablyover two or four-year periods, with unexercised options expiring after theearlier of 10 years or shortly after termination of employment.  No further options can be issued under the1992 Plan.

 

In 2001 the Company adopted the 2001 Stock Option Plan (the “2001 StockOption Plan”).  The 2001 Stock OptionPlan permits the granting of options to purchase up to an aggregate of10,000,000 shares of the Company’s common stock to employees (includingemployees who are directors) and consultants of the Company.  Under the 2001 Stock Option Plan, the Companymay grant either incentive stock options, at an exercise price of not less than100% of the fair market value of the underlying shares on the date of grant, ornon-qualified stock options, at an exercise price not less than 85% of the fairmarket value of the underlying shares on the date of grant.  Options generally become exercisable ratablyover two or four-year periods, with unexercised options expiring after the earlierof 10 years or shortly after termination of employment.  Terminated options are available forreissuance.  Under this plan, 6,465,000shares remain available for future grant at December 31, 2003.

 

The Company also established a Stock Option Plan for New Directors (the“New Director Plan”) that, upon an individual’s initial election or appointmentto the Board of Directors, provides for the grant of an option to purchase20,000 shares of common stock at an exercise price equal to the market value ofthe common stock on the date of grant. Options become exercisable over a three-year period.  The New Director Plan expired January 29,2000, although previously granted options remain outstanding.

 

In June 1997 the Company adopted the Bio-Technology General Corp. 1997Stock Option Plan for Non-Employee Directors (the “Directors Plan”).  The Directors Plan provides that eachnon-employee director will automatically receive an option to purchase 7,500shares of the Company’s common stock on each date such person is re-elected adirector of the Company.  The exerciseprice of each option is equal to the market value of the common stock on thedate of grant.  Options becomeexercisable over a three-year period. An aggregate of 500,000 shares of common stock has been reserved forissuance under the Directors Plan.  TheBoard of Directors terminated the Directors Plan in February 2002, and insteadprovided that each non-employee director would receive under the 2001 StockOption Plan an option to purchase 5,000 shares of the Company’s common stock onthe last business day of each quarter, commencing with the quarter ended March31, 2002.  The exercise price of eachoption is equal to the market value of the common stock on the date of grant,and options become fully exercisable on the first anniversary of the date ofgrant.

 

Transactions under the 1992 Stock Option Plan, the 2001 Stock OptionPlan, the New Director Plan and the Directors Plan during 2001, 2002 and 2003were as follows:

 
|                                           |   | **Year ended December 31,** |   |
|------------------------------------------------|--------|-----------------------------|--------|
|                                           |   | **2001**                    |   | **2002** |   | **2003** |   |
|                                           |   | **Shares  (‘000s)**    |   | **Weighted  Average  Exercise  Price** |   | **Shares  (‘000s)** |   | **Weighted  Average  Exercise  Price** |   | **Shares  (‘000s)** |   | **Weighted  Average  Exercise  Price** |   |
|                                           |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Options outstanding at beginning of year       |   | 7,037                       |   | $ | 8.39 |   | 7,917 |   | $ | 9.47 |   | 8,573 |   | $ | 8.54 |   |
| Granted                                        |   | 2,095                       |   | 11.89 |   | 1,730 |   | 4.93 |   | 2,204 |   | 3.14 |   |
| Exercised                                      |   | (873                        | )      | 6.59 |   | (4 | ) | 5.94 |   | (245 | ) | 4.09 |   |
| Terminated                                     |   | (342                        | )      | 9.42 |   | (1,070 | ) | 9.59 |   | (2,169 | ) | 7.53 |   |
| Options outstanding at end of year             |   | 7,917                       |   | 9.47 |   | 8,573 |   | 8.54 |   | 8,363 |   | 7.51 |   |
| Exercisable at end of year                     |   | 4,319                       |   |   |   | 4,941 |   |   |   | 5,364 |   |   |   |
| Weighted average fair value of options granted |   |                        |   | 7.65 |   |   |   | 3.21 |   |   |   | 2.04 |   |
|                                                |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Under SFAS No. 123, the fair value of each option is estimated on thedate of grant using the Black-Scholes option-pricing model with the followingweighted average assumptions used for grants in

 

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2001, 2002 and 2003: (i) expected life of option of seven years; (ii)dividend yield of 0%; (iii) expected volatility of 62%, 64% and 64%,respectively; and (iv) risk-free interest rate of 3.50%.

 

Of the 8,363,000 options outstanding as of December 31, 2003:

 

•                  4,154,000 haveexercise prices between $2.48 and $7.41 with a weighted average exercise priceof $4.45 and a weighted average remaining contractual life of 7.62 years.  Of these 4,154,000 options, 1,738,239 areexercisable; their weighted average exercise price is $5.73.

•                  1,784,000options have exercise prices between $7.50 and $9.88 with a weighted averageexercise price of $8.01 and a weighted average remaining contractual life of4.55 years.  Of these 1,784,000 options,1,611,000 are exercisable; their weighted average exercise price is $8.04.

•                  2,425,000options have exercise prices between $10.25 and $20.44 with a weighted averageexercise price of $12.38 and a weighted average remaining contractual life of6.58 years. Of these 2,425,000 options, 2,015,000 are exercisable; theirweighted average exercise price is $12.45.

 

During 2001 the Company made modifications to the period of vesting andexercisability of approximately 273,000 stock option awards, for certainemployees in connection with the termination of their employment andpost-employment consulting arrangements. As a result, the Company recognized stock compensation expense of$1,024,000 in 2001, which expense was primarily included in research anddevelopment expenses.

 

NOTE 11 –  EMPLOYEE BENEFITS

 

(a)           Employee StockPurchase Plan

 

In April 1998, the Company adopted the 1998 Employee Stock Purchase Plan(the “1998 ESPP”). The 1998 ESPP is qualified as an employee stock purchaseplan under Section 423 of the Internal Revenue Code of 1986, as amended.  Under this plan 3,000,000 shares have beenreserved for issuance.  All full-timeemployees of the Company in the United States and Israel are eligible toparticipate in the 1998 ESPP.  From timeto time, the Board of Directors may fix a date or a series of dates on whichthe Company will grant rights to purchase shares of common stock under the 1998ESPP (“Rights”) at prices not less than 85% of the lesser of (i) the fairmarket value of the shares on the date of grant of such Rights or (ii) the fairmarket value of the shares on the date such Rights are exercised.  Rights granted under the 1998 ESPP will runfor a maximum of 27 months.  No employeemay be granted a Right that permits such employee to purchase shares under the1998 ESPP having a fair market value that exceeds $25,000 (determined at thetime such Right is granted) for each calendar year in which such Right is outstanding,and no Right granted to any participating employee may cover more than 12,000shares.  In 2001, 2002 and 2003 theCompany issued 268,000 shares, 451,000 shares and 603,000 shares, respectively,of common stock under the 1998 ESPP.

 

(b)           401(k) Profit-SharingPlan

 

Savient has a 401(k) profit-sharing plan.  As of December 31, 2003, the 401(k) plan permits employees whomeet the age and service requirements to contribute up to $12,000 of theirtotal compensation on a pretax basis, which is matched 50% by Savient.  Savient’s contribution to the plan amountedto approximately $391,000, $444,000 and $458,000 for the years ended December31, 2001, 2002 and 2003, respectively.

 

(c)           Pension Plan

 

Rosemont operates a defined contribution pension plan for the benefit ofits employees.  The assets of the planare administered by trustees in a fund independent from those of theCompany.  Under the pension plan anemployee contributes 3.5% of his or her pensionable annual salary (annual basesalary minus the income tax exempt portion), of which Rosemont makes a matchingcontribution equal to 8% of the pensionable annual salary.  If the working relationship terminateswithin two years from the date the employee joined the pension plan, he or sheis then entitled to a refund of his or her contribution only.  If the working relationship terminates aftertwo years then the entire amount accumulated in the pension plan is considereda deferred benefit.  The pension costcharge for the year ended December 31, 2002 was $1,286,000, which includes aone time contribution of $1,100,000 to the pension plan made in connection withthe acquisition of Rosemont.  Thepension cost charge for 2003 was $255,000.

 

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NOTE 12 –OTHER INCOME (EXPENSE), NET

 
|                                                                   |   | **Year  ended December 31,** |         |
|------------------------------------------------------------------------|--------|------------------------------|--------------|
|                                                                   |   | **2001**                     |         | **2002** |   | **2003** |   |
|                                                                   |   | **(in  thousands)**          |         |
| Recognition of unamortized contract fee balance previously deferred(1) |   | $                            | –– |   | $ | –– |   | $ | 3,354 |   |
| Gain on forward contract                                               |   | ––                 |         | 800 |   | –– |   |
| Investment income                                                      |   | 7,472                   |         | 2,654  |   | 737 |   |
| Realized and unrealized gain on investments, net                       |   | ––                 |         | –– |   | 71 |   |
|                                                                   |   | 7,472                        |         | 3,454 |   | 4,162 |   |
| Less:                                                                  |   |                         |         |   |   |   |   |
| Realized and unrealized losses on investments, net                     |   | 12,231                       |         | 1,181 |   | –– |   |
| Interest and other finance expense                                     |   | 170                          |         | 631 |   | 527 |   |
|                                                                   |   | 12,401                       |         | 1,812 |   | 527 |   |
|                                                                   |   | $                            | (4,929       | ) | $ | 1,642 |   | $ | 3,635 |   |

 

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(1) On September 25, 2003, the Company and DePuy Orthopaedics, Inc.(“DePuy”) signed a Termination Agreement that effectively terminated aDistribution Agreement dated May 1, 2000, previously entered into by the twoparties.  The Distribution Agreementprovided DePuy with distribution rights to the Company’s sodium hyaluronateproduct for osteoarthritis product.  Uponexecution of the Distribution Agreement, DePuy had paid the Company a $5 millionnonrefundable up front license fee, which fee the Company was recognizing ascontract fee revenue ratably over the term of the agreement in accordance withSAB 101.  As a result of the TerminationAgreement, the Company recognized as other income the remaining deferred feespaid by DePuy of $3,354,000 that had been previously deferred in accordancewith SAB 101.

 

NOTE 13 – CONCENTRATIONS

 

In 2001 and 2002, one customer for human growth hormone, located solelyin Japan, represented $16,292,000 and $12,331,000, or 17% and  12%, respectively, of revenues,respectively.  In 2001 and 2002, onecustomer for Oxandrin and Delatestryl, located solely in the United States,represented $43,718,000 and $45,625,000, or 46% and 47% of revenues,respectively.  In 2001 and 2002, oneadditional customer for Oxandrin, located solely in the United States,represented $10,383,000 and $6,595,000, or 11% and 6%, respectively, ofrevenues.  In 2003, three additionalcustomers for Oxandrin and Delatestryl represented $18,997,000, $19,068,000 and$20,506,000, or 14%, 14% and 15%, respectively, of revenues.  In 2003, the Company’s product salesconsisted primarily of sales of Oxandrin, Delatestryl, human growth hormone,BioLon and oral liquid products in the amount of approximately $57,641,000,$12,343,000, $20,490,000, $5,964,000 and $27,146,000, or 46%, 10%, 16%, 5% and22% of total product sales, respectively. In 2002, the Company’s product sales consisted primarily of sales ofOxandrin, Delatestryl, human growth hormone, BioLon and oral liquid products inthe amount of approximately $45,861,000, $20,564,000, $15,595,000, $6,696,000and $6,346,000, or 48%, 21%, 16%, 7% and 7% of total product sales,respectively.  Two customers accountedfor 33% and 16% of total accounts receivable as of December 31, 2002,respectively. Another customer accounted for 10% and 18%, respectively, oftotal accounts receivable as of December 31, 2002 and 2003.  Another two customers accounted for 13% and11% of total accounts receivable as at December 31, 2003, respectively.

 

The Company purchases Oxandrin and Delatestryl mainly from threevendors.

 

Several companies have filed drug master files with the FDA relating toa generic oxandrolone product, and while the Company cannot predict whengeneric competition for Oxandrin will begin, it is possible the FDA may approveone or more generic versions of Oxandrin during 2004.  The introduction of these generic products will cause asignificant decrease in the Company’s Oxandrin revenues, which will have a materialadverse effect on the Company’s results of operations, cash flows, financialcondition and profitability and may require us to scale back our businessactivities in certain areas.

 

The Company is dependent on third parties for the manufacture of Oxandrinand Delatestryl, the filling and vialing of its Bio-Tropin product and thesterilization of its BioLon product. The Company’s dependence upon third parties for the manufacture of theseproducts may adversely impact its profit margins or result in unforeseen delaysor other problems beyond its control. If for any reason the

 

83

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Company is unable to retain these third-party manufacturers, or obtainalternate third-party manufacturers, on commercially acceptable terms, theCompany may not be able to distribute its products as planned.  If the Company encounters delays ordifficulties with contract manufacturers in producing, filling, vialing orsterilizing these products, the sale of these products would be adverselyaffected.

 

NOTE 14 – INCOME TAXES

 

The components of currentand deferred income tax expense (benefit) are as follows:

 
|                     |   | **Year ended December 31,** |   |
|--------------------------|--------|-----------------------------|--------|
|                     |   | **2001**                    |   | **2002** |   | **2003** |   |
|                     |   | **(in thousands)**          |   |
| Current                  |   |                        |   |   |   |   |   |
| State                    |   | $                           | 1,067  |   | $ | 984 |   | $ | — |   |
| Federal                  |   | 12,959                      |   | 3,040 |   | — |   |
| Foreign                  |   | 1,891                       |   | 1,876 |   | 3,439 |   |
|                     |   | 15,917                      |   | 5,900 |   | 3,439 |   |
| Deferred:                |   |                        |   |   |   |   |   |
| State                    |   | (463                        | )      | (100 | ) | 260 |   |
| Federal                  |   | (10,164                     | )      | (1,140 | ) | 2,947 |   |
| Foreign                  |   | (557                        | )      | 403 |   | (485 | ) |
|                     |   | (11,184                     | )      | (837 | ) | 2,722 |   |
|                     |   |                        |   |   |   |   |   |
| Total income tax expense |   | $                           | 4,733  |   | $ | 5,063 |   | $ | 6,161 |   |

 

The domestic and foreign components of income (loss)before income taxes and cumulative effect of change in accounting principle areas follows:

 
|     |   | **Year ended December 31,** |    |
|----------|--------|-----------------------------|---------|
|     |   | **2001**                    |    | **2002** |   | **2003** |   |
|     |   | **(in thousands)**          |    |
| Domestic |   | $                           | (32,519 | ) | $ | 7,593 |   | $ | 8,287 |   |
| Foreign  |   | 6,606                       |    | 7,181 |   | 11,796 |   |
|     |   | $                           | (25,193 | ) | $ | 14,780 |   | $ | 20,083 |   |

 

84

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Reconciliation of income taxes between the statutoryand effective tax rates on income before income taxes is as follows:

 
|                                                  |   | **Year ended December 31,** |   |
|-------------------------------------------------------|--------|-----------------------------|--------|
|                                                  |   | **2001**                    |   | **2002** |   | **2003** |   |
|                                                  |   | **(in thousands)**          |   |
| Income tax at U.S. statutory rate                     |   | $                           | (8,818 | ) | $ | 5,172 |   | $ | 7,029 |   |
| State and local income taxes (net of federal benefit) |   | 386                         |   | 564 |   | 170 |   |
| Non-deductible expenses                               |   | 428                         |   | 263 |   | 533 |   |
| R&E credit                                        |   | (1,229                      | )      | (812 | ) | (493 | ) |
| Foreign income subject to a reduced rate of tax       |   | (1,928                      | )      | (510 | ) | (1,528 | ) |
| In-process research and development acquired          |   | 15,504                      |   | — |   | — |   |
| Goodwill amortization                                 |   | (1,066                      | )      | — |   | — |   |
| Foreign taxes in respect of previous years            |   | 1,530                       |   | 519 |   | 324 |   |
| Foreign compensation                                  |   | 358                         |   | — |   | — |   |
| Foreign tax benefit                                   |   | (759                        | )      | — |   | — |   |
| Other                                                 |   | 127                         |   | (133 | ) | 126 |   |
| Income tax expense                                    |   | $                           | 4,733  |   | $ | 5,063 |   | $ | 6,161 |   |

 

BTG Israel has received final tax assessments for the years up to andincluding 2000.  As a result, theCompany has recorded in the years ended December 31, 2001 and 2002, a provisionfor additional tax liabilities.

 

The components of deferred income tax assets(liabilities) are as follows:

 
|                          |   | **December 31,**   |   |
|-------------------------------|--------|--------------------|--------|
|                          |   | **2002**           |   | **2003** |   |
|                          |   | **(in thousands)** |   |
|                          |   |               |   |   |   |
| Net operating loss carryover  |   | $                  | 5,599  |   | $ | 4,578 |   |
| Capital loss carryover        |   | 1,047              |   | 2,763 |   |
| R&E credit                |   | 2,516              |   | 3,688 |   |
| Valuation of securities       |   | 4,443              |   | 1,718 |   |
| Deferred revenues             |   | 4,119              |   | 3,197 |   |
| Accrued amounts               |   | 3,037              |   | 2,354 |   |
| Other                         |   | —             |   | 669 |   |
|                          |   | 20,761             |   | 18,967 |   |
| Depreciation and amortization |   | (24,141            | )      | (25,274 | ) |
|                          |   | $                  | (3,380 | ) | $ | (6,307 | ) |

 

At December 31, 2003, Savient had a capital loss carryover ofapproximately $7,500,000 available to offset future capital gains, whichexpires at various times with respect to various amounts through 2008, a netoperating loss carryover of approximately $12,500,000 available to offsetfuture taxable income in limited amounts per year, which expires at various timeswith respect to various amounts through 2021, and a research and experimental(“R&E”) credit carryover of approximately $3,700,000 available to reducefuture income taxes, which expires at various times with respect to variousamounts through 2023.

 

The Company anticipates making one or more of its products underdevelopment available for sale to a third party, in whole or in part, within atime frame that would allow the Company to utilize its capital losscarryforwards.  Any sale of products issubject to board approval.  Thisstrategy has been considered by the Company when determining the need for avaluation allowance.  Althoughrealization is not assured, management believes it is more likely than not thatall the deferred tax assets will be realized. Accordingly, the Company believes that no valuation allowance isrequired.

 

85

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Provision for income taxes has not been made for U.S. or additionalforeign taxes on undistributed earnings of foreign subsidiaries.  Those earnings have been and will continueto be permanently reinvested. It is not practicable to determine the amount ofadditional tax that might be payable on the foreign earnings.  The cumulative amount of reinvested earningswas approximately $19,000,000 at December 31, 2003.

 

The United States Internal Revenue Service is conducting an audit of itstax return for the year ended December 31, 2002.  The Company is also subject to other ongoing tax audits in theCity of New York and State of New Jersey. Although there can be no assurances, the Company believes anyadjustments that may arise as a result of these audits will not have a materialadverse effect on its financial position.

 

86

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NOTE 15 – INTERNATIONAL OPERATIONS

 

The Company’s operations are treated as one operating segment as it onlyreports profit and loss information on an aggregate basis to chief operatingdecision makers of the Company. Information about the Company’s operations in the United States, Israeland the U.K. is presented below:

 
|                                        |   | **U.S.**                           |   | **Israel** |   | **U.K.** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------|--------|------------------------------------|--------|------------|--------|----------|--------|------------------|--------|------------------|--------|
|                                        |   | **(in thousands of U.S. dollars)** |   |
|                                        |   |                               |   |       |   |     |   |             |   |             |   |
| Year ended December 31, 2001:               |   |                               |   |       |   |     |   |             |   |             |   |
| Revenues§                              |   | $                                  | 82,182 |       | $      | 12,592   |   |             |   |             |   | $ | 94,774 |   |
| Intercompany transactions                   |   | 318                                |   | 4,863      |   |     |   | $                | (5,181 | )                |   |   |
| Reimbursement of subsidiary’s expenses |   |                               |   | 13,498     |   |     |   | (13,498          | )      |             |   |
| Depreciation and amortization               |   | 1,376                              |   | 1,561      |   |     |   |             |   | 2,937            |   |
| Other income (expense), net                 |   | (5,080                             | )      | 151        |   |     |   |             |   | (4,929           | )      |
| Income tax expense                          |   | 3,398                              |   | 1,335      |   |     |   |             |   | 4,733            |   |
| Net income                                  |   | (35,205                            | )      | 4,612      |   |     |   | 667              |   | (29,926          | )      |
| Identifiable assets+                        |   | 189,415                            |   | 61,261     |   |     |   | (15,590          | )      | 235,086          |   |
| Foreign liabilities+                        |   |                               |   | 32,639     | ‡ |     |   |             |   | 32,639           |   |
| Investment in subsidiaries (cost basis)     |   | 15,298                             |   |       |   |     |   | (15,298          | )      |             |   |
|                                        |   |                               |   |       |   |     |   |             |   |             |   |
| Year ended December 31, 2002:               |   |                               |   |       |   |     |   |             |   |             |   |
| Revenues§                              |   | 86,460                             |   | 10,160     |   | 6,346    |   |             |   | 102,966          |   |
| Intercompany transactions                   |   | 308                                |   | 4,354      |   |     |   | (4,662           | )      |             |   |
| Reimbursement of subsidiary’s expenses |   |                               |   | 14,808     |   |     |   | (14,808          | )      |             |   |
| Depreciation and amortization               |   | 1,119                              |   | 1,419      |   | 163      |   |             |   | 2,701            |   |
| Other income (expense), net                 |   | 2,189                              |   | (590       | )      | 43       |   |             |   | 1,642            |   |
| Income tax expense                          |   | 2,784                              |   | 2,026      |   | 253      |   |             |   | 5,063            |   |
| Net income (loss)                           |   | 5,853                              |   | 2,832      |   | 1,140    |   | (108             | )      | 9,717            |   |
| Identifiable assets+                        |   | 90,021                             |   | 72,971     |   | 134,360  |   | (11,921          | )      | 285,431          |   |
| Foreign liabilities+                        |   |                               |   | 32,338     | ‡ | 5,000    |   |             |   | 37,338           |   |
| Investment in subsidiaries (cost basis)     |   | 119,842                            |   |       |   |     |   | (119,842         | )      |             |   |
|                                        |   |                               |   |       |   |     |   |             |   |             |   |
| Year ended December 31, 2003                |   |                               |   |       |   |     |   |             |   |             |   |
| Revenues§                              |   | 94,095                             |   | 11,284     |   | 27,146   |   |             |   | 132,525          |   |
| Intercompany transactions                   |   | 293                                |   | 6,145      |   |     |   | (6,438           | )      |             |   |
| Reimbursement of subsidiary’s expenses |   | 11,820                             |   |       |   |     |   | (11,820          | )      |             |   |
| Depreciation and amortization               |   | 1,876                              |   | 2,063      |   | 684      |   |             |   | 4,623            |   |
| Other income, net                           |   | 105                                |   | 3,331      |   | 199      |   |             |   | 3,635            |   |
| Income tax expense                          |   | 3,212                              |   | 1,111      |   | 1,838    |   |             |   | 6,161            |   |
| Net income                                  |   | 8,363                              |   | 4,373      |   | 6,767    |   | (5,581           | )      | 13,922           |   |
| Identifiable assets+                        |   | 111,852                            |   | 75,833     |   | 137,820  |   | (34,965          | )      | 290,540          |   |
| Foreign liabilities+                        |   |                               |   | 21,427     | ‡ | 7,504    |   |             |   | 28,931           |   |
| Investment in subsidiaries (cost basis)     |   | 119,842                            |   |       |   |     |   | (119,842         | )      |             |   |
|                                             |        |                                    |        |            |        |          |        |                  |        |                  |        |  |  |  |  |  |

 

----

§      Includes sales to countries outside the United States of$31,665,000, $32,725,000 and $54,617,000 in 2001, 2002 and 2003, respectively,of which $16,292,000, $12,331,000 and $9,330,000, respectively, are sales toJapan and $6,829,000 and $25,646,000 are sales to the United Kingdom in 2002and 2003, respectively.

+      At year end.

‡      Excludes liability to parent.

 

87

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NOTE 16 – QUARTERLY DATA (UNAUDITED)

 

Following are the quarterly results of operations forthe years ended December 31, 2002 and 2003.

 
|                                                            |   | **March 31,**                            |   |
|-----------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                            |   | **2002**                                 |   | **2003** |   |
|                                                            |   | **(in thousands except per share data)** |   |
| Revenues:                                                       |   |                                     |   |   |   |
| Product  sales                                                  |   | $                                        | 18,938 |   | $ | 26,950 |   |
| Contract  fees                                                  |   | 564                                      |   | 366 |   |
| Other                                                           |   | 1,346                                    |   | 660 |   |
|                                                            |   | 20,848                                   |   | 27,976 |   |
| Expenses:                                                       |   |                                     |   |   |   |
| Research and development                                        |   | 8,935                                    |   | 6,448 |   |
| Marketing and sales                                             |   | 4,449                                    |   | 6,571 |   |
| General and administrative                                      |   | 3,225                                    |   | 5,051 |   |
| Cost of products sales                                          |   | 3,171                                    |   | 4,486 |   |
| Amortization of intangibles associated with acquisition         |   | —                                   |   | 1,103 |   |
| Other                                                           |   | 683                                      |   | 411 |   |
|                                                            |   | 20,463                                   |   | 23,980 |   |
| Operating  income                                               |   | 385                                      |   | 3,996 |   |
| Other  income, net                                              |   | 928                                      |   | 382 |   |
| Income  before income taxes                                     |   | 1,313                                    |   | 4,378 |   |
| Income  tax expense                                             |   | 324                                      |   | 1,396 |   |
| Net  income                                                     |   | $                                        | 989    |   | $ | 2,982 |   |
| Earnings per common share:                                      |   |                                     |   |   |   |
| Basic                                                           |   | $                                        | 0.02   |   | $ | 0.05 |   |
| Diluted                                                         |   | $                                        | 0.02   |   | $ | 0.05 |   |
| Weighted average number of common and common equivalent shares: |   |                                     |   |   |   |
| Basic                                                           |   | 58,305                                   |   | 58,840 |   |
| Diluted                                                         |   | 58,649                                   |   | 58,895 |   |

 

88

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|                                                            |   | **June 30,**                             |   |
|-----------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                            |   | **2002**                                 |   | **2003** |   |
|                                                            |   | **(in thousands except per share data)** |   |
| Revenues:                                                       |   |                                     |   |   |   |
| Product sales                                                   |   | $                                        | 23,205 |   | $ | 28,048 |   |
| Contract fees                                                   |   | 414                                      |   | 377 |   |
| Other                                                           |   | 1,481                                    |   | 2,511 |   |
|                                                            |   | 25,100                                   |   | 30,936 |   |
| Expenses:                                                       |   |                                     |   |   |   |
| Research and development                                        |   | 8,208                                    |   | 7,408 |   |
| Marketing and sales                                             |   | 4,816                                    |   | 5,407 |   |
| General and administrative                                      |   | 3,566                                    |   | 6,445 |   |
| Cost of products sales                                          |   | 3,489                                    |   | 5,194 |   |
| Amortization of intangibles associated with acquisition         |   | —                                   |   | 1,012 |   |
| Other                                                           |   | 412                                      |   | 1,821 |   |
|                                                            |   | 20,491                                   |   | 27,287 |   |
| Operating income                                                |   | 4,609                                    |   | 3,649 |   |
| Other income (expenses), net                                    |   | (1,012                                   | )      | 39 |   |
| Income before income taxes                                      |   | 3,597                                    |   | 3,688 |   |
| Income tax expense                                              |   | 1,236                                    |   | 1,176 |   |
| Net income                                                      |   | $                                        | 2,361  |   | $ | 2,512 |   |
|                                                            |   |                                     |   |   |   |
| Earnings per common share:                                      |   |                                     |   |   |   |
| Basic                                                           |   | $                                        | 0.04   |   | $ | 0.04 |   |
| Diluted                                                         |   | $                                        | 0.04   |   | $ | 0.04 |   |
| Weighted average number of common and common equivalent shares: |   |                                     |   |   |   |
| Basic                                                           |   | 58,403                                   |   | 59,044 |   |
| Diluted                                                         |   | 58,498                                   |   | 59,485 |   |

 

89

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|                                                            |   | **September 30,**                        |   |
|-----------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                            |   | **2002**                                 |   | **2003** |   |
|                                                            |   | **(in thousands except per share data)** |   |
| Revenues:                                                       |   |                                     |   |   |   |
| Product sales                                                   |   | $                                        | 24,719 |   | $ | 32,112 |   |
| Contract fees                                                   |   | 262                                      |   | 327 |   |
| Other                                                           |   | 1,252                                    |   | 1,342 |   |
|                                                            |   | 26,233                                   |   | 33,781 |   |
| Expenses:                                                       |   |                                     |   |   |   |
| Research and development                                        |   | 6,778                                    |   | 11,528 |   |
| Marketing and sales                                             |   | 5,200                                    |   | 5,412 |   |
| General and administrative                                      |   | 4,082                                    |   | 6,343 |   |
| Cost of products sales                                          |   | 3,097                                    |   | 4,876 |   |
| Amortization of intangibles associated with acquisition         |   | —                                   |   | 1,013 |   |
| Other                                                           |   | 435                                      |   | 1,704 |   |
|                                                            |   | 19,592                                   |   | 30,876 |   |
| Operating income                                                |   | 6,641                                    |   | 2,905 |   |
| Other income, net                                               |   | 1,478                                    |   | 3,517 |   |
| Income before income taxes                                      |   | 8,119                                    |   | 6,422 |   |
| Income tax expense                                              |   | 2,465                                    |   | 2,064 |   |
| Net income                                                      |   | $                                        | 5,654  |   | $ | 4,358 |   |
|                                                            |   |                                     |   |   |   |
| Earnings per common share:                                      |   |                                     |   |   |   |
| Basic                                                           |   | $                                        | 0.10   |   | $ | 0.07 |   |
| Diluted                                                         |   | $                                        | 0.10   |   | $ | 0.07 |   |
| Weighted average number of common and common equivalent shares: |   |                                     |   |   |   |
| Basic                                                           |   | 58,531                                   |   | 59,339 |   |
| Diluted                                                         |   | 58,578                                   |   | 60,164 |   |

 

90

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|                                                            |   | **December 31,**                         |   |
|-----------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                            |   | **2002**                                 |   | **2003** |   |
|                                                            |   | **(in thousands except per share data)** |   |
| Revenues:                                                       |   |                                     |   |   |   |
| Product sales                                                   |   | $                                        | 29,245 |   | $ | 37,736 |   |
| Contract fees                                                   |   | 564                                      |   | 270 |   |
| Other                                                           |   | 976                                      |   | 1,826 |   |
|                                                            |   | 30,785                                   |   | 39,832 |   |
| Expenses:                                                       |   |                                     |   |   |   |
| Research and development                                        |   | 8,862                                    |   | 6,413 |   |
| Marketing and sales                                             |   | 7,679                                    |   | 5,913 |   |
| General and administrative                                      |   | 6,708                                    |   | 8,905 |   |
| Cost of products sales                                          |   | 4,391                                    |   | 10,189 |   |
| Amortization of intangibles associated with acquisition         |   | 1,013                                    |   | 1,012 |   |
| Other                                                           |   | 629                                      |   | 1,503 |   |
|                                                            |   | 29,282                                   |   | 33,935 |   |
|                                                            |   |                                     |   |   |   |
| Operating income                                                |   | 1,503                                    |   | 5,987 |   |
| Other income (expense), net                                     |   | 248                                      |   | (303 | ) |
| Income before income taxes                                      |   | 1,751                                    |   | 5,594 |   |
| Income tax expense                                              |   | 1,038                                    |   | 1,525 |   |
| Net income                                                      |   | $                                        | 713    |   | $ | 4,069 |   |
|                                                            |   |                                     |   |   |   |
| Earnings per common share:                                      |   |                                     |   |   |   |
| Basic                                                           |   | $                                        | 0.01   |   | $ | 0.07 |   |
| Diluted                                                         |   | $                                        | 0.01   |   | $ | 0.07 |   |
| Weighted average number of common and common equivalent shares: |   |                                     |   |   |   |
| Basic                                                           |   | 58,678                                   |   | 59,541 |   |
| Diluted                                                         |   | 58,716                                   |   | 60,519 |   |

 

91

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**ITEM 9.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

There were no disagreements with accountants on accounting and financialdisclosures during the last three fiscal years.  On May 8, 2002, we dismissed Arthur Andersen LLP as Savient’sindependent public accountants and decided to engage KPMG LLP to serve as ourindependent public accountant for 2002. Savient’s decision to change itsindependent accountants was approved by the Board of Directors uponrecommendation of the Audit Committee. For more information with respect to this matter, see our current reporton Form 8-K, as amended, dated May 8, 2002. On October 4, 2002, KPMG LLP notified us that it resigned as ourindependent auditors.  For moreinformation with respect to this matter, see our current report on Form 8-Kdated October 4, 2002.  On October 16,2002, our Board, upon the recommendation of the Audit Committee, approved theengagement of Grant Thornton LLP to serve as Savient’s independent publicaccountants for the fiscal year ended December 31, 2002.  For more information with respect to thismatter, see our current report on Form 8-K dated October 16, 2002.

 

**ITEM 9A.  CONTROLS AND PROCEDURES**

 

Savient maintains “disclosure controls and procedures”, as such term isdefined under Securities Exchange Act Rule 13a-15(e), that are designed toensure that information required to be disclosed in our Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to Savient’s management, including our Chief Executive Officer andacting Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosures.  Indesigning and evaluating the disclosure controls and procedures, Savient’smanagement recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives and Savient’s management necessarily was required toapply its judgment in evaluating the cost-benefit relationship of possiblecontrols and procedures.  Savient hascarried out an evaluation, as of December 31, 2003, under the supervision andwith the participation of Savient’s management, including Savient’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of Savient’s disclosure controls and procedures.  Based upon their evaluation and subject tothe foregoing, the Chief Executive Officer and Chief Financial Officerconcluded that Savient’s disclosure controls and procedures were effective inensuring that material information relating to Savient is made known to theChief Executive Officer and Chief Financial Officer by others within Savientduring the period in which this report was being prepared.

 

There were no changes in Savient’s internal controls over financialreporting that occurred during our most recent fiscal quarter that havematerially affected, or are reasonably likely to materially affect, Savient’sinternal control over financial reporting.

 

**PART III**

 

**ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

Directors

 

The section entitled “Proposal No. 1 - Election of Directors” inSavient’s Proxy Statement for the Annual Meeting of Stockholders isincorporated herein by reference.

 

Executive Officers

 

See “Part I - Item 1. Business - Executive Officers of Savient”.

 

We have adopted a financial code of ethics that applies to our principalexecutive officer, principal financial officer, principal accounting officerand all other Savient employees performing similar functions.  This financial code of ethics will be postedon our website.  The Internet addressfor our website is http://www.savientpharma.com.  We intend to satisfy the disclosure requirement under Item 10 ofForm 8-K regarding an amendment to, or waiver from, a provision of this code ofethics by posting such information on our website, at the address and locationspecified above.

 

92

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**ITEM 11.  EXECUTIVE COMPENSATION**

 

The section entitled “Executive Compensation” in Savient’s ProxyStatement for the Annual Meeting of Stockholders is incorporated herein byreference.

 

**ITEM 12. SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The sections entitled “Beneficial Ownership of Common Stock” and “EquityCompensation Plan Information” in Savient’s Proxy Statement for the AnnualMeeting of Stockholders are incorporated herein by reference.

 

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

The sections entitled “Executive Compensation - Compensation CommitteeInterlocks and Insider Participation” and “Certain Transactions” in Savient’sProxy Statement for the Annual Meeting of Stockholders is incorporated hereinby reference.

 

**ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.**

 

The section entitled “Audit Matters” in Savient’s Proxy Statement forthe Annual Meeting of Stockholders is incorporated hereby in reference.

 

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**PART IV**

 

**ITEM15.  EXHIBITS, FINANCIAL STATEMENTSCHEDULES, AND REPORTS ON FORM 8-K**

 

(a)                                  Financial Statements

 

(1)and (2) See “Index to Consolidated Financial Statements” at Item 8 of thisAnnual Report on Form 10-K.

 

(b)                                 Reports on Form 8-K

 

Current Report on Form 8-Kdated October 3, 2003, announcing that the Company was in preliminaryacquisition discussions with Teva Pharmaceutical Industries Limited.

 

Current Report on Form 8-Kdated October 8, 2003, announcing that the Company reacquired commercial rightsto its sodium hyaluronate product from DePuy Orthopaedics, Inc.

 

Current Report on Form 8-Kdated November 7, 2003, announcing that the Company and Teva PharmaceuticalIndustries Limited had mutually agreed to terminate their acquisitiondiscussions.

 

Current Report on Form 8-Kdated November 10, 2003, announcing the Company’s financial results for thethree and nine months ended September 30, 2003.

 

Current Report on Form 8-Kdated November 12, 2003, containing the transcript of the Company’s thirdquarter conference call.

 

Current Report on Form 8-Kdated December 24, 2003, announcing that Alan Rubinfeld had been appointedacting chief financial officer.

 

Current Report on Form 8-Kdated February 20, 2004 announcing the Company’s financial results for the yearand three months ended December 31, 2003.

 

Current Report on Form 8-Kdated February 20, 2004 containing the transcript of the Company’s year-endconference call.

 

(c)           Exhibits

 

Certainexhibits presented below contain information that has been granted or issubject to a request for confidential treatment.  Such information has been omitted from the exhibit.  Exhibit Nos. 10.13, 10.14, 10.15, 10.16,10.17, 10.18, 10.19, 10.20, 10.21, 10.22, 10.23, 10.24, 10.25, 10.26, 10.27,10.28 and 10.32 and are management contracts, compensatory plans orarrangements.

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.1              |   | Agreement and Plan of  Reorganization, dated as of February 21, 2001, by and among Bio-Technology  General Corp., MYLS Acquisition Corp. and Myelos Corporation.*(1)                                                                                                                                                                                                                                                                                                                           |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.2              |   | Share Purchase Agreement,  dated September 20, 2002, relating to Rosemont Pharmaceuticals Limited,  between NED-INT Holdings Ltd, Akzo Nobel N.V. and Bio-Technology General  Corp.*(20)                                                                                                                                                                                                                                                                                                       |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1              |   | Certificate of  Incorporation of the Registrant, as amended. *(2)                                                                                                                                                                                                                                                                                                                                                                                                                              |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2              |   | By-laws of the  Registrant, as amended.*(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1              |   | Rights Agreement, dated  as of October 7, 1998, by and between Bio-Technology General Corp. and  American Stock Transfer & Trust Company, as Rights Agent, which includes  the form of Certificate of Designations setting forth the terms of the  Series A Junior Participating Cumulative Preferred Stock, par value $0.01 per  share, as Exhibit A, the form of Right Certificate as Exhibit B and the  Summary of Rights to Purchase Preferred Shares as Exhibit C.*(3) |

 

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| 4.2    |   | Certificate of  Designations of the Series A Junior Participating Cumulative Preferred  Stock.*(3)                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                 |
| 10.1   |   | Agreement, dated January  25, 1981, between Bio-Technology General (Israel) Ltd. and Yeda Research and  Development Co., Ltd. (“Yeda”). *(4)               |
|   |   |                                                                                                                                                                 |
| 10.2   |   | Letter from the Chief  Scientist to Bio-Technology General (Israel) Ltd. *(4)                                                                                        |
|   |   |                                                                                                                                                                 |
| 10.3   |   | Letter from the Company  to Yeda relating to bGH and hSOD. *(5)                                                                                                      |
|   |   |                                                                                                                                                                 |
| 10.4   |   | Agreement, dated January  20, 1984, between Bio-Technology General (Israel) Ltd., and the Chief  Scientist with regard to certain projects. *(6)                     |
|   |   |                                                                                                                                                                 |
| 10.5   |   | Agreement, dated July 9,  1984, between the Company and Yeda. *(6)                                                                                                   |
|   |   |                                                                                                                                                                 |
| 10.6   |   | Agreement, dated as of  January 1, 1984, between the Company and Yissum. *(7)                                                                                        |
|   |   |                                                                                                                                                                 |
| 10.7   |   | Form of Indemnity  Agreement between the Company and its directors and officers. *(8)                                                                                |
|   |   |                                                                                                                                                                 |
| 10.8   |   | Agreement, dated November  18, 1988, between the Company and Yeda. *(9)                                                                                              |
|   |   |                                                                                                                                                                 |
| 10.9   |   | Reacquisition of Rights  Agreement, effective June 12, 1991 between the Company and The Du Pont Merck  Pharmaceutical Company. *(10)                                 |
|   |   |                                                                                                                                                                 |
| 10.10  |   | Agreement, dated as of  November 9, 1992, between the Company and SmithKline Beecham Intercredit B.V.  *(11)                                                         |
|   |   |                                                                                                                                                                 |
| 10.11  |   | Research and Development  Services Agreement, dated as of January 1, 1996 by and between Bio-Technology  General Corp. and Bio-Technology General (Israel) Ltd.*(12) |
|   |   |                                                                                                                                                                 |
| 10.12  |   | Manufacturing Services  Agreement, dated as of January 1, 1996, by and between Bio-Technology General  Corp. and Bio-Technology General (Israel) Ltd.*(12)           |
|   |   |                                                                                                                                                                 |
| 10.13  |   | Bio-Technology General  Corp. Stock Compensation Plan for Outside Directors, as amended. *(13)                                                                       |
|   |   |                                                                                                                                                                 |
| 10.14  |   | Bio-Technology General  Corp. Stock Option Plan for New Directors, as amended. *(13)                                                                                 |
|   |   |                                                                                                                                                                 |
| 10.15  |   | Bio-Technology General  Corp. 1992 Stock Option Plan, as amended.*(14)                                                                                               |
|   |   |                                                                                                                                                                 |
| 10.16  |   | Bio-Technology General  Corp. 1997 Stock Option Plan for Non-Employee Directors.*(14)                                                                                |
|   |   |                                                                                                                                                                 |
| 10.17  |   | Bio-Technology General  Corp. 1998 Employee Stock Purchase Plan.*(15)                                                                                                |
|   |   |                                                                                                                                                                 |
| 10.18  |   | Bio-Technology General  Corp. 2001 Stock Option Plan. *(16)                                                                                                          |
|   |   |                                                                                                                                                                 |
| 10.19  |   | Employment Agreement,  dated as of December 19, 2002, by and between Bio-Technology General Corp.  and Andre Groenewegen. *(22)                                      |
|   |   |                                                                                                                                                                 |
| 10.20  |   | Employment Agreement,  dated as of December 2, 2002, by and between Bio-Technology General Corp. and  Whitney K. Stearns, Jr. *(22)                                  |
|   |   |                                                                                                                                                                 |
| 10.21  |   | Employment Agreement,  dated as of January 1, 2002, by and between Bio-Technology General Corp. and  Sim Fass. *(16)                                                 |
|   |   |                                                                                                                                                                 |
| 10.22  |   | Employment Agreement,  dated as of January 1, 2002, by and between Bio-Technology General Corp. and  Ernest Kelly. *(16)                                             |
|   |   |                                                                                                                                                                 |
| 10.23  |   | Employment Agreement,  dated as of January 1, 2002, by and between Bio-Technology General Corp. and  Robert Shaw. *(16)                                              |
|   |   |                                                                                                                                                                 |
| 10.24  |   | Amendment to Employment  Agreement, dated as of January 22, 2003, by and between Bio-Technology  General Corp. and Robert Shaw.*(22)                                 |

 

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| 10.25  |   | Employment Agreement,  dated as of January 1, 2002, by and between Bio-Technology General Corp. and  Dov Kanner.*(17)                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                          |
| 10.26  |   | Amendment to Employment  Agreement dated as of September 1, 2003 between the Company and Dov Kanner.  *(23)                                   |
|   |   |                                                                                                                                          |
| 10.27  |   | Employment Agreement,  dated as of May 14, 2002, by and between Bio-Technology General Corp. and  Christopher Clement.*(18)                   |
|   |   |                                                                                                                                          |
| 10.28  |   | Employment Agreement, dated  March 23, 2003, by and between Bio-Technology General Corp. and Zebulun D.  Horowitz, M.D. *(22)                 |
|   |   |                                                                                                                                          |
| 10.29  |   | Intention letter for  granting credit,  dated March 22,  2000, between Bank Hapoalim B.M. and Bio-Technology General (Israel)  Ltd.*(19) |
|   |   |                                                                                                                                          |
| 10.30  |   | Unlimited guaranty of  Bio-Technology General Corp. in favor of Bank Hapoalim B.M. *(19)                                                      |
|   |   |                                                                                                                                          |
| 10.31  |   | Lease and Lease  Agreement, dated as of June 11, 2002, between SCV Partners and Bio-Technology  General Corp., as amended. *(17)              |
|   |   |                                                                                                                                          |
| 10.32  |   | Employment Letter, dated  as of December 24, 2003, between Savient Pharmaceuticals, Inc. and Alan  Rubinfeld.                                 |
|   |   |                                                                                                                                          |
| 21     |   | Subsidiaries of  Bio-Technology General Corp. *(21)                                                                                           |
|   |   |                                                                                                                                          |
| 23.1   |   | Consent of KPMG LLP.                                                                                                                          |
|   |   |                                                                                                                                          |
| 23.2   |   | Consent of Grant Thornton  LLP.                                                                                                               |
|   |   |                                                                                                                                          |
| 31.1   |   | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                     |
|   |   |                                                                                                                                          |
| 31.2   |   | Certification of the  Acting Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                              |
|   |   |                                                                                                                                          |
| 32.1   |   | Certification by the  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                     |
|   |   |                                                                                                                                          |
| 32.2   |   | Certification of the  Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                              |

 

Exhibitshave been included in copies of this Report filed with the Securities andExchange Commission.  Stockholders ofthe Company will be provided with copies of these exhibits upon written requestto the Company.

 

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+   Confidential treatment has been granted for portions of such document.

*   Previously filed with the Commission as Exhibits to, and incorporatedherein by reference from, the following documents:

 
| (1)  |   | Company’s Current Report  on Form 8-K, dated March 19, 2001.                  |
|------|--------|------------------------------------------------------------------------------------|
| (2)  |   | Company’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 1994. |
| (3)  |   | Company’s Current Report  on Form 8-K, dated October 7, 1998.                 |
| (4)  |   | Registration Statement on  Form S-1 (File No. 2-84690).                            |
| (5)  |   | Company’s Annual Report  on Form 10-K for the year ended December 31, 1983.   |
| (6)  |   | Registration Statement on  Form S-1 (File No. 33-2597).                            |
| (7)  |   | Registration Statement on  Form S-2 (File No. 33-12238).                           |
| (8)  |   | Company’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 1987. |
| (9)  |   | Company’s Annual Report  on Form 10-K for the year ended December 31, 1988.   |
| (10) |   | Registration Statement on  Form S-3 (File No. 33-39018).                           |
| (11) |   | Company’s Annual Report  on Form 10-K for the year ended December 31, 1992.   |
| (12) |   | Company’s Annual Report  on Form 10-K for the year ended December 31, 1998.   |
| (13) |   | Company’s Annual Report  on Form 10-K for the year ended December 31, 1991.   |

 

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| (14)   |   | Company’s Annual Report  on Form 10-K for the year ended December 31, 1997.                                                                                                                                                                                                            |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (15)   |   | Company’s Registration  Statement on Form S-8 (File No. 333-64541).                                                                                                                                                                                                                    |
| (16)   |   | Company’s Annual Report  on Form 10-K for the year ended December 31, 2001.                                                                                                                                                                                                            |
| (17)   |   | Company’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2002.                                                                                                                                                                                                     |
| (18)   |   | Company’s Quarterly  Report on Form 10-Q for the quarter ended March 31, 2002.                                                                                                                                                                                                         |
| (19)   |   | Company’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2000.                                                                                                                                                                                                          |
| (20)   |   | Company’s Current Report  on Form 8-K, dated September 30, 2002.                                                                                                                                                                                                                       |
| (21)   |   | Company’s Annual Report  on Form 10-K for the year ended December 31, 2002.                                                                                                                                                                                                            |
| (22)   |   | Company’s Annual Report on  Form 10-K for the year ended December 31, 2003.                                                                                                                                                                                                            |
| (23)   |   | Company’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2003.                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                        |
| (d)    |   | Financial Statement  Schedule                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                        |
|   |   | See “Index to  Consolidated Financial Statements” at Item 8 of this Annual Report on Form  10-K.  Schedules not included herein  are omitted because they are not applicable or the required information  appears in the Consolidated Financial Statements or notes thereto. |

 

97

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, asamended, the Registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
|   |   |   |   |   | Savient Pharmaceuticals,  Inc. |                           |
|--------|--------|--------|--------|--------|--------------------------------|--------------------------------|
|   |   |   |   |   | (Registrant)                   |                           |
|   |   |   |   |   |                           |
|   |   |   |   |   |                           | By:  /s/ Sim Fass         |   |
|   |   |   |   |   |                           | Chairman of the Board and  CEO |
|        |        |        |        |        |                                |                                |  |  |

 

March 12, 2004

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, this report has been signed below by the following persons on behalfof the Registrant and in the capacities and on the dates indicated.

 
| **Signature**            |   | **Title** |                                             | **Date** |           |
|--------------------------|--------|-----------|--------------------------------------------------|----------|----------------|
|                     |   |      | ** **                                       |     | ** **     |
| /s/ Sim Fass             |   |      | Chairman of the Board,                           |     | March 12, 2004 |   |
| (Sim Fass)               |   |      | CEO and Director  (Principal  Executive Officer) |     |           |   |
|                     |   |      |                                             |     |           |   |
| /s/ Herbert Conrad       |   |      | Director                                         |     | March 12, 2004 |   |
| (Herbert Conrad)         |   |      |                                             |     |           |   |
|                     |   |      |                                             |     |           |   |
| /s/ Jeremy Hayward-Surry |   |      | Director                                         |     | March 12, 2004 |   |
| (Jeremy Hayward-Surry)   |   |      |                                             |     |           |   |
|                     |   |      |                                             |     |           |   |
| /s/ Stephen Jaeger       |   |      | Director                                         |     | March 12, 2004 |   |
| (Stephen Jaeger)         |   |      |                                             |     |           |   |
|                     |   |      |                                             |     |           |   |
| /s/ Carl Kaplan          |   |      | Director                                         |     | March 12, 2004 |   |
| (Carl Kaplan)            |   |      |                                             |     |           |   |
|                     |   |      |                                             |     |           |   |
| /s/ David Tendler        |   |      | Director                                         |     | March 12, 2004 |   |
| (David Tendler)          |   |      |                                             |     |           |   |
|                     |   |      |                                             |     |           |   |
| /s/ Virgil Thompson      |   |      | Director                                         |     | March 12, 2004 |   |
| (Virgil Thompson)        |   |      |                                             |     |           |   |
|                     |   |      |                                             |     |           |   |
| /s/ Faye Wattleton       |   |      | Director                                         |     | March 12, 2004 |   |
| (Faye Wattleton)         |   |      |                                             |     |           |   |

 

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| /s/ Herbert Weissbach |   |   | Director                                                             |   | March 12, 2004 |   |
|-----------------------|--------|--------|----------------------------------------------------------------------|--------|----------------|--------|
| (Herbert Weissbach)   |   |   |                                                                 |   |           |   |
|                  |   |   |                                                                 |   |           |   |
| /s/ Alan Rubinfeld    |   |   | Acting Chief Financial                                               |   | March 12, 2004 |   |
| (Alan Rubinfeld)      |   |   | Officer and Treasurer  (Principal Financial and  Accounting Officer) |   |           |   |

 

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