Sciclone Pharmaceuticals (SCLN) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number: 0-19825

SCICLONE PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware	94-3116852
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer Identification no.)
950 Tower Lane, Suite 900, Foster City, California	94404
(Address of principal executive offices)	(Zip code)

(650) 358-3456

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of November 4, 2010, 47,803,849 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.

SCICLONE PHARMACEUTICALS, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010

INDEX

		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009		3
	Condensed Consolidated Statements of Operations for the three- and nine-month periods ended September 30, 2010 and 2009		4
	Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2010 and 2009		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21
Item 4.	Controls and Procedures		21
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		22
Item 1A.	Risk Factors		22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		35
Item 3.	Defaults Upon Senior Securities		35
Item 4.	Removed and Reserved		35
Item 5.	Other Information		35
Item 6.	Exhibits		35
Signature			36

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)

	September 30, 2010			December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	45,697		$	29,687
Short-term investments		7,278			1,646
Accounts receivable		21,588			21,394
Inventories		7,376			10,149
Prepaid expenses and other current assets		1,773			1,518
Restricted short-term investments		—			71
Total current assets		83,712			64,465
Property and equipment, net		633			771
Restricted investments		390			415
Other assets		857			1,249
Total assets	$	85,592		$	66,900
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,503		$	2,339
Accrued liabilities		5,685			6,048
Deferred revenue		—			141
Total current liabilities		7,188			8,528
Long-term liabilities		1,000			979
Stockholders’ equity:
Preferred stock; $0.001 par value; 10,000,000 shares authorized; no shares outstanding		—			—
Common stock; $0.001 par value; 75,000,000 shares authorized; 47,803,849 and 47,217,944 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		48			47
Additional paid-in capital		224,918			222,229
Accumulated other comprehensive income		42			22
Accumulated deficit		(147,604	)		(164,905	)
Total stockholders’ equity		77,404			57,393
Total liabilities and stockholders’ equity	$	85,592		$	66,900

See accompanying notes to unaudited condensed consolidated financial statements.

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SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Product sales	$	22,840		$	17,240		$	61,496		$	54,280
Cost of product sales		3,146			3,098			9,445			9,185
Gross margin		19,694			14,142			52,051			45,095
Operating expenses:
Research and development		2,618			4,101			7,700			12,498
Sales and marketing		5,445			4,625			15,996			13,523
General and administrative		3,820			3,137			10,403			9,076
Total operating expenses		11,883			11,863			34,099			35,097
Income from operations		7,811			2,279			17,952			9,998
Interest and investment income		31			23			79			128
Interest and investment expense		(19	)		(49	)		(57	)		(149	)
Other income (expense), net		64			(27	)		(19	)		(4	)
Income before income tax		7,887			2,226			17,955			9,973
Provision for income tax		259			162			654			474
Net income	$	7,628		$	2,064		$	17,301		$	9,499
Basic net income per share	$	0.16		$	0.04		$	0.36		$	0.20
Diluted net income per share	$	0.16		$	0.04		$	0.35		$	0.20

See accompanying notes to unaudited condensed consolidated financial statements.

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SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended September 30,
	2010			2009
Operating activities:
Net income	$	17,301		$	9,499
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash expense related to stock-based compensation		1,552			1,306
Depreciation and amortization		318			398
Realized gain on trading securities		(212	)		(97	)
Other non-cash expense		236			96
Changes in operating assets and liabilities:
Accounts receivable		(194	)		(5,329	)
Inventories		2,803			(2,464	)
Prepaid expenses and other assets		(174	)		108
Accounts payable (including $0 and $1,800 due to related party as of September 30, 2010 and 2009, respectively)		(836	)		1,415
Accrued liabilities		(363	)		(2,364	)
Deferred revenue		(141	)		21
Long-term liabilities		21			188
Net cash provided by operating activities		20,311			2,777
Investing activities:
Purchases of property and equipment		(105	)		(170	)
Purchases of available-for-sale investments		(7,146	)		—
Proceeds from the sale or maturity of available-for-sale investments		—			44
Proceeds from the sale or maturity of trading security investments		1,800			—
Net cash used in investing activities		(5,451	)		(126	)
Financing activities:
Proceeds from issuances of common stock		1,108			2,600
Net cash provided by financing activities		1,108			2,600
Effect of exchange rate changes on cash and cash equivalents		42			(8	)
Net increase in cash and cash equivalents		16,010			5,243
Cash and cash equivalents, beginning of period		29,687			27,673
Cash and cash equivalents, end of period	$	45,697		$	32,916
Supplemental disclosure of cash flow information:
Income taxes paid related to foreign operations	$	579		$	446

See accompanying notes to unaudited condensed consolidated financial statements.

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SCICLONE PHARMACEUTICALS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of SciClone Pharmaceuticals, Inc. (“SciClone” or the “Company”) have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) consistent with those applied in, and should be read in conjunction with, the audited financial statements for the year ended December 31, 2009 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The Company prepared the unaudited condensed consolidated financial statements following the requirements of the Securities and Exchange Commission for interim reporting. The interim financial information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented and are not necessarily indicative of results for subsequent interim periods or for the full year. The condensed consolidated balance sheet data at December 31, 2009 is derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Material intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Actual results could differ significantly from those estimates.

Revenue Recognition

The Company recognizes revenue from product sales at the time of delivery. There are no significant customer acceptance requirements or post-shipment obligations on the part of the Company, except for sales to a new market where acceptance requirements may have to be met. Sales to importing agents or distributors are recognized at time of shipment when title to the product is transferred to them. Importing agents or distributors do not have contractual rights of return except under limited terms regarding product quality. However, the Company may replace products that have expired or are deemed to be damaged or defective when delivered. The Company estimates expected returns primarily on historical patterns. Historically, the Company has had no product returns of damaged, defective or expired product. As such, no amount was accrued for product returns as of September 30, 2010 and December 31, 2009 in the accompanying condensed consolidated balance sheets. Payments by the importing agents and distributors are not contingent upon sale to the end user by the importing agents or distributors. Amounts invoiced relating to arrangements where collectability is uncertain and revenue cannot be recognized are reflected on the Company’s balance sheet as deferred revenue and recognized as the applicable revenue recognition criteria are satisfied.

Research and Development Expenses

Research and development costs are expensed as incurred. These costs consist primarily of salaries and other personnel-related expenses, including associated stock-based compensation, facility-related expenses, depreciation of facilities and equipment, license-related fees, services performed by clinical research organizations and research institutions and other outside service providers, and certain costs shared for the development of ZADAXIN by the Company’s partner, Sigma-Tau Finanziaria S.p.A (“Sigma-Tau”).

Expenses related to clinical trials generally are accrued based on estimates of work performed or the level of patient enrollment and activities according to the protocols and agreements. The Company monitors planned protocols, work performed, patient enrollment levels and related activities to the extent possible and adjusts estimates accordingly. Nonrefundable advance payments for research and development goods or services are recognized as expense as the related goods are delivered or the related services are provided.

Concentrations of Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, investments and accounts receivable. The Company is exposed to credit risk in the event of default by the institutions holding the cash, cash equivalents and investments and by importers with whom the Company has accounts

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receivable to the extent of the amounts recorded on the condensed consolidated balance sheet. Substantially all the Company’s cash and cash equivalents are held by financial institutions that the Company believes are of high credit quality. At times, deposits may exceed government insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.

The People’s Republic of China (“China”) uses a tiered method to import and distribute products. The distributors make the sales in the country, but the product is imported for them by licensed importers. For the three months ended September 30, 2010 and 2009, sales to two and three importing agents in China, respectively, accounted for 97% of the Company’s product sales. For the nine months ended September 30, 2010 and 2009, sales to four and three importing agents, respectively, in China accounted for 97%, of the Company’s product sales. As of September 30, 2010, approximately $21.1 million, or 98%, of the Company’s accounts receivable were attributable to two importing agents in China. The Company performs on-going credit evaluations of its importers’ financial condition and generally does not require collateral from its importers.

Net Income Per Share

Basic net income per share has been computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Diluted net income per share is computed by dividing net income by the weighted-average number of common equivalent shares outstanding for the period. Diluted net income per share includes any dilutive impact from outstanding stock options, warrants and the employee stock purchase plan using the treasury stock method.

The following is a reconciliation of the numerator and denominators of the basic and diluted net income per share computations(in thousands, except per share amounts):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Numerator:
Net income	$	7,628	$	2,064	$	17,301	$	9,499
Denominator:
Weighted-average shares outstanding used to compute basic net income per share		47,795		46,615		47,535		46,360
Effect of dilutive securities		1,374		2,954		1,863		737
Weighted-average shares outstanding used to compute diluted net income per share		49,169		49,569		49,398		47,097
Basic net income per share	$	0.16	$	0.04	$	0.36	$	0.20
Diluted net income per share	$	0.16	$	0.04	$	0.35	$	0.20

For the three months ended September 30, 2010 and 2009, 3,393,720 and 1,666,117 shares, respectively, related to outstanding stock options and warrants were excluded from the calculation of diluted net income per share because the effect from the assumed exercise of these options and warrants calculated under the treasury stock method would have been anti-dilutive. For the nine months ended September 30, 2010 and 2009, 3,033,068 and 6,826,442 shares, respectively, related to outstanding stock options and warrants were excluded from the calculation of diluted net income per share because the effect from the assumed exercise of these options and warrants calculated under the treasury stock method would have been anti-dilutive.

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Comprehensive Income

The following table summarizes components of total comprehensive income (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010			2009
Net income	$	7,628	$	2,064	$	17,301		$	9,499
Other comprehensive income (loss):
Net change in unrealized loss and foreign currency translation on foreign-denominated available-for-sale securities		39		21		(26	)		35
Net change in unrealized gains/losses on available for sale securities		5		19		4			11
Foreign currency translation		34		3		42			(8	)
Total comprehensive income	$	7,706	$	2,107	$	17,321		$	9,537

Fair Value of Financial Instruments

The fair value of the Company’s financial instruments reflects the amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The fair value estimates presented in this report reflect the information available to the Company as of September 30, 2010 and December 31, 2009. See Note 3, “Fair Value Measurements.”

Recent Accounting Guidance

In January 2010, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. The ASU requires new disclosures about significant transfers in and out of Levels 1 and 2 fair value measurements and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. The ASU also clarifies existing disclosure requirements regarding inputs and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities for which separate fair value measurements should be disclosed. The Company adopted ASU 2010-06 at the beginning of fiscal 2010. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

Reclassifications

The Company reclassified shipping and handling costs related to product shipments of $0.1 million and $0.4 million, respectively, from sales and marketing expense to cost of product sales for the three and nine months ended September 30, 2009, and reclassified $0.2 million and $0.5 million of legal expense from research and development expense to general and administrative expense for the three and nine months ended September 30, 2009, respectively, to conform to the current period presentation. These reclassifications had no effect on the prior period’s net income or stockholders’ equity.

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2. Cash, Cash Equivalents and Investments

The following is a summary of cash, cash equivalents, and investments(in thousands):

	September 30, 2010
	Amortized Cost		Unrealized Gains		In Unrealized Loss Position For More Than 12 Months			Estimated Fair Value
Cash and cash equivalents:
Cash	$	19,816	$	—	$	—		$	19,816
Money market funds		877		—		—			877
Foreign U.S. dollar term deposits		25,004		—		—			25,004
Total cash and cash equivalents	$	45,697	$	—	$	—		$	45,697
Available-for-sale investments:
Certificates of deposit maturing within 1 year	$	76	$	—	$	—		$	76
Foreign U.S. dollar term deposits maturing within 1 year		7,146		—		—			7,146
Restricted long-term Italian state bonds maturing in 2013		450		—		(60	)		390
Corporate equity securities		51		5		—			56
Total available-for-sale investments	$	7,723	$	5	$	(60	)	$	7,668
	December 31, 2009
	Amortized Cost		Unrealized Gains		In Unrealized Loss Position For More Than 12 Months			Estimated Fair Value
Cash and cash equivalents:
Cash	$	17,541	$	—	$	—		$	17,541
Money market funds		16		—		—			16
Foreign U.S. dollar term deposits		12,130		—		—			12,130
Total cash and cash equivalents	$	29,687	$	—	$	—		$	29,687
Available-for-sale investments:
Certificates of deposit maturing within 1 year	$	76	$	—	$	—		$	76
Restricted long-term Italian state bonds maturing in 2013		449		—		(34	)		415
Corporate equity securities		51		2		—			53
Total available-for-sale investments	$	576	$	2	$	(34	)	$	544
Trading security investments:
Auction rate securities maturing after 20 years	$	1,588	$	—	$	—		$	1,588
Total trading security investments	$	1,588	$	—	$	—		$	1,588

As of September 30, 2010 and December 31, 2009, available-for-sale securities included $0.4 million and $0.5 million in restricted investments, respectively. The unrealized losses on the Company’s restricted Italian state bond investments are mainly as a result of currency translation. The Company intends to hold its restricted Italian state bond investments until recovery.

As of December 31, 2009, the Company’s certificate of deposit for $0.1 million secured the Company’s letter of credit required under its European value added tax filing arrangements.

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3. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of input are:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Where quoted prices are available in an active market, the Company determines fair value based upon quoted market prices, and classifies these values in level 1 of the valuation hierarchy. If quoted market prices are not available, fair values are based upon observable inputs such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities and are classified in level 2 of the valuation hierarchy. When quoted prices and observable inputs are unavailable, fair values are based on a market approach using internally developed cash flow models and are classified in level 3 of the valuation hierarchy. The internally developed cash flow models primarily use, as inputs, estimates for interest rates and discount rates including yields of comparable traded instruments adjusted for illiquidity and other risk factors, amount of cash flows and expected holding periods of the assets. These inputs reflect the Company’s assumptions about the assumptions market participants would use in pricing the assets including assumptions about risk developed based on the best information available in the circumstances. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets being measured and their placement within the fair value hierarchy.

Other financial instruments, including accrued liabilities, are carried at cost, which the Company believes approximates fair value because of the short-term maturity of these instruments.

The following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents, investments, and other current assets) measured at fair value on a recurring basis(in thousands):

	Fair Value Measurements at September 30, 2010 Using
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of September 30, 2010
Money market funds	$	877	$	—	$	—	$	877
Foreign U.S. dollar term deposits		—		32,150		—		32,150
Certificates of deposit		—		76		—		76
Corporate equity securities		56		—		—		56
Restricted long-term Italian state bonds		390		—		—		390
Total	$	1,323	$	32,226	$	—	$	33,549

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	Fair Value Measurements at December 31, 2009 Using
Description	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance as of December 31, 2009
Money market funds	$	16	$	—	$	—	$	16
Foreign U.S. dollar term deposits		—		12,130		—		12,130
Certificates of deposit		—		76		—		76
Corporate equity securities		53		—		—		53
Restricted long-term Italian state bonds		415		—		—		415
Auction rate securities		—		—		1,588		1,588
Put Option		—		—		202		202
Total	$	484	$	12,206	$	1,790	$	14,480

The following table provides a summary of changes in fair value of the Company’s level 3 financial assets(in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Auction Rate Securities:
Balance at beginning of period	$	—		$	1,583		$	1,588		$	1,485
Proceeds from sales		(550	)		—			(1,800	)		—
Receivable from broker		550			—			—			—
Total realized (loss) gain included in other income (expense)		—			(1	)		212			97
Balance at end of period	$	—		$	1,582		$	—		$	1,582
Put Option:
Balance at beginning of period	$	—		$	206		$	202		$	285
Total realized loss included in other expense		—			(17	)		(202	)		(96	)
Balance at end of period	$	—		$	189		$	—		$	189

On June 30, 2010, the Company exercised its right (“the Put Option”) under its Auction Rate Securities (“ARS”) Rights Offer from UBS AG to sell its ARS back to the investment firm. As of December 31, 2009, the Company had recorded the $0.2 million fair value of the Put Option in prepaid expenses and other current assets in its condensed consolidated balance sheet. The Company’s fair value election was intended to create accounting symmetry with its fair value accounting of the ARS.

4. Inventories

Inventories consisted of the following(in thousands):

	September 30, 2010		December 31, 2009
Raw materials	$	1,530	$	2,446
Work in progress		355		1,048
Finished goods		5,491		6,655
	$	7,376	$	10,149

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5. Other Assets

The following is a summary of other assets(in thousands):

	September 30, 2010		December 31, 2009
Value added tax receivable	$	450	$	732
Lease deposits		247		247
Intangible assets		140		192
Other		20		78
	$	857	$	1,249

6. Accrued Liabilities

The following is a summary of accrued liabilities(in thousands):

	September 30, 2010		December 31, 2009
Accrued compensation	$	1,846	$	1,913
Accrued sales and marketing expenses		1,644		1,394
Accrued professional fees		797		394
Accrued taxes		405		309
Accrued manufacturing costs		309		808
Accrued clinical trial expense		163		452
Other		521		778
	$	5,685	$	6,048

7. Silicon Valley Bank Line-of-Credit

Under its loan and security agreement and an unconditional guaranty and security agreement with Silicon Valley Bank (the “Credit Facility”), the Company and its subsidiaries, SciClone Pharmaceuticals International Ltd. and SciClone Pharmaceuticals International China Holding Ltd. as borrowers, may borrow up to $6 million for a term of 36 months, subject to certain sublimits, including $2.5 million for letters of credit. The Credit Facility is secured by a first priority secured interest in all of the Company’s assets, other than intellectual property. The Credit facility expires in November 2011, and upon termination all amounts borrowed must be repaid in full. As of September 30, 2010, there were no outstanding borrowings under the Credit Facility. The Credit Facility bears interest on borrowed funds at the bank’s prime rate plus 1.75% on outstanding balances. The Company is required to meet certain financial covenants, including minimum consolidated revenue, and minimum consolidated earnings before interest and income tax, as defined, and since November 14, 2009, has been subject to certain minimum fees and interest payments. The Company is also required to meet certain operating covenants that limit its ability to incur liabilities, create liens, make capital expenditures, pay dividends or distributions, make investments, and dispose of assets and to carry credit insurance. The Company has received a limited waiver to the Credit Facility to waive certain minimum fees and interest payments, and to waive the requirement to maintain a credit insurance policy. The Company is currently in compliance with the Credit Facility after giving effect to the limited waiver. Refer also to note 11 “Subsequent Events.”

8. Stock-Based Compensation

Stock Options

The Company has several stock-based compensation plans (the “Plans”) that are described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009. The Company, under the various equity plans, is permitted to grant incentive stock options, nonstatutory stock options, restricted stock units, performance shares and other forms of equity compensation. In accordance with the Plans, the options expire ten years from the date of grant. Options are generally granted at fair market value on the date of grant and the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period, generally four years, or upon achievement of certain service conditions. Certain options granted under the Plans vest over shorter periods. During the nine months ended September 30, 2010, the Company granted options to purchase a total of 1,473,000 shares of common stock and options to purchase 578,000 shares of common stock were exercised. During the twelve months ended December 31, 2009, the Company granted options to purchase a total of 2,269,000 shares of common stock and 999,000 shares of common stock were exercised.

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The Company has granted certain performance-based options to purchase shares of the Company’s common stock at an exercise price equal to the closing price of a share of the Company’s common stock as of the grant date. The options will fully vest upon meeting a performance goal within an established time frame. If the performance goal is met for the option within the established time frame, the option generally has a ten-year term measured from the date of grant. If the performance goal is not met within the established time frame, the option expires in its entirety. The grant date fair value per share of the awards has been calculated using the Black-Scholes option pricing model. The Company recognizes expense related to the performance-based options over the period of time the Company determines that it is probable that the performance goal will be achieved. For the nine months ended September 30, 2010, the Company granted a performance-based option to purchase a total of 40,000 shares of common stock. For the twelve months ended December 31, 2009, the Company granted performance-based options to purchase a total of 340,000 shares of common stock. For the three and nine months ended September 30, 2010, the Company recorded $30,000 and $0.2 million, respectively, of expense related to performance-based options. For the three and nine months ended September 30, 2009, the Company recorded $7,000 of expense of expense related to performance-based options.

In May 2010, the Company amended target-stock-price-based options to purchase 750,000 of the Company’s common stock granted to its chief executive officer. The amendment modified the vesting provisions of the options such that 1/36^th of the unvested stock options vest monthly over a three-year period, with initial vesting occurring on June 1, 2010. The fair value of the modified award was estimated using the Black-Scholes option valuation model with the assumptions of a risk-free rate of 2.28%, a volatility factor of 71.83%, a dividend yield of 0%, and an expected life of 5.07 years. The incremental compensation cost resulting from the modification and the remaining unrecognized compensation expense from the original award are being recognized ratably over the three-year vesting period. The Company recorded expense of $0.1 million and $0.2 million for the three and nine months ended September 30, 2010, respectively, related to these options. The Company recorded expense of $37,000 and $0.2 million for the three and nine months ended September 30, 2009, respectively, related to these options.

Employee Stock Purchase Plan

As of September 30, 2010, 1,300,000 shares of our common stock are reserved for issuance under the Company’s Employee Stock Purchase Plan (“ESPP”). Each offering under the ESPP is for a three-month period. Commencing with the offering period beginning June 1, 2010, the purchase price of the stock issued under the ESPP will be equal to 85% of the lower of the fair market value of a share of common stock on the first day of the offering or on the final day of the offering period. For the three and nine months ended September 30, 2010, the Company recorded $4,000 and $8,000, respectively, of expense related to the ESPP. There was no expense recorded during the three or nine months ended September 30, 2009 related to the ESPP.

9. Income Taxes

Provision for income tax of $0.3 million and $0.2 million for the three months ended September 30, 2010 and 2009, respectively, and $0.7 million and $0.5 million for the nine months ended September 30, 2010 and 2009, respectively, related to the Company’s foreign operations in China. The Company’s statutory tax rate in China was 20% in 2009 and is 22% for 2010. The Company did not provide for U.S. income taxes on undistributed earnings of its foreign operations that are intended to be permanently reinvested in the foreign operations.

10. Other Corporate Matters

On August 5, 2010, SciClone was contacted by the United States Securities and Exchange Commission (“SEC”) and advised that the SEC has initiated a formal, non-public investigation of SciClone, and the SEC issued a subpoena to SciClone requesting a variety of documents and other information. The subpoena requests documents relating to a range of matters including, but not limited to, potential payments or transfers of anything of value to regulators and government-owned entities in China, bids or contracts with state or government-owned entities in China, any joint venture partner, intermediary or local agent of the Company in China, the Company’s ethics and anti-corruption policies, training, and audits, and certain company financial and other disclosures. On August 6, 2010, the Company received a letter from the United States Department of Justice (“DOJ”) indicating that the DOJ was investigating Foreign Corrupt Practices Act (“FCPA”) issues in the pharmaceutical industry generally, and that the DOJ had information about the Company’s practices suggesting possible violations. The Company intends to cooperate fully with the SEC and DOJ in the conduct of their investigations.

In response to these matters, the Company’s board of directors has appointed a special committee of independent directors. Based on an initial review, the special committee has decided to undertake an independent investigation as to matters reflected in and arising from the SEC and DOJ investigations including, but not limited to, certain sales and marketing matters in China, in order to evaluate whether any violation of the FCPA or other laws occurred as to such matters.

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The investigation is in process and no conclusions have been reached, however if the investigation results in a determination that a violation occurred or may have occurred, the additional information resulting from such investigation or the determinations made in such investigation may indicate that the Company’s internal controls were not effective. In addition, the Company may determine based upon the results of such investigation that changes in internal controls are appropriate even if a violation did not occur. Independent of the outcome of the investigation, the Company has determined to undertake a further review of its internal controls to consider whether it will implement additional internal controls or modifications of its internal controls.

Following the Company’s announcement of these investigations, purported class actions naming SciClone and certain of its officers as defendants were filed and derivate lawsuits purportedly on behalf of the Company were filed naming certain of its officers and directors as defendants. See Item 1, “Legal Proceedings.”

Based on the information obtained to date, the Company has determined that any potential liability that may result is not probable or cannot be reasonably estimated and therefore no accrual was made related to these matters in its unaudited condensed consolidated financial statements as of September 30, 2010.

11. Subsequent Events

On October 1, 2010, the Company’s subsidiaries, SciClone Pharmaceuticals International Ltd. and SciClone Pharmaceuticals International China Holding Ltd. as borrowers, terminated the existing $6 million Credit Facility with Silicon Valley Bank (“SVB”) and entered into a $15 million loan and security agreement with SVB (“the Debt Financing Facility”). SciClone Pharmaceuticals, Inc. is the guarantor of the Debt Financing Facility. The Debt Financing Facility bears interest on borrowed funds at SVB’s prime rate plus 1.25% on outstanding balances and is secured by a first priority secured interest in all of the Company’s assets, including intellectual property in an event of default. The Company is required to meet certain financial covenants, including minimum liquidity, as defined, and is subject to certain minimum fees and interest payments. The Company is also required to meet certain operating covenants that limit its ability to incur liabilities, create liens, make capital expenditures, pay dividends or distributions, make investments, and dispose of assets. The Debt Financing Facility expires October 1, 2012, and upon termination all amounts borrowed must be repaid in full. There have been no draws made on the Debt Financing Facility.

In November 2010, the Company was awarded a total of $978,000 in non-taxable grants as part of the U.S. Department of Treasury’s Therapeutic Discovery Project Program related to its research and development activities in SCV-07 and ZADAXIN.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on our current expectations, estimates and projections about our business, industry, management’s beliefs and certain assumptions made by us. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe” or similar expressions are intended to identify forward-looking statements including those statements we make regarding our future financial results; anticipated product sales; the sufficiency of our resources to complete clinical trials and other new product development initiatives; government regulatory actions that may affect product reimbursement, product pricing or otherwise affect the scope of our sales and marketing; the timing and outcome of clinical trials; the timing of completion of therapy and observation for our clinical trials; ZADAXIN^®’s ability to complement existing therapies; prospects for ZADAXIN and our plans for its enhancement and commercialization; future size of the worldwide hepatitis B virus (“HBV”) and hepatitis C virus (“HCV”) and other markets; research and development and other expense levels; the ability of our suppliers to continue financially viable production of our products; cash and other asset levels; the allocation of financial resources to certain trials and programs, and expenses related to litigation and regulatory investigations. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors including, but not limited to, those described under the caption “Risk Factors” in this Quarterly Report on Form 10-Q. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Overview

SciClone Pharmaceuticals (NASDAQ: SCLN) is a revenue-generating, global specialty pharmaceutical company with a substantial international business, based primarily in the People’s Republic of China (“China”), and with a product portfolio of novel therapies for cancer and infectious diseases. Our strategy is focused on continuing international sales growth, a cost-containing clinical development strategy, and overall expense management. ZADAXIN, our brand of thymalfasin or thymosin alpha 1, has regulatory approval in over 30 countries for the treatment of HBV and HCV, certain cancers and as a vaccine adjuvant. All of our revenues are derived from sales of ZADAXIN, substantially all of which is sold in China. As our approval in China is an import license, all sales are made to licensed importers, and they are also our primary distributors in China. Substantially all our sales are made to two such importers/distributors. We have a sales force of over 200 representatives in China and our increases in sales are due in part to sales force expansion and further market penetration in China. To date, we have been able to maintain our gross margin in part due to relatively stable or even decreasing costs of sales, and in part due to maintaining a relatively stable sales price. We anticipate that gross margins will remain in the historical range, however prices in China are subject to regulation, and are currently under review by regulatory authorities, and if a substantial reduction in the sale price to hospitals occurred our gross margins would be substantially reduced. We believe our current cash and investment position and the gross profit from our product sales provide the financial resources to execute on our strategy for continued growth in our international business and for development of our pipeline of late-stage product candidates.

We plan to expand our commercial operations with the goal of becoming a significant pharmaceutical company in China’s rapidly growing pharmaceutical market. A key part of our strategy is to leverage our decade of experience in China and to grow our international business by adding commercial stage or near term commercial stage products to our portfolio. We believe we are well-positioned to in-license additional therapeutics for our international business, in part because of our opportunity to commercialize these products utilizing our well established sales and marketing organization in China. Furthermore, our international growth strategy may include additional partnerships and merger and acquisition transactions for synergistic, commercially attractive products.

We have successfully in-licensed two products that are part of this international commercial growth strategy, DC Bead^® and ondansetron RapidFilm^®.

Our DC Bead product candidate is a novel treatment for advanced liver cancer which is currently approved in approximately 40 countries worldwide, including Europe and the U.S. We have commercialization rights for this product in China. We commenced a small local registration trial in the first quarter of 2010, which is expected to enroll approximately 40 advanced liver cancer patients at several liver cancer treatment centers. The primary endpoint is safety and the secondary endpoint is efficacy, as measured by tumor response. If the trial results are positive, we believe we may receive regulatory approval for DC Bead in 2011.

Our second in-licensed product candidate as part of this international commercial growth strategy is ondansetron RapidFilm. This product is an oral thin film formulation of ondansetron, a serotonin 5-HT3 receptor antagonist commonly used to treat and prevent nausea and vomiting caused by chemotherapy, radiotherapy and surgery. In March 2010, we announced that BioAlliance Pharma had received European Union (“EU”) approval of ondansetron RapidFilm. BioAlliance

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Pharma holds all European rights to ondansetron RapidFilm and was granted regulatory approval under the EU decentralized procedure in 16 major EU countries. We have commercialization rights for this product candidate in China including Hong Kong and Macau, and Vietnam, and we plan to file a clinical trial application as part of the product registration process around the end of the year.

Outside of China, SciClone’s clinical development strategy is to focus on driving cost-efficient phase 1 and 2 development of promising compounds while seeking development partners for more costly phase 3 trials, allowing us to achieve the potential upside of our portfolio of drug candidates. Our portfolio of product candidates for cancer and infectious diseases includes SCV-07 and thymalfasin. SCV-07, a small molecule synthetic peptide with immunomodulating properties, is being developed for attenuating oral mucositis in subjects with head and neck cancer receiving concurrent chemotherapy and radiotherapy, and for the treatment of HCV.

Oral mucositis (“OM”) is a common, painful, debilitating complication of cancer treatment, and we estimate that total medical costs for the treatment of oral mucositis may reach around $4.2 billion in the U.S. and $10 billion worldwide in 2010. In May 2010, we announced further top-line results from our phase 2a proof of concept clinical trial of SCV-07 to modify the course of oral mucositis in patients with head and neck cancer receiving chemoradiotherapy regimens.

This phase 2a study showed a signal towards delay to onset of severe oral mucositis, the study’s primary endpoint, in the higher dose group. The incidence of severe OM after 5 weeks of chemoradiation was 30% lower in the patients in the high dose treatment arm (0.1 mg/kg; 17 patients) compared to the 20 patients who received placebo (29% vs. 42%). A post hoc data analysis of ulcerative mucositis (WHO grades 2-4), a major cause of morbidity associated with OM, was also conducted. The high dose of SCV-07 delayed the onset of any ulcerative mucositis in 24% of patients at doses of radiation up to 50Gy (after approximately 5 weeks of treatment) while 100% of patients in the placebo group suffered from ulcerative mucositis at 35Gy (after approximately 3.5 weeks of treatment). Supportive of these findings, the high dose SCV-07 group also showed improvement over placebo for exploratory endpoints, including the use of gastric tube feedings, unplanned office or emergency room visits, and breaks in planned course of radiation therapy of one week or longer.

The incidence of severe OM after 5 weeks of chemoradiation was 50% higher in the patients in the low-dose treatment arm (0.02 mg/kg; 20 patients) compared to the 20 patients who received placebo (63% vs. 42%). However, the post hoc data analysis of ulcerative mucositis showed that the low dose of SCV-07 delayed the onset of any ulcerative mucositis in 5% of patients at doses of radiation up to 50Gy compared to 100% of patients in the placebo group who suffered from ulcerative mucositis at 35Gy. Regarding exploratory endpoints, the low dose group showed similar results to the placebo group. Importantly, both doses of SCV-07 were shown to be safe and well tolerated with no drug-related serious adverse events reported in either arm.

In September 2010, we announced that researchers have identified two unique gene clusters that were associated with subjects who responded to treatment in our phase 2a study. We believe that the discovery of these gene clusters may assist in providing the framework for effectively identifying those patients most likely to respond to SCV-07 in future clinical trials based on their individual genomic profile or gene signature.

Based on the findings from the phase 2a study and completed discussions with the U.S. Food and Drug Administration, we are planning to initiate a phase 2b study in late 2010 or early 2011. As compared to the phase 2a trial, the phase 2b study design is expected to include higher doses of SCV-07 and be adequately powered to demonstrate statistical significance. Additionally, we intend to continue to investigate the role of specific genetic profiles on patient response to SCV-07, as well as the potential link between cytokine activity and SCV-07’s sub-cellular mechanism of action.

The second component of the SCV-07 clinical development program is for the treatment of HCV. This multicenter, multidose, open-label phase 2b study is designed to evaluate the safety and immunomodulatory effects of SCV-07 as a monotherapy or in combination with ribavirin in non–cirrhotic patients with genotype 1 chronic HCV who have relapsed after at least 44 weeks of treatment with pegylated interferon and ribavirin. The study, which monitors biomarkers of immune activation and HCV viral load dynamics, includes two treatment cohorts of 20 patients each who receive SCV-07 at a dose of either 0.1 mg/kg or 1.0 mg/kg. The treatment period is approximately eight weeks long, including four weeks of SCV-07 monotherapy followed by four weeks of SCV-07 in combination with ribavirin. We expect to report top-line results in the fourth quarter of 2010. During our previous phase 2a clinical trial of SCV-07 designed to evaluate the effect of SCV-07 on HCV viral load, as well as on other measures of immune response, SCV-07 demonstrated activity in some treated patients in the higher dosage groups, and the decrease in viral load in these patients was accompanied by an increase in a biomarker which is usually correlated with an immunological response against HCV. Additionally, SCV-07 was shown to be generally safe and well-tolerated with no dose-limiting toxicities or serious adverse events reported.

We continue to seek development opportunities with ZADAXIN (“thymalfasin”) focused on vaccine enhancement. In June 2010, we and our partner, Sigma-Tau Finanziaria S.p.A., announced final results from a clinical study evaluating the potential of ZADAXIN (thymalfasin) to enhance the immune response. ZADAXIN administration given with the MF59 adjuvanted H1N1 influenza monovalent vaccine, Focetria^® from Novartis, led to a statistically significant increase in the

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percentage of subjects who seroconverted, when evaluated at 21 days after vaccination, compared with those who received the H1N1 vaccine alone; and at 42 days after vaccination the improvement in titers seen in ZADAXIN-treated patients was maintained. When evaluated at 84 and 168 days after vaccination, the seroconversion rates were similar for patients receiving ZADAXIN and those receiving vaccine alone. The study was conducted in an immunocompromised population of patients with end-stage renal disease on chronic hemodialysis. These data indicate that the enhancement effect of ZADAXIN, while significantly higher in the critical first six weeks following vaccination, was reduced at later time points and no longer significantly different compared to the vaccine alone. Based on the positive study results and potential applications to enhance vaccines targeting other types of infections and diseases, including cancer, we plan to continue discussions with bio-defense agencies and related groups to determine which vaccines might benefit most from enhancement with ZADAXIN.

The United States Securities and Exchange Commission (“SEC”) and the United States Department of Justice (“DOJ”) are each conducting formal investigations of us regarding a range of matters including the possibility of violations of the Foreign Corrupt Practices Act (“FCPA”). In response to these matters, our board of directors has appointed a special committee of independent directors. Based on an initial review, the special committee has decided to undertake an independent investigation as to matters reflected in and arising from the SEC and DOJ investigations including, but not limited to, certain sales and marketing matters in China, in order to evaluate whether any violation of the FCPA or other laws occurred as to such matters. The investigation is in process and no conclusions have been reached, however if the investigation results in a determination that a violation occurred or may have occurred, the additional information resulting from such investigation or the determinations made in such investigation may indicate that our internal controls were not effective. In addition, we may determine based upon the results of such investigation that changes in our internal controls are appropriate even if a violation did not occur. Independent of the outcome of the investigation, we have determined to undertake a further review of our internal controls to consider whether we will implement additional internal controls or modifications of our internal controls. Following our announcement of the SEC and DOJ investigations, purported class actions naming SciClone and certain of its officers as defendants were filed and derivate lawsuits purportedly on behalf of the Company were filed naming certain of its officers and directors as defendants. In addition, the board of directors has received a demand from a purported stockholder demanding that the board of directors take actions to remedy breaches of fiduciary duties by the directors and certain officers relating to alleged violations of the FCPA and securities laws. We cannot predict the outcome of these matters, but we anticipate that we will incur substantial expenses in the course of the investigations, and in connection with current or future litigation. If it is determined that sales or marketing activities have occurred that violate, or may have violated, the FCPA or other laws, our future operating results could be adversely affected. In addition, we could incur additional expenses related to fines, or to remediative measures including if we determine that our internal controls or disclosure controls are not effective.

We believe our cash and investments as of September 30, 2010 and ongoing revenue generating business operations will be sufficient to support our current operating plan for at least the next 12 months. Our results may fluctuate from quarter to quarter and we may report quarterly losses in the future.

Recent Accounting Guidance

In January 2010, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. The ASU requires new disclosures about significant transfers in and out of Levels 1 and 2 fair value measurements and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 fair value measurements. The ASU also clarifies existing disclosure requirements regarding inputs and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities for which separate fair value measurements should be disclosed. We adopted ASU 2010-06 at the beginning of fiscal 2010. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements.

Critical Accounting Estimates and Assumptions

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgments, estimates and assumptions in the preparation of our condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. We believe there have been no significant changes in our critical accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2009.

Results of Operations

Product Sales and Gross Margin:

The following tables summarize the period over period changes in our product sales(in thousands), in our cost of product sales(in thousands) and our product gross margin:

	Three Months Ended September 30,						Change			Nine Months Ended September 30,						Change
	2010			2009						2010			2009
Product Sales	$	22,840		$	17,240			32	%	$	61,496		$	54,280			13	%
Cost of Product Sales		3,146			3,098			2	%		9,445			9,185			3	%
Product Gross Margin		86.2	%		82.0	%					84.6	%		83.1	%

Product sales were $22.8 million and $61.5 million for the three- and nine-months ended September 30, 2010, respectively, compared to $17.2 million and $54.3 million for the corresponding periods in 2009. Product sales to China were $22.1 million and $59.4 million, or 97% of sales, for the three- and nine-month periods ended September 30, 2010, compared to $16.7 million and $52.5 million, or 97% of sales, for the corresponding periods in 2009. Our overall revenue growth for the three- and nine-month periods ended September 30, 2010, compared to the corresponding period in 2009, was attributable to an increase in the quantity of ZADAXIN sold primarily due to further market penetration in China. All product sales in each

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period were derived from sales of ZADAXIN. For the three-month period ended September 30, 2010, sales to two importing agents in China accounted for approximately 64% and 33% of our product sales. For the three-month period ended September 30, 2009, sales to two importing agents in China accounted for approximately 61% and 29% of our product sales. For the nine-month period ended September 30, 2010, sales to two importing agents in China accounted for approximately 66% and 20% of our product sales. For the nine-month period ended September 30, 2009, sales to two importing agents in China accounted for approximately 64% and 31% of our product sales. The two largest customers were the same importing agents in each of these periods. Our experience with those importers has been good and we anticipate that we will continue to sell a majority of our product to them.

Our product gross margin for the three- and nine- months ended September 30, 2010 was 86.2% and 84.6%, respectively, compared to 82.0% and 83.1% for the same periods in 2009. The higher product gross margin for the three- and nine- months ended September 30, 2010 compared to the same periods in 2009 was due primarily to lower per vial production costs mainly as a result of increased production. We expect cost of product sales and gross margins to fluctuate from period to period depending upon the level of sales and price of ZADAXIN, the absorption of product-related fixed costs, currency exchange fluctuations, and any charges associated with excess or expiring finished product inventory. There are discussions in China that government reimbursement levels in China for listed drugs could be reviewed in the next three to six months, and that ZADAXIN’s list price could be included in such a review. In similar situations where drugs have been included on government reimbursement lists in China in the past, the price reductions from list price were usually between 5 and 15 percent, although we can’t predict what reduction, if any, will be imposed.

Research and Development (“R&D”):

The following tables summarize the period over period changes in our R&D expenses(in thousands):

	Three Months  Ended September 30,				Change			Nine Months Ended September 30,				Change
	2010		2009					2010		2009
Research and Development	$	2,618	$	4,101		-36	%	$	7,700	$	12,498		-38	%

R&D expenses for the three months ended September 30, 2010 decreased by $1.5 million, or 36%, compared to the same period in 2009. R&D expenses for the nine months ended September 30, 2010 decreased by $4.8 million, or 38%, compared to the same period in 2009. The decreases in the three- and nine-month periods were primarily related to the timing of clinical trial-related expenses, including the completion of enrollment of patients in our phase 2a clinical trial of SCV-07 for the delay to onset of severe oral mucositis in the first quarter of 2010 and the discontinuation of the RP101 clinical trial for the treatment of pancreatic cancer last year. These decreases were partially offset by increased expenses related to our SCV-07 phase 2b clinical trial for the treatment of HCV.

The major components of R&D expenses include salaries and other personnel-related expenses, including associated stock-based compensation, facility-related expenses, depreciation of facilities and equipment, license-related fees, services performed by clinical research organizations and research institutions and other outside service providers, and the sharing of certain costs for the development of ZADAXIN by our partner, Sigma-Tau.

The initiation, continuation, and completion of our current clinical development programs has had and is expected to continue to have a significant effect on our research and development expenses. Actual costs incurred in future periods will vary depending in particular upon timeline and design of further clinical trials and final decisions regarding the timing and expense-sharing arrangements for these trials, though we expect our research and development expenses to increase significantly for the remainder of the year in preparation for our SCV-07 phase 2b trial in oral mucositis which we plan to initiate in late 2010 or early 2011. We are evaluating opportunities to acquire or in-license the marketing rights to proprietary products primarily in China, which may result in increased research and development expenses due to license fee payments or other expenses related to in-licensing and development of new products in the future.

Sales and Marketing:

The following tables summarize the period over period changes in our sales and marketing expenses(in thousands):

	Three Months  Ended September 30,				Change			Nine Months Ended September 30,				Change
	2010		2009					2010		2009
Sales and Marketing	$	5,445	$	4,625		18	%	$	15,996	$	13,523		18	%

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Sales and marketing expenses for the three months ended September 30, 2010 increased by $0.8 million, or 18%, compared to the same period in 2009, primarily related to increased conferences and local training seminars associated with our sales efforts for ZADAXIN in the 2010 period. Sales and marketing expenses for the nine months ended September 30, 2010 increased by $2.5 million, or 18%, compared to the same period in 2009, primarily related to increased conferences and local training seminars and an increase in employee-related costs associated with growth in our sales force and our sales efforts for ZADAXIN in the 2010 period. We expect sales and marketing expenses to increase for the remainder of 2010 compared to 2009, related to our expanding sales efforts associated with the growth of our international business, primarily in China.

General and Administrative:

The following tables summarize the period over period changes in our general and administrative expenses(in thousands):

	Three Months  Ended September 30,				Change			Nine Months Ended September 30,				Change
	2010		2009					2010		2009
General and Administrative	$	3,820	$	3,137		22	%	$	10,403	$	9,076		15	%

General and administrative expenses for the three months ended September 30, 2010 increased by $0.7 million, or 22%, compared to the same period in 2009, and general and administrative expenses for the nine months ended September 30, 2010 increased by $1.3 million, or 15%, compared to the same period in 2009. Increases for both of the 2010 periods, compared to the same periods in 2009, primarily resulted from higher corporate and legal expenses related to business development efforts for China and in connection with the SEC and DOJ investigations announced in August 2010. We expect our general and administrative expenses will increase for the remainder of 2010 compared to 2009, related to our expanding operations in China, responding to the SEC and DOJ investigations and shareholder litigations that have been, or may be, filed following our announcement of those investigations, and the conduct of an independent investigation by a special committee of our board of directors.

Other Income:

In November 2010, we were awarded a total of $978,000 in non-taxable grants as part of the U.S. Department of Treasury’s Therapeutic Discovery Project Program related to our research and development activities in SCV-07 and ZADAXIN. We expect other income will increase for the fourth quarter of 2010, compared to 2009, related to this grant award.

Provision for Income Tax:

Provision for income tax was $0.3 million and $0.7 million for the three- and nine-month periods ended September 30, 2010, respectively, compared to $0.2 million and $0.5 million for the three- and nine-month periods ended September 30, 2009, and related to our foreign operations in China. The increases in the 2010 periods compared to 2009 were due to increased operating activities in China and an increased statutory tax rate in China from 20% in 2009 to 22% in 2010. We expect these increases to continue for the remainder of 2010.

Liquidity and Capital Resources

Days’ sales outstanding in accounts receivable, using the average receivables method, were 94 and 93 days as of September 30, 2010 and 2009, respectively. The majority of our sales are to importers in China where our accounts receivable collections have standard credit terms ranging from 90 to 180 days.

The following tables summarize our cash and investments and our cash flow activities as of the end of, and for each of, the periods presented(in thousands):

	As of September 30, 2010		As of December 31, 2009
Cash and investments	$	53,365	$	31,819

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	Nine Months Ended September 30,
	2010			2009
Cash provided by (used in):
Operating activities	$	20,311		$	2,777
Investing activities	$	(5,451	)	$	(126	)
Financing activities	$	1,108		$	2,600

At September 30, 2010 and December 31, 2009, we had $53.4 million and $31.8 million, respectively, in cash and investments. Net cash provided by operating activities was $20.3 million for the nine months ended September 30, 2010 and primarily reflected the net income for the period, adjusted for non-cash items such as stock-based compensation expense, depreciation and amortization expense and changes in operating assets and liabilities. Such changes included a decrease in inventory levels by $2.8 million to fulfill sales demands and a $0.8 million decrease in accounts payable.

Net cash provided by operating activities was $2.8 million for the nine months ended September 30, 2009 and primarily reflected the net income for the period adjusted for non-cash items such as stock-based compensation expense, depreciation and amortization expense and changes in operating assets and liabilities. Such changes included an increase in accounts receivable of $5.3 million due to an increase in sales and normal fluctuations in the timing of payments received from customers, an increase in inventory levels by $2.5 million to address potential increased demands, and a $0.9 million net decrease in accrued expenses and accounts payable.

Net cash used in investing activities was $5.5 million and $0.1 million for the nine months ended September 30, 2010 and 2009, respectively. Cash used in investing activities was primarily related to the purchase of available-for-sale investments, net of proceeds from the sale or maturity of investments.

Net cash provided by financing activities of $1.1 million and $2.6 million for the nine months ended September 30, 2010 and 2009, respectively, consisted of proceeds from the exercise of stock options made under our stock award plans and the issuance of stock under our employee stock purchase plan.

On October 1, 2010, our subsidiaries, SciClone Pharmaceuticals International Ltd. and SciClone Pharmaceuticals International China Holding Ltd. as borrowers, terminated the existing $6 million line-of-credit facility with Silicon Valley Bank (“SVB”) and entered into a new loan and security agreement with SVB (“the Debt Financing Facility”) for a debt financing facility up to $15 million for a term of 24 months. SciClone Pharmaceuticals, Inc. is the guarantor of the facility. The Debt Financing Facility bears interest on borrowed funds at the bank’s prime rate plus 1.25% on outstanding balances and is secured by a first priority secured interest in all of our assets, including intellectual property in an event of default. We are required to meet certain financial covenants, including minimum liquidity, as defined, and are subject to certain minimum fees and interest payments. We are also required to meet certain operating covenants that limit our ability to incur liabilities, create liens, make capital expenditures, pay dividends or distributions, make investments, and dispose of assets. The Debt Financing Facility expires October 1, 2012, and upon termination all amounts borrowed must be repaid in full.

In May 2009, we filed a shelf registration statement on Form S-3 with the SEC under which we may offer and sell up to $50.0 million of our securities, assuming we continue to meet the SEC’s eligibility requirements for primary offerings on Form S-3.

We believe that our existing cash and investments and ongoing revenue generating business operations will be sufficient to support our current operating plan for at least the next 12 months. We have no current commitments to offer and sell any securities that may be offered or sold pursuant to our registration statement. To the extent that we raise additional capital by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may subject us to restrictive covenants and significant interest costs. To the extent that we raise additional funds through collaboration and licensing arrangements, we would be required to relinquish some rights to our technologies, product candidates or marketing territories. Additional financing or collaboration and licensing arrangements may not be available when needed either at all or, on favorable terms.

We intend to continue to explore alternatives for financing to provide additional flexibility in managing our operations, in-licensing or acquiring new products, particularly in China, and funding our clinical trials. The unavailability or the inopportune timing of any financing could prevent or delay our long-term product development and commercialization programs, either of which could hurt our business. We cannot assure you that funds from financings, if any, will be sufficient to conduct and complete further clinical trials or to acquire or in-license additional products. The need, timing and amount of any such financing would depend upon numerous factors, including the status of the pending regulatory investigations and pending litigations, the level and price of ZADAXIN sales, the timing and amount of manufacturing costs related to ZADAXIN, the availability of complementary products, technologies and businesses, the initiation and continuation of

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preclinical and clinical trials and testing, the timing of regulatory approvals, developments in relationships with existing or future collaborative parties, the status of competitive products, and various alternatives for financing. We have not determined the timing or structure of any transaction.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in money market funds, certificates of deposit, term deposits, U.S. Treasury, or government agency notes. All of our investments mature within one year from date of purchase except for our Italian state bonds which mature in 2013. Our investment securities may be subject to interest rate risk and could decrease in value if market interest rates rise. To minimize this risk, we primarily hold securities that are short-term in duration and maintain an average maturity of less than one year. We believe that our exposure to interest rate risk is not significant and a 1% movement in market interest rates would not have a significant impact to the total value of our investment portfolio at September 30, 2010.

We do not hold any derivative financial instruments for speculation or trading purposes. Substantially all our sales have been in U.S. dollars. Our purchases with contract manufacturers are denominated in U.S. dollars and euros and costs of our marketing efforts in China are paid in local currency. In addition, we have certain cash balances and other assets denominated in euros. As a result, we are exposed to foreign currency rate fluctuations, and we do not hedge against the risk associated with such fluctuations. Consequently, changes in exchange rates could result in material exchange losses and could unpredictably, materially and adversely affect our operating results and stock price. Such losses have not been significant to date.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Controls

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Act of 1934, as amended) that was identified in connection with the evaluation thereof that occurred during the third quarter of 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Subsequent to the end of the quarter, and based on an initial review, a special committee of our board of directors determined to undertake an independent investigation as to matters reflected in and arising from the SEC and DOJ investigations, including but not limited to, certain sales and marketing matters in China in order to evaluate whether any violation of the FCPA or other laws occurred as to such matters. The investigation is in process and no conclusions have been reached, however if the investigation results in a determination that a violation occurred or may have occurred, the additional information resulting from such investigation or the determinations made in such investigation may indicate that our internal controls were not effective. In addition, we may determine based upon the results of such investigation that changes in our internal controls are appropriate even if a violation did not occur. Independent of the outcome of the investigation, we have determined to undertake a further review of our internal controls to consider whether we will implement additional internal controls or modifications of our internal controls.

Limitations of the Effectiveness of Internal Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of inherent limitations in any control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. We are continuously seeking to improve the efficiency and effectiveness of our operations and of our internal controls. This results in refinements to processes throughout our organization.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In August 2010, a purported securities class action lawsuit was filed in the United States District Court for the Northern District of California, naming us and certain of our officers as defendants. In September 2010, a second purported securities class action lawsuit was filed in the same court. The lawsuits allege violations of the Securities Exchange Act of 1934, as amended, in connection with allegedly false, misleading and incomplete statements issued by the defendants related to potential violations of the Foreign Corrupt Practices Act, our reported revenues, income and sales growth, and marketing and sales activities. Plaintiffs seek damages, an award of their costs and attorney’s fees, and injunctive and/or equitable relief on behalf of a purported class of stockholders who purchased our common stock during the period between May 11, 2009 and August 10, 2010. On October 27, 2010, the securities class action lawsuits were consolidated under the captionIn re SciClone Pharmaceuticals, Inc. Securities Litigation, Case No. CV 10-03584-JW, and the court appointed lead plaintiffs. Plaintiffs must file an amended consolidated complaint on or before November 29, 2010. Our motion to dismiss the amended consolidated complaint, if made, must be filed by January 10, 2011. A hearing on our motion to dismiss has been scheduled for March 21, 2011.

In September 2010, three derivative lawsuits were filed purportedly on behalf of the Company in California Superior Court for the County of San Mateo naming certain of our officers and directors as defendants. The lawsuits assert claims for breach of fiduciary duty, abuse of control, unjust enrichment and corporate waste based on alleged violations of the Foreign Corrupt Practices Act. Plaintiffs seek damages, restitution and injunctive and/or equitable relief purportedly on behalf of the Company, and an award of their costs and attorney’s fees. We expect the derivative lawsuits may be consolidated and we anticipate that we will not respond to the complaints until after one of the complaints has been designated as the operative complaint, or until an amended consolidated complaint is filed.

While Company management believes that we have meritorious defenses and intend to defend these lawsuits vigorously, these lawsuits and any other related lawsuits are subject to inherent uncertainties, and the actual cost will depend upon many unknown factors. The outcome of the litigation is necessarily uncertain, we could be forced to expend significant resources in the defense of this lawsuit and we may not prevail.

On November 3, 2010 the board of directors received a letter from a purported stockholder demanding that the board of directors take actions to remedy alleged breaches of fiduciary duties by the directors and certain officers relating to alleged violations of the FCPA and other securities laws. The board has not yet responded to the letter.

Item 1A. Risk Factors

Our risk factors are set forth below in their entirety. The list is not exhaustive and you should carefully consider these risks and uncertainties before investing in our common stock. We have marked with an asterisk (*) those risk factors below that reflect substantive changes from the risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2010.

Our stock price may be volatile, and an investment in our stock could suffer a decline in value. *

We have a history of operating losses and an accumulated deficit. Although we reported net income of $11.9 million for the year ended December 31, 2009 and $17.3 million for the nine months ended September 30, 2010, we have experienced significant operating losses in the past, and as of September 30, 2010, we had an accumulated deficit of approximately $147.6 million. If our operating expenses were to increase or if we were not able to increase or sustain revenue, we may not achieve profitability over the next 12 months.

The market price of our common stock has experienced, and may continue to experience, substantial volatility due to many factors, some of which we have no control over, including:

• developments related to the pending United States Securities and Exchange Commission (“SEC”) and United States Department of Justice (“DOJ”) investigations, our efforts to cooperate with the investigations and events related to pending litigations;

• government regulatory action affecting our Company or our drug products or our competitors’ company or their drug products in China, the United States and other foreign countries, including the effect of any change in the governmentally permitted maximum listed price for ZADAXIN;

• actual or anticipated fluctuations in our quarterly operating results;

• progress and results of clinical trials;

• progress of thymalfasin and SCV-07 through the regulatory process, especially regulatory actions and the adequacy of clinical data and documentation for regulatory purposes;

• finding a partner for late-stage trials of our clinical development candidates;

• progress of DC Bead^® and ondansetron RapidFilm^® through required clinical studies and the regulatory process, especially regulatory actions and the adequacy of clinical data and documentation for regulatory purposes in China and Vietnam;

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• timing and achievement of milestones;

• changes in our agreements or relationships with collaborative partners;

• announcements of technological innovations or new products by us or our competitors;

• announcement and completion of corporate acquisition, merger, licensing or marketing arrangements, or sales of assets;

• developments or disputes concerning patent or proprietary rights;

• changes in the composition of our management team or board of directors;

• changes in company assessments or financial estimates by securities analysts;

• changes in assessments of our internal controls over financial reporting;

• general stock market conditions and fluctuations for the emerging growth and pharmaceutical market sectors;

• economic and political conditions in the United States or abroad; and

• broad financial market fluctuations in the United States, Europe or Asia.

Our revenue is dependent on our sale of ZADAXIN in China, and if we experience difficulties in our foreign sales efforts, our operating results and financial condition will be harmed. *

Our product revenue is highly dependent on the sale of ZADAXIN in China. If we experience difficulties in our foreign sales efforts in China, our business will suffer and our operating results and financial condition will be harmed. For both the nine months ended September 30, 2010 and 2009, approximately 97% of our ZADAXIN sales were to customers in China. Sales of ZADAXIN in China may be limited due to the low average personal income, lack of patient cost reimbursement, poorly developed infrastructure and competition from other products, including generics. ZADAXIN sales growth in recent years has benefited from the rapidly growing Chinese economy and growing personal disposable income. Sales of ZADAXIN in China could be adversely affected by a slowing or downturn of the Chinese economy.

In China, ZADAXIN is approved only for the treatment of hepatitis B virus (“HBV”) and as a vaccine adjuvant. We face competition from pharmaceutical companies who are aggressively marketing competing products for the treatment of HBV and other indications where we believe ZADAXIN may be used on an off-label basis. In addition, several local companies are selling lower-priced, locally manufactured generic thymosin, which is a competitive product and is selling in substantial and increasing quantities. While generic products outsell ZADAXIN in unit volumes, we have been able to maintain an advantage through the reputation of our imported, branded product. We expect such competition to continue and there could be a negative impact on the price and the volume of ZADAXIN sold in China, which would harm our business. Our efforts to in-license or acquire other pharmaceutical products for marketing in China and other markets may be unsuccessful or even if successful may not have a meaningful effect on our dependence on ZADAXIN sales in those markets.

In November 2009, thymosin alpha 1, the generic chemical name for our pharmaceutical product ZADAXIN, was included as a Category B product in the National Reimbursed Drug List and pricing for ZADAXIN on the National Reimbursed Drug List is still being reviewed by the authorities. China regulates pharmaceutical prices and pharmaceutical importation. These regulations may reduce prices for ZADAXIN to levels significantly below those that would prevail in an unregulated market, limit the volume of product which may be imported and sold or place high import duties on the product, any of which may limit the growth of our revenues or cause them to decline. We believe that the Chinese government is increasing its efforts to reduce overall health care costs, including through pricing controls. Individual provinces in China and, in some cases, individual hospitals can and have established pricing requirements for a product to be included on formulary lists. In some cases, these prices have been lower than our distributors have been selling ZADAXIN, in which case we have been removed from formulary lists, which consequently has reduced sales to certain hospitals and could adversely affect our future sales. The Chinese national and provincial governments may regulate our product pricing and the maximum prices for ZADAXIN at the provincial level over the next several years, and potentially at the national level. The process and timing for this is unpredictable. In addition, we are aware that ZADAXIN may be used on an off-label basis, and the Chinese government’s pricing, reimbursement or other actions might reduce such uses. We are working on these regulatory processes as well as on potential changes in our business model depending on potential outcomes. We believe we will be able to successfully manage our business in China through this process, however maximum prices could be set at some time in the future which could adversely affect our results or require substantial changes in our business model which may be difficult to implement.

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We have received regulatory approvals to import and market ZADAXIN in China and to manufacture ZADAXIN and export the product from Italy. In order to continue our sales to China, we need to maintain these approvals. Our license to import ZADAXIN into China needs to be renewed every five years and the next renewal is required in 2013. Although we were successful in obtaining a renewal in 2008, there is no assurance that we will receive renewals in the future when applied for or that the renewals will not be conditioned or limited in ways that limit our ability to sell ZADAXIN in China. Further, our licenses to manufacture and export ZADAXIN from Italy are dependent upon our continuing compliance with regulations in Italy. Our business would be adversely affected if we are not able to maintain these approvals. In order to sell ZADAXIN to the licensed importers in China, our manufacturers must 1) be approved by the Italian Ministry of Health (“AIFA”) and 2) be accepted by the State Food and Drug Administration of China (“SFDA”), the Chinese equivalent to the United States Food and Drug Administration (“FDA”), and we must obtain an Imported Drug License from the SFDA permitting the importation of ZADAXIN into China. The license must be renewed every five years, and if we change manufacturers, these changes must 1) be approved by the AIFA in Italy and 2) be accepted by the SFDA. When we change manufacturers we must obtain a new approval. We are currently in the process of changing manufacturer and if we are not successful in obtaining the necessary approval in a timely manner, our business would be adversely affected. The SFDA, the FDA, AIFA and other regulatory agencies may, and have, changed their internal administrative rules in ways that may delay or complicate the regulatory process. Those changes are not always disclosed or known to us and we may experience unexpected delays or additional costs as a result of such changes.

Our ZADAXIN sales and operations in other parts of China and the world are subject to a number of risks and increasing regulations, including difficulties and delays in obtaining registrations, renewals of registrations, permits, pricing approvals and reimbursement, increasing regulation of product promotion and selling practices, unexpected changes in regulatory requirements and political instability. In addition, during the second quarter of 2009 we experienced a strong upsurge in ZADAXIN sales which we believe was attributable both to the increasing penetration of ZADAXIN within the Chinese market, as well as concerns in China from the H1N1 flu virus. Although we believe that ZADAXIN sales have returned to levels more consistent with our established business, if distributors and hospitals that purchase ZADAXIN stockpile more ZADAXIN than needed for current use, our sales of ZADAXIN may suffer as distributors and hospitals use ZADAXIN already in their inventory before purchasing additional product from us. This could lead to uneven future revenue results for ZADAXIN and in turn materially impact our cash flow and business condition.

We experience other issues with managing foreign sales operations including long payment cycles, potential difficulties in accounts receivable collection and, especially from significant customers, fluctuations in the timing and amount of orders and the adverse effect of any of these issues on our business could be increased due to the concentration of our business with a small number of distributors. Problems with collections from, or sales to, any one of those distributors could materially adversely affect our results. Operations in foreign countries including China also expose us to risks relating to difficulties in enforcing our proprietary rights, currency fluctuations and adverse or deteriorating economic conditions. If we experience problems with obtaining registrations, complying with reimbursement rules or compliance with foreign country or applicable U.S. laws, adverse or mixed outcome of clinical studies anywhere in the world, or if we experience difficulties in payments or intellectual property matters in foreign jurisdictions, or if significant political, economic or regulatory changes occur, our results could be adversely affected. Moreover, our operations throughout the world including China are potentially subject to the laws and regulations of the United States including the Foreign Corrupt Practices Act, in addition to the laws and regulations of the local countries. Regulation in China of the activities in the pharmaceutical industry has increased and may continue to undergo significant and unanticipated changes. A number of companies have faced significant expenses or fines as a result of the increasing regulation of, and enforcement activity regarding, the pharmaceutical industry. We recently received notices of investigations by U.S. government agencies that relate to our operations in China. If we fail to comply with regulations or to carry out controls on our Chinese or other foreign operations in a manner that satisfies all applicable laws, our business would be harmed.

The Chinese government has been engaged in an extensive stimulus program in China over the past year. We believe that the Chinese government is reducing these stimulus programs. We believe these programs have had broad effects across the Chinese economy, and the reduction or withdrawal of these programs could adversely affect spending in numerous ways, including reduction of spending on pharmaceutical products including ZADAXIN.

We face risks related to the potential outcomes of the SEC investigation regarding Foreign Corrupt Practices Act (“FCPA”) compliance and other matters and DOJ investigation regarding FCPA and our own investigation into such matters, including potential penalties, substantial expenses and the use of significant management time and attention, any of which could adversely affect our business. *

        We are subject to a formal, non public investigation by the SEC. In connection with the investigation the SEC issued a subpoena to us requesting documents regarding a range of matters including but not limited to documents relating to potential payments or transfer of anything of value to regulators and government-owned entities in China; documents relating to bids or contracts with state or government-owned entities in China; documents relating to intermediary or local agent of the Company in China; documents regarding the Company’s ethics and anti-corruption policies, training, and audits; and documents relating to certain Company financial and other disclosures made by the Company. The DOJ is currently conducting an investigation of us in connection with compliance with the FCPA, as to which they have advised us that the DOJ has information about the Company’s practices suggesting possible violations. We have been cooperating with, and will continue to cooperate with, the investigations by and inquiries from the SEC and DOJ. In response to these matters, our board of directors has appointed a special committee of independent directors. Based on an initial review, the special committee has decided to undertake an independent

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investigation as to matters reflected in and arising from the SEC and DOJ investigations including, but not limited to, certain sales and marketing matters in China, in order to evaluate whether any violation of the FCPA or other laws occurred as to such matters. We are unable to predict what consequences, if any, that any investigation by any regulatory agency or by our special committee may have on us. These and any other regulatory investigations and our cooperation with them will result in substantial legal and accounting expenses, and could divert management’s attention from other business concerns and harm our business. Any civil or criminal action commenced against us by a regulatory agency could result in administrative orders against us, the imposition of significant penalties and/or fines against us, and/or the imposition of civil or criminal sanctions against certain of our officers, directors and/or employees. The investigations, results of the investigations, or remedial actions we may take, if any, as a result of such investigations, may adversely affect our business in China. If we are subject to an adverse finding resulting from the SEC and DOJ investigations, or from our own independent investigation, we could be required to pay damages or penalties or have other remedies imposed upon us. If it is determined that sales or marketing activities have occurred that violate, or may have violated, the FCPA or other laws, our future operating results could be adversely affected. In addition, we could incur additional expenses related to fines, or to remediative measures including if we determine that our internal controls or disclosure controls are not effective. The period of time necessary to resolve our independent investigation, and the investigation by the DOJ the SEC is uncertain, and these matters could require significant management and financial resources which could otherwise be devoted to the operation of our business.

We have been named as a party to purported stockholder class actions and purported derivative lawsuits, and we may be named in additional litigation, all of which will require significant management time and attention and result in significant legal expenses and may result in an unfavorable outcome which could have a material adverse effect on our business, financial condition, results of operations and cash flows. *

Certain of our officers and directors have been named as nominal defendants in several purported stockholder derivative lawsuits. The lawsuits assert claims for breach of fiduciary duty, abuse of control, unjust enrichment and corporate waste based on alleged violations of the Foreign Corrupt Practices Act. We and certain of our officers have also been named as defendants in two purported class actions lawsuits which allege violations of the Securities Exchange Act of 1934, as amended, in connection with allegedly false, misleading and incomplete statements issued by the defendants related to potential violations of the Foreign Corrupt Practices Act, our reported revenues, income and sales growth, and marketing and sales activities. In addition, our board of directors has received a demand from a purported stockholder demanding that the board of directors take actions to remedy breaches of fiduciary duties by the directors and certain officers relating to alleged violations of the FCPA and securities laws. We cannot predict whether these or other litigations are likely to result in any material recovery by, or expense to, SciClone. We expect to continue to incur legal fees in responding to these lawsuits. The expense of defending such litigation may be significant. The amount of time to resolve this and any additional lawsuits is unpredictable and these actions may divert management’s attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows.

We are at risk of additional securities class action and derivative lawsuits. *

Securities class action litigation has often been brought against a company following a decline in the market price of its securities. We were sued recently after our announcement regarding SEC and DOJ investigations and we and certain of our officers and directors have been named as parties in purported stockholder class actions and derivative lawsuits. We may be named in additional litigation, all of which will require significant management time and attention and result in significant legal expenses and may result in an unfavorable outcome which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We may experience stock price volatility in the future, either related to announcements regarding the SEC and DOJ investigation, our own investigations related thereto or other matters. This risk is especially relevant for us because biotechnology companies have experienced greater than average stock price volatility in recent years. Such litigation could result in additional substantial costs and a diversion of management’s attention and resources, which could harm our business.

Our sales of ZADAXIN may fluctuate due to seasonality of product orders and sales in any quarter may not be indicative of future sales.

Our sales for the quarter ended June 30, 2009 were greatly affected by the demand in China for ZADAXIN which we believe was in connection with Influenza A (H1N1). Similarly, our sales for the quarter ended September 30, 2003 were greatly affected by the demand in China for ZADAXIN in connection with the treatment of Severe Acute Respiratory Syndrome (“SARS”). To date, SARS has not re-emerged, like influenza, as a seasonal public health problem. However, it is not possible to predict what effect, if any, H1N1, SARS, or similar epidemics would have on future sales of ZADAXIN, if they were to emerge. Although we do not market ZADAXIN for use in treating epidemic diseases such as Influenza A (H1N1) or SARS, if ZADAXIN is purchased in connection with outbreaks of seasonal viral contagions, product sales could become more concentrated in certain quarters of the calendar year, quarterly sales levels could fluctuate and sales in any quarter may not be indicative of sales in future periods.

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We may lose market share or otherwise fail to compete effectively in the intensely competitive pharmaceutical industry.

Competition in the pharmaceutical industry in China is intense, and we expect that competition will increase. Our success depends on our ability to compete in this industry, but we cannot assure you that we will be able to successfully compete with our competitors. Increased competitive pressure could lead to intensified price-based competition resulting in lower prices and margins, which would hurt our operating results. We cannot assure you that we will compete successfully against our competitors or that our competitors, or potential competitors, will not develop drugs or other treatments for our targeted indications that will be superior to ours.

We depend on sales in China, and global conditions could negatively affect our operating results or limit our ability to expand our operations outside of China. Changes in China’s political, social and economic environment may affect our financial performance.

A large majority of our sales are in China. Heightened tensions resulting from the current geopolitical conditions in the Middle East, North Korea and elsewhere could worsen, causing disruptions in foreign trade, which would harm our sales. In particular, our commercial product is manufactured in Europe and distributed by us from our operations in Hong Kong. Any disruption of our supply and distribution activities due to geopolitical conditions could decrease our sales and harm our operating results.

With respect to China, our financial performance may be affected by changes in China’s political, social and economic environment. The role of the Chinese central and local governments in the Chinese economy is significant. Chinese policies toward economic liberalization, and laws and policies affecting foreign companies, currency exchange rates and other matters could change, resulting in greater restrictions on our ability to do business in China. Any imposition of surcharges or any increase in Chinese tax rates could hurt our operating results. The Chinese government could revoke, terminate or suspend our license for national security and similar reasons without compensation to us. If the government of China were to take any of these actions, we would be prevented from conducting all or part of our business. Any failure on our part to comply with governmental regulations could result in the loss of our ability to market our products in China.

Because of China’s tiered method of importing and distributing finished pharmaceutical products, our quarterly results may vary substantially from one period to the next. *

China uses a tiered method to import and distribute finished pharmaceutical products. At each port of entry, and prior to moving the product forward to the distributors, government-licensed importing agents must process and evaluate each shipment to determine whether such shipment satisfies China’s quality assurance requirements. In order to efficiently manage this process, the importing agents typically place large, and therefore relatively few, orders within an annual period. Therefore, our sales to an importing agent can vary substantially from quarter to quarter depending on the size and timing of the orders, which has in the past and may in the future cause our quarterly results to fluctuate. We rely on a limited number of importers, in any given quarter, to supply substantially all of our product in China. Because we use a small number of importing agents in China, our receivables from any one importing agent are material, and if we were unable to collect receivables from any importer, our business and cash-flow would be adversely affected. These importers are not obligated to place purchase orders for our product, and if they determined for any reason not to place purchase orders, we would need to seek alternative licensed importers, which could cause short term fluctuations in our business.

The existence of counterfeit pharmaceutical products in China’s pharmaceutical retail market may damage our brand and reputation and have a material adverse effect on our business, financial condition, results of operations and prospects. *

Certain medicine products distributed or sold in China’s pharmaceutical retail market, including those appearing to be our products, may be counterfeit. Counterfeit products are products sold under the same or very similar brand names and/or having a similar appearance to genuine products. Counterfeit products, including counterfeit pharmaceutical products, are a significant problem in China. Such products divert sales from genuine products, often are of lower cost, often are of lower quality (having different ingredients or formulations, for example), and have the potential to damage the reputation for quality and effectiveness of the genuine product. The counterfeit pharmaceutical product regulation control and enforcement system in China is not able to completely eliminate production and sale of counterfeit pharmaceutical products. Any sale of counterfeit products resulting in adverse side effects to consumers may subject us to negative publicity and expenses. It could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may be subject to currency exchange rate fluctuations, which could adversely affect our financial performance. *

Substantially all of our product sales are denominated in U.S. dollars. Fluctuation in the U.S. dollar exchange rate with local currency directly affects the customer’s cost for our product. In particular, a stronger U.S. dollar vis-à-vis the local currency would tend to have an adverse effect on sales and potentially on collection of accounts receivable. China currently

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maintains the value of the renminbi in a narrow currency trading band that may or may not fluctuate based upon government policy. Depending on market conditions and the state of the Chinese economy, China has intervened in the foreign exchange market in the past to prevent significant short-term fluctuations in the renminbi exchange rate, and it could make future adjustments, including moving to a managed float system, with opportunistic interventions. This reserve diversification may negatively impact the United States dollar and U.S. interest rates. A trend to a stronger U.S. dollar would erode margins earned by our Chinese importers and prompt them to ask us to lower our prices. We are subject to currency exchange rate fluctuations as a result of expenses incurred by our foreign operations. In particular, one of our supply arrangements under which we purchase finished products is denominated in euros and costs of our operations in China are paid in local currency. Consequently, changes in exchange rates could unpredictably and adversely affect our operating results and could result in exchange losses. To date, we have not hedged against the risks associated with fluctuations in exchange rates and, therefore, exchange rate fluctuations could have a material adverse impact on our future operating results and stock price.

Our business strategy is dependent on our ability to in-license or otherwise acquire the rights to develop and commercialize products, particularly in China. If we fail to acquire such rights or are unsuccessful in our efforts to develop such products and obtain regulatory approval to market and successfully commercialize them, our business will suffer.

All of our products, including ZADAXIN, the only one for which we have sales revenue, have been in-licensed by us. We do not conduct product discovery and typically have in-licensed our products from third parties who have discovered the products and conducted at least some pre-clinical research on them. We are particularly focused on in-licensing products for the China market and the competition for attractive products to in-license is intense, and we cannot assure you that we will be able to in-license products in the future on acceptable terms, if at all. In addition, we face the risks of developing the in-licensed products and the risks and uncertainties of conducting clinical trials and seeking regulatory approval to market the in-licensed products, all of which require years of effort and the commitment of significant financial resources. Our ability to grow our business requires the development and commercialization of additional products. If we are unable to in-license or acquire products on acceptable terms and successfully develop and commercialize them, our business could be harmed.

We may engage in acquisitions and must successfully integrate any acquired products or companies in order to avoid a material disruption to our business and material adverse effects to our financial results. *

We may engage in one or more acquisitions of products or companies. Acquisitions involve numerous risks, including the following:

• difficulties and costs in integrating the operations, technologies, products and personnel of the acquired businesses;

• inadequate internal control procedures and disclosure controls to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or poor integration of a target company’s or businesses’ procedures and controls;

• potential difficulties in complying with the Foreign Corrupt Practices Act;

• diversion of management’s attention from normal daily operations of the business;

• potential difficulties in completing projects associated with in-process research and development;

• difficulties in entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;

• insufficient net revenue to offset increased expenses associated with acquisitions;

• potential failure to achieve commercial expectations;

• potential loss of key employees of the acquired companies; and

• difficulty in forecasting revenues and margins.

Acquisitions may also cause us to:

• issue common stock that would dilute our current shareholders’ percentage ownership;

• assume liabilities, some of which may be unknown at the time of such acquisitions;

• record goodwill and intangible assets that will be subject to impairment testing and potential periodic impairment charges;

• incur amortization expenses related to certain intangible assets;

• incur large and immediate write-offs of in-process research and development costs; or

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• become subject to litigation.

Mergers and acquisitions of pharmaceutical companies inherently entail risk, and no assurance can be given that any future acquisitions will be successful or will not adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could harm our business and operating results in a material way. Even when an acquired company has already developed and marketed products, there can be no assurance of the continued prospects or success of such products or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products.

We may not be able to successfully develop or commercialize our products. *

While we have sales of ZADAXIN (“thymalfasin or thymalfasin alpha 1”) in certain markets, regulatory approval does not exist at this time for ZADAXIN in other key markets. In 2006, we acquired the rights to distribute DC Bead in China, but we must receive regulatory approval before we can commercialize this product. We previously believed that regulatory approval for DC Bead in China would be forthcoming in 2009. However, the SFDA required us to conduct a local trial in China to supplement data already obtained from a previous DC Bead study. This study is underway and if the trial results are positive, we expect to receive regulatory approval for DC Bead in 2011, although timing may be delayed if there are additional requirements requested by the SFDA. Our other potential products presently are SCV-07 and ondansetron RapidFilm and each of them is in an earlier stage of development than ZADAXIN. Clinical trials outcomes are uncertain. For example, in October 2009, we halted our phase 2 trial of RP101 and we have no plans to proceed with further development of RP101 at this time. We may consider and undertake various strategies to expand our portfolio of potential products, including acquiring product candidate rights through licenses or other relationships, or through other strategic relationships including acquisitions of other companies that may have proprietary rights to other development candidates or the capability to discover new drug candidates. Such transactions could require a substantial amount of our financial resources, or, if equity is involved, may result in substantial dilution to current stockholders. Strategic transactions also require substantial management time and effort and are subject to various risks that could adversely affect us or our financial results.

To fully develop our products, substantial resources are required for extensive research, development, pre-clinical testing, clinical trials, and manufacturing scale-up and regulatory approval prior to the potential products being ready for sale. We cannot assure that our efforts will produce commercially viable products. We face significant technological risks inherent in developing these products. We may also abandon some or all of our proposed products before they become commercially viable. For ondansetron RapidFilm, we are obligated to make a milestone payment upon regulatory approval. If any of our products, even if developed and approved, cannot be successfully commercialized in a timely manner, our business will be harmed and the price of our stock may decline.

We have not yet sold any product other than ZADAXIN and our sales have been primarily to a single country, China. Our future revenue growth depends to a great extent on increased sales of ZADAXIN to China. If we fail to successfully market ZADAXIN, our revenue and operating results will be limited. If unexpected and serious adverse events are reported, or if expected efficacy results are not achieved, it would have a material adverse effect on our business. Our future revenue will also depend in part on our ability to develop other commercially viable and accepted products, such as DC Bead, ondansetron RapidFilm, and SCV-07. Market acceptance of our products will depend on many factors, including our ability to convince prospective customers to use our products as an alternative to other treatments and therapies and to convince prospective strategic partners to market our products effectively and to manufacture our products in sufficient quantities with acceptable quality and at an acceptable cost. In addition, doctors must opt to use treatments involving our products. If doctors elect to use a different course of treatment, demand for our drug products would be reduced. Failure to do any of the above will lead to an unfavorable outcome on the results of our operations.

We cannot predict the safety profile of the use of thymalfasin, DC Bead, ondansetron RapidFilm or SCV-07 when used in combination with other drugs.

Many of our trials involve the use of thymalfasin in combination with other drugs. SCV-07 may be developed to be used in combination with other drugs. Some of these drugs, particularly pegylated interferon alpha, ribavirin, non-pegylated interferon alpha, dacarbazine and gemcitabine are known to cause adverse patient reactions. We cannot predict how thymalfasin, DC Bead, ondansetron RapidFilm or SCV-07 will work with other drugs, including causing possible adverse side effects not directly attributable to the other drugs that could compromise the safety profile of thymalfasin, DC Bead, ondansetron RapidFilm or SCV-07 when used in certain combination therapies.

Final results from our proposed or ongoing clinical trials for thymalfasin, SCV-07, ondansetron RapidFilm, and DC Bead may differ materially from interim or pre-clinical trial results. These clinical trials could be affected by the future actions of our partners, unexpected delays, unanticipated patient dropout rates or adverse side effects, future actions by the SFDA or the FDA or equivalent regulatory authorities in Europe or other countries or additional expenses.

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Our ability to achieve and sustain operating profitability depends in large part on our ability to commence, execute and complete clinical programs and obtain additional regulatory approvals for ZADAXIN and other drug candidates.

Clinical trials are inherently risky and may reveal that our product candidates are ineffective or have unanticipated side effects and/or drug interactions that may significantly decrease the likelihood of regulatory approval. In October 2009, we announced the discontinuation of our phase 2 clinical trial evaluating RP101, a nucleoside analog known as BVdU, for the treatment of late-stage pancreatic cancer. This decision followed the recommendation of the trial’s Data Safety Monitoring Committee (“DSMC”) based upon the data reviewed and we have no plans to proceed with further development of RP101 at this time. In addition, on November 5, 2008, we announced the top-line results from a large, randomized, phase 3 clinical trial evaluating thymalfasin in combination with pegylated interferon alpha-2a (“peg-IFN-2a”) and ribavirin (“RBV”) as a treatment for patients with hepatitis C virus (“HCV”) who have not responded to prior therapy consisting of peg-IFN and RBV alone (current standard of care). The thymalfasin treated group did not achieve statistical significance for the primary end point of sustained virological response (“SVR”) as assessed in the primary analysis population, i.e. the intent-to-treat population. In the prospectively defined secondary population of patients who completed the full course of 48 weeks of treatment with thymalfasin in addition to peg-IFN-2a and RBV (“Completer Population”), the primary endpoint was achieved with statistical significance. These results did not meet our expectations based upon prior clinical trials. Similarly, the results of our thymalfasin phase 2 melanoma clinical trial do not necessarily predict future clinical or commercial success. Finally, the results of studies in DC Bead, ondansetron RapidFilm, SCV-07, including a phase 2a for HCV, pre-clinical and phase 1 trial results also do not predict clinical or commercial success.

We may face numerous unforeseen events during, or as a result of, clinical trials that could delay or prevent commercialization of our product candidates including: our product candidate clinical trials may not prove statistical significance; negative or inconclusive clinical trial results may require us to conduct further testing or we may choose to abandon projects that we had been expecting to complete; clinical trials may be halted due to safety reasons; patient dropout rates in our clinical trial may be higher than anticipated; the FDA, its European equivalent EMEA or the SFDA may not approve our products for commercialization or may require additional clinical trial data prior to approving our products; and/or our future expenses and ability to proceed with a trial may be dependent in part on finding a partner. Moreover, if the outcome of any of these trials is unsuccessful, or even if successful, does not achieve commercially meaningful results, our business could be harmed.

If third-party reimbursement is not available or patients cannot otherwise pay for ZADAXIN, DC Bead, ondansetron RapidFilm, or SCV-07, we may not be able to successfully market them. *

Significant uncertainty exists as to the reimbursement status of new therapeutic products, such as ZADAXIN, and once commercialized, DC Bead, ondansetron RapidFilm and SCV-07. We cannot assure you that third-party insurance coverage and reimbursement will be available for therapeutic products we might develop. Although ZADAXIN receives some limited reimbursement in certain provinces in China, we cannot assure you that we will be able to maintain existing reimbursements or increase third-party payments for ZADAXIN or obtain third-party payments for DC Bead in China or ondansetron RapidFilm in China including Hong Kong and Macau, or Vietnam. The failure to obtain or maintain third-party reimbursement for our products would harm our business. Further, we cannot assure you that additional limitations will not be imposed in the future in the United States or elsewhere on drug coverage and reimbursement due to proposed health care reforms. In many emerging markets where we have marketing rights to ZADAXIN, but where government resources and per capita income may be so low that our products will be prohibitively expensive, we may not be able to market our products on economically favorable terms, if at all.

Efforts by governmental and third-party payers to contain or reduce health care costs or the announcement of legislative proposals or reforms to implement government controls could cause us to reduce the prices at which we market our drugs, which would reduce our gross margins and may harm our business.

If we do not obtain regulatory approval for thymalfasin, SCV-07, ondansetron RapidFilm or DC Bead for the intended indications that we are evaluating, our revenues will be limited and our operating results may be materially affected. *

Our ability to execute on our business strategy is largely dependent on our ability to obtain regulatory approval for the use of thymalfasin in major markets, for the use of SCV-07 in major markets, excluding Russia, for the use of ondansetron RapidFilm in China including Hong Kong and Macau, and Vietnam, and for the use of DC Bead in China. The regulatory approval processes in the United States, Europe and China are demanding and typically require 12 months or more in the United States and China and 18 months or more in Europe from the date of submission of an NDA. We have committed significant resources, including capital and time, to develop these products, and intend to continue to do so, including the initiation and execution of additional clinical trials, with the goal of obtaining such approvals. If we do not obtain these approvals, we will be unable to achieve any revenue from these products in these major markets and our thymalfasin sales in other jurisdictions could decline.

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We believed that regulatory approval for DC Bead would be forthcoming in 2009. However, the SFDA required us to conduct a local trial in China to supplement data already obtained from a previous DC Bead study. The study is underway and if the trial results are positive, we expect to receive regulatory approval for DC Bead in 2011. However, we cannot give assurance that such submission will be approved by the regulatory authorities. If additional clinical trials in China are required as part of the regulatory process, the regulatory submission for marketing approval could be delayed for a considerable period of time, and there can be no assurance that the results of clinical trials would support a regulatory submission or that the regulatory authorities would approve the product to be commercialized and sold in China. To the extent that additional information or clinical trials are required by the regulatory authorities, or we do not receive regulatory approval in China, our future sales potential in China could be harmed.

All new drugs, including our products, which have been developed or are under development, are subject to extensive and rigorous regulation by the FDA, SFDA and similar regulatory agencies. These regulations govern, among other things, the development, testing, manufacturing, labeling, storage, pre-market approval, importation, advertising, promotion, sale and distribution of our products. These regulations may change from time to time and new regulations may be adopted.

Satisfaction of government regulations may take several years and the time needed to satisfy them varies substantially based on the type, complexity and novelty of the pharmaceutical product. As a result, government regulation may cause us to delay the introduction of, or prevent us from marketing, our existing or potential products for a considerable period of time and impose costly procedures upon our activities. Even if we obtain regulatory approval for our products, such approval may impose limitations on the indicated uses for which our products may be marketed. Further unsatisfactory data resulting from clinical trials may also adversely affect our ability to market and sell thymalfasin in markets where it is approved for sale.

We rely on third parties who are our sole source suppliers for our clinical trial and commercial products and their inability to deliver products that meet our quality-control standards could delay or harm one or more important areas of our business including our sales, clinical trials or the regulatory approval process.*

We rely on third parties, who are subject to regulatory oversight, to supply our clinical and commercial products. For example, Biocompatibles is the sole supplier of DC Bead, Applied Pharma Research S.A. (“APR”) is the sole supplier of ondansetron RapidFilm, and Solvay Peptides S.A. is our sole supplier of SCV-07. Any unanticipated deficiencies in these suppliers, or the suppliers or our raw materials, and/or recall of the manufacturing lots or similar action regarding the pegylated interferon alpha, ribavirin or gemcitabine used in our clinical trials could delay the trials or detract from the integrity of the trial data and its potential use in future regulatory filings. In addition, manufacturing interruptions or failure to comply with regulatory requirements by any of these suppliers could significantly delay clinical development of potential products and reduce third-party or clinical researcher interest and support of proposed trials. These interruptions or failures could also impede commercialization of our products and impair our competitive position.

Further, any deficiencies or shortages in supply of our commercial products would adversely affect our ability to realize our sales plans. For example, the manufacturing of the raw material and the processing to finished product of ZADAXIN is done in few batches in any given three-month period and any manufacturing errors have the potential to require a product recall. During 2006, we experienced failures and lower yields on production runs from our sole supplier of bulk active pharmaceutical ingredient (“API”) product for the manufacture of ZADAXIN for our current markets, including China. During 2009, we experienced quality-control problems with a component of our ZADAXIN kit. We have experienced further problems recently. Although we are taking steps to ensure that such problems do not continue, there is no assurance that we will either be successful in doing so with our current supplier or be able to timely and cost-effectively qualify a new supplier for this component. Manufacturing interruptions or failure or delay of product to meet quality assurance specifications could adversely affect shipments and recognition of sales of ZADAXIN in any period and impair our relationships with customers and our competitive position and may increase the cost of material produced.

We are in the process of registering new suppliers for ZADAXIN with regulatory agencies in markets where thymalfasin is approved for sale, including China. This process, quality assurance and other steps could cause delays or interruptions of supply in certain other markets. In some countries, a manufacturing change may require additional regulatory approvals that may delay thymalfasin marketing approvals in new markets. In addition, if sales of ZADAXIN were to increase dramatically, our third-party suppliers may not be able to supply ZADAXIN either quickly enough or at a commercially reasonable cost, which could limit our ability to satisfy increased demand or could adversely affect the ability of these suppliers to provide products for our clinical trials. If any of our suppliers are unable to match our need for supply, either because of product defects, inability to increase supply in the face of increased demand, or maintain financially viable businesses, our ability to affect our sales and protect our brand reputation would be materially impaired, thereby materially and adversely affecting our sales and results of operations.

We rely on third parties for development of our products and the inability of any of these parties to reliably, timely or cost-effectively provide us with their obligated services could materially harm the timing of bringing our products to market and accordingly adversely affect our business.

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We rely on third parties, such as contract research organizations, medical institutions, clinical investigators, contract laboratories, and collaborative partners in the conduct of clinical trials for our product candidates. If these parties, whom we do not control, do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines or choose not to continue their relationship with us, if the third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical or clinical activities may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize our product candidates.

Commercialization of some of our products depends on collaborations with others. If our collaborators are not successful, or if we are unable to find future collaborators, we may not be able to properly develop and commercialize our products.

We depend in part on our distributors and business partners to develop or promote our drugs, and if they are not successful in their efforts or fail to do so, our business will suffer. For example, Sigma-Tau is responsible for the development and marketing of ZADAXIN in most of Europe. Biocompatibles is providing SciClone with the necessary supporting documents to obtain regulatory approval in China for DC Bead, APR is providing SciClone with the necessary supporting documents to obtain regulatory approval in China including Hong Kong and Macau, and Vietnam for ondansetron RapidFilm. We generally do not have control over the amount and timing of resources that our business partners devote to our collaborative efforts, and some have not always performed as or when expected. If they do not perform their obligations as we expect, particularly obligations regarding clinical trials, our development expenses would increase and the development or sale of our products could be limited or delayed, which could hurt our business and cause our stock price to decline. In addition, our relationships with these companies may not be successful. Disputes may arise with our collaborators, including disputes over ownership rights to intellectual property, know-how or technologies developed with our collaborators. We may not be able to negotiate similar additional arrangements in the future to develop and commercialize ZADAXIN or other products.

If we are unable to manage our key personnel, or are unable to attract and retain additional, highly skilled and experienced personnel, our business will suffer. *

We are highly dependent upon our ability to attract and retain qualified personnel because of the specialized, scientific and worldwide nature of our business. Further, we are also dependent on our ability to appropriately staff these personnel in appropriate positions as our business fluctuates. There is intense competition for qualified management, scientific, clinical, regulatory, and sales and marketing personnel in the pharmaceutical industry. There is significant turnover in the industry in China in particular, and we have also experienced turnover in our sales personnel. We may not be able to attract and retain the qualified personnel we need to grow and develop our business globally. Conversely, in the event that we need to reduce the size of a particular aspect of our business, we are also dependent on our ability to make such adjustments while retaining suitably skilled personnel. Further, our efforts to in-license or acquire, develop and commercialize product candidates for China require the addition of clinical and regulatory personnel and the capabilities to expand our sales and marketing operation. In addition, we assign numerous key responsibilities to a limited number of individuals, and we would experience difficulty in finding immediate replacements for any of them were any one of them to choose to leave employment with us. If we were unable to attract and retain qualified personnel as needed or promptly replace those employees who are critical to our product development and commercialization, the development and commercialization of our products would be adversely affected. At this time, we do not maintain “key person” life insurance for any of our personnel.

We may need to obtain additional funding to support our long-term product development and commercialization programs.

We believe our existing cash and investments and ongoing revenue generating business operations will be sufficient to support our current operating plan for at least the next 12 months. However, our ability to achieve and sustain operating profitability is dependent on numerous factors including our ability to achieve our goal of increasing sales of ZADAXIN, securing regulatory approval for DC Bead in China, and for ondansetron RapidFilm in China including Hong Kong and Macau, and Vietnam, the execution and successful completion of thymalfasin, SCV-07, and DC Bead clinical trials and securing partnerships for those programs that lead to regulatory approvals in major pharmaceutical markets. We cannot assure you that such funds from operating activities will be sufficient, or that we will attain profitable operations in future periods. In addition, we intend to develop other products and we may need additional funds in the future to support such development and to support future growth and achieve profitability. If we need to raise additional funds in the future and such funds are not available on reasonable terms, if at all, our commercialization efforts may be impeded, our revenues may be limited and our operating results may suffer.

If we fail to protect our products, technologies and trade secrets, we may not be able to successfully use, manufacture, market or sell our products, or we may fail to advance or maintain our competitive position, and we have limited intellectual property protection in China.

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Our success depends significantly on our ability to obtain and maintain meaningful patent protection for our products and technologies and to preserve our trade secrets. Our pending patent applications may not result in the issuance of patents in the future. Our patents or patent applications may not have priority over others’ applications. Our existing patents and additional patents that may be issued, if any, may not provide a competitive advantage to us or may be invalidated or circumvented by our competitors. Others may independently develop similar products or design around patents issued or licensed to us. Patents issued to, or patent applications filed by, other companies could harm our ability to use, manufacture, market or sell our products or maintain our competitive position with respect to our products. Although many of our patents relating to thymalfasin have expired, including composition of matter patents, we have rights to other patents and patent applications relating to thymalfasin and thymalfasin analogues, including method of use patents with respect to the use of thymalfasin for certain indications. Additionally, thymosin alpha 1 (“thymalfasin”), the chemical composition of thymalfasin, has received Orphan Drug designation in the United States for the treatment of stage IIb through stage IV melanoma. If other parties develop generic forms of thymalfasin for other indications, including conducting clinical trials for such indications, our patents and other rights might not be sufficient to prohibit them from marketing and selling such generic forms of thymalfasin. If other parties develop analogues or derivatives of thymalfasin, our patents and other rights might not be sufficient to prohibit them from marketing these analogues or derivatives.

Pharmaceutical products are either not patentable or have only recently become patentable in some of the countries in which we market or may market thymalfasin. We do not have composition patent claims directed to the same form of thymalfasin currently marketed in China, our largest market, although we do have other type of patent claims, pending or issued, directed to other aspects of thymalfasin therapy. Other companies market generic thymosin alpha 1 in China, sometimes in violation of our patent, trademark or other rights which, to date, we have defended by informing physicians and hospitals of the practice. Past enforcement of intellectual property rights in many of these countries, including China in particular, has been limited or non-existent. Future enforcement of patents and proprietary rights in many other countries will likely be problematic or unpredictable. Moreover, the issuance of a patent in one country does not assure the issuance of a similar patent in another country. Claim interpretation and infringement laws vary by nation, so the extent of any patent protection is uncertain and may vary in different jurisdictions.

If we are involved in intellectual property claims and litigation, the proceedings may divert our resources and subject us to significant liability for damages, substantial litigation expense and the loss of our proprietary rights.

Our commercial success depends in part on our not infringing valid, enforceable patents or proprietary rights of third parties, and not breaching any licenses that may relate to our technologies and products. In addition, we may not be aware of all patents or patent applications that may impact our ability to make, use or sell any of our potential products. For example, U.S. patent applications may be kept confidential for 12 or more months while pending in the Patent and Trademark Office, and patent applications filed in foreign countries are often first published nine months or more after filing. It is possible that we may unintentionally infringe these patents or other patents or proprietary rights of third parties. We may in the future receive notices claiming infringement from third parties as well as invitations to take licenses under third-party patents. Any legal action against us or our collaborative partners claiming damages and seeking to enjoin commercial activities relating to our products and processes affected by third-party rights may require us or our collaborative partners to obtain licenses in order to continue to manufacture or market the affected products and processes. Our efforts to defend against any of these claims, regardless of merit, would require us to devote resources and attention that could have been directed to our operations and growth plans. In addition, these actions may subject us to potential liability for damages. We or our collaborative partners may not prevail in a patent action and any license required under a patent may not be made available on commercially acceptable terms, or at all. Any conflicts resulting from the patent rights of others could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection.

If other companies obtain patents with conflicting claims, we may be required to obtain licenses to those patents or develop or obtain alternative technology to manufacture or market the affected products and processes. We may not be able to obtain any such licenses on acceptable terms or at all. Any failure to obtain such licenses could delay or prevent us from pursuing the development or commercialization of our potential products. Our efforts to defend against any of these claims would require us to devote resources and attention that could have been directed to our operations and growth plans.

We may need to initiate litigation, which could be time-consuming and expensive, to enforce our proprietary rights or to determine the scope and validity of others’ rights. If litigation results, a court may find our patents or those of our licensors invalid or may find that we have infringed on a competitor’s rights. If any of our competitors have filed patent applications in the United States which claim technology we also have invented, the Patent and Trademark Office may require us to participate in expensive interference proceedings to determine who has the right to a patent for the technology. These actions may subject us to potential liability for damages. We or our collaborative partners may not prevail in a patent action and any license required under a patent may not be made available on commercially acceptable terms, or at all.

Substantial sales of our stock or equity in our subsidiaries or the exercise or conversion of options or convertible securities may impact the market price of our common stock.

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Our collaborative partner Sigma-Tau and affiliates hold a substantial amount of our stock. The stock is freely tradable and Sigma-Tau is not under any obligation to SciClone which would prevent it from selling some or all of the stock it holds except for applicable U.S. insider trading regulations with respect to possession of material non-public information by Sigma-Tau or its officers and directors.

In May 2009, we filed a Form S-3 Shelf registration with the Securities and Exchange Commission (“SEC”) which was later declared effective by the SEC and will allow us to sell securities in one or more offerings. Future issuances of substantial amounts of our common stock could adversely affect the market price of our common stock. Similarly, if we raise additional funds through the issuance of common stock or securities convertible into or exercisable for common stock or sell equity in a subsidiary, the percentage ownership of our present stockholders of the respective entities will be reduced and the price of our common stock may fall.

Our cash and investments are subject to certain risks which could materially adversely affect our overall financial position. *

We invest our cash in accordance with an established internal policy and customarily in instruments which historically have been highly liquid and carried relatively low risk. However, with turmoil in the credit markets, similar types of investments have experienced losses in value or liquidity issues which differ from their historical pattern. For example, we routinely have invested in money market funds with large financial institutions. One or more of these funds could experience losses or liquidity problems and, although to date some of the largest financial institutions who sponsor such funds have offset similar losses, there is no assurance that our financial institutions would either not incur losses or would offset any losses were they to occur.

Should any of our cash investments permanently lose value or have their liquidity impaired, it would have a material and adverse effect on our overall financial position by imperiling our ability to fund our operations and forcing us to seek additional financing sooner than we would otherwise and such financing may not be available on commercially attractive terms.

In addition, financial instruments may subject us to a concentration of credit risk. Substantially all of our cash, and cash equivalents are held by a limited number of financial institutions including all of our term deposits held by financial institutions in Hong Kong and offshore. Such term deposits do not exceed federally insured limits and to date, we have not experienced any losses on our deposits of cash and cash equivalents. However, if any of these instruments permanently lost value or had their liquidity impaired, it would also have a material and adverse effect on our overall financial position by imperiling our ability to fund our operations and forcing us to seek additional financing sooner than we would otherwise and such financing may not be available on commercially attractive terms.

New accounting pronouncements may impact our financial position or results of operations.

Future changes in financial accounting standards may cause adverse, unexpected fluctuations in the timing of the recognition of revenues or expenses and may affect our financial position or results of operations. New pronouncements and varying interpretations of pronouncements have occurred with frequency and may occur in the future and this may lead to changes in our accounting policies in the future.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

Effective internal controls are necessary for us to provide reliable financial reports and to protect from fraudulent, illegal or unauthorized transactions. If we cannot provide effective controls and reliable financial reports, our business and operating results could be harmed. Moreover, as a United States-based corporation doing business in China, these controls often need to satisfy the requirements of Chinese law as well as the requirements of United States law which frequently differ in certain aspects. We have in the past discovered, and may in the future discover, areas of our internal controls that need improvement. For example, our management determined that as of December 31, 2008 we had a material weakness in our internal controls related to our failure to expense approximately $540,000 in research and development costs related to changes in the scope of activities performed by our clinical research organization during 2008. Although we have since taken steps to rectify this material weakness, there can be no assurance that we will be successful in this regard. Any failure to implement and maintain controls over our financial reporting, or difficulties encountered in the implementation of improvements in our controls, could cause us to fail to meet our reporting obligations. Any failure to improve our internal controls or to address identified weaknesses in the future, including with respect to our clinical research expenses, if they were to occur, could also cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock.

Subsequent to the end of the quarter, a special committee of our board of directors determined to undertake an independent investigation as to matters reflected in and arising from the SEC and DOJ investigations, including but not limited to, certain sales and marketing matters in China in order to evaluate whether any violation of the FCPA or other laws occurred as to such matters. The investigation is in process and no conclusions have been reached, however if the investigation results in a determination that a violation occurred or may have occurred, the additional information resulting from such investigation or the determinations made in such investigation may indicate that our internal controls were not effective. In addition, we may determine based upon the results of such investigation that changes in our internal controls are appropriate even if a violation did not occur. Independent of the outcome of the investigation, we have determined to undertake a further review of our internal controls to consider whether we will implement additional internal controls or modifications of our internal controls.

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New legislation may impact our financial position or results of operations.

Compliance with changing regulations concerning corporate governance and public disclosure has resulted in and may continue to result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and The NASDAQ Stock Market rules, are creating uncertainty for companies such as ours and costs are increasing as a result of this uncertainty and other factors. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest all reasonably necessary resources to comply with evolving standards, and this investment has and may continue to result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

Currently a majority of our revenue is generated from customers located outside the United States, and a substantial portion of our assets, including employees, are located outside the United States. United States income taxes and foreign withholding taxes have not been provided on undistributed earnings of non-United States subsidiaries, because such earnings are intended to be indefinitely reinvested in the operations of those subsidiaries. President Obama’s administration has recently announced initiatives that would substantially reduce our ability to defer U.S. taxes including: repealing deferral of U.S. taxation of foreign earnings, eliminating utilization or substantially reducing our ability to claim foreign tax credits, and eliminating various tax deductions until foreign earnings are repatriated to the United States. If any of these proposals are constituted into legislation, they could increase our U.S. income tax liability and as a result have a negative impact on our financial position and results of operations.

Anti-takeover provisions in our charter documents and under Delaware law may make an acquisition of us, which may be beneficial to our stockholders, more difficult.

Certain anti-takeover provisions of Delaware law and our charter documents as currently in effect may make a change in control of our company more difficult, even if a change in control would be beneficial to our stockholders. Our charter documents contain certain anti-takeover provisions, including provisions in our certificate of incorporation providing that stockholders may not cumulate votes, stockholders’ meetings may be called by stockholders only if they hold 25% or more of our common stock and provisions in our bylaws providing that the stockholders may not take action by written consent. Additionally, our board of directors has the authority to issue 10 million shares of preferred stock and to determine the terms of those shares of stock without any further action by the stockholders. The rights of holders of our common stock are subject to the rights of the holders of any preferred stock that may be issued. The issuance of preferred stock could make it more difficult for a third-party to acquire a majority of our outstanding voting stock. Delaware law also prohibits corporations from engaging in a business combination with any holders of 15% or more of their capital stock until the holder has held the stock for three years unless, among other possibilities, the board of directors approves the transaction. Our board of directors may use these provisions to prevent changes in the management and control of our company. Also, on December 18, 2006, our board of directors declared a dividend distribution of one Preferred Stock Purchase Right (collectively, the “Rights”) for each outstanding share of our Common Stock, each Right which entitles the registered holder to purchase from the Company one one-thousandth of a share of the Company’s Series D Preferred Stock, $0.001 par value, at a price of $25.00 pursuant to a Rights Agreement dated as of December 19, 2006, between the Company and Mellon Investor Services LLC. The Rights have certain anti-takeover effects. Under certain circumstances the Rights could cause substantial dilution to a person or group who attempts to acquire the Company on terms not approved by our board of directors. Although the Rights should not interfere with an acquisition of the Company approved by the board, the Rights may have the effect of delaying and perhaps improving the terms of an acquisition for our stockholders, or deterring an acquisition of the Company. Also, under applicable Delaware law, our board of directors may adopt additional anti-takeover measures in the future.

We may be subject to product liability lawsuits, and our insurance may be inadequate to cover damages.

Clinical trials of any of our current and potential products or the actual commercial sales of our product may expose us to liability claims from the use of these products. We currently carry product liability insurance. However, we cannot be certain that we will be able to maintain insurance on acceptable terms, if at all, for clinical and commercial activities or that the insurance would be sufficient to cover any potential product liability claim or recall. If we fail to have sufficient coverage, our business, results of operations and cash flows could be adversely affected.

If we are unable to comply with environmental and other laws and regulations, our business may be harmed.

We are subject to various federal, state and local laws, regulations and recommendations relating to the use, manufacture, storage, handling and disposal of hazardous materials and waste products (including radioactive compounds and infectious disease agents), as well as safe working conditions, laboratory and manufacturing practices and the experimental use of animals. The extent of government regulation that might result from future legislation or administrative action in these areas cannot be accurately predicted.

We do not currently maintain hazardous materials at our facilities. While we outsource our research and development programs involving the controlled use of biohazardous materials, if in the future we conduct these programs ourselves, we might be required to incur significant cost to comply with environmental laws and regulations. Further, in the event of an accident, we would be liable for any damages that result, and the liability could exceed our resources.

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Our business and operations are subject to the risks of being based in particular locations known for earthquakes, other natural catastrophic disasters and service interruptions. *

Our corporate headquarters are located in the Silicon Valley area of Northern California, a region known for seismic activity. Although we maintain a disaster recovery policy that includes storage of important corporate data in a different geographic region of the United States, all of our significant corporate data is stored in our headquarters facility and accordingly, a significant natural disaster, such as an earthquake, could have a material adverse impact on our business, operating results, and financial condition. Most of our sales are into China for which we maintain a sole warehouse for finished goods in Hong Kong, which can experience severe typhoon storms, earthquakes or other natural catastrophic disasters. Although our distributors in China may maintain several months supply of our product, were our warehouse capability to be interrupted, either through a natural disaster such as flooding or through a service interruption, such as a lack of electricity to power required air conditioning, our ability to timely deliver finished product to China could be adversely affected which in turn would materially adversely affect our sales and ensuing operating results.

We May Be Affected by Climate Change and Market or Regulatory Responses to Climate Change

Climate change, including the impact of global warming, could have a material adverse effect on our results of operations, financial condition, and liquidity if it were to disrupt the demand, supply or delivery of product, management of our business, or result in cost increases as a result of government regulation.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Removed and Reserved

Item 5. Other Information

None

Item 6. Exhibits

Exhibit Number	Description
10.1(1)	Loan and Security Agreement by and among SciClone Pharmaceuticals International Ltd., Sciclone Pharmaceuticals International China Holding Ltd., and Silicon Valley Bank, dated as of October 1, 2010.
10.2(1)	License Agreement between Edward T. Wei, SciClone Pharmaceuticals, Inc. and SciClone Pharmaceuticals International Ltd. dated July 28, 1997.
31.1(1)	Rule 13a-14(a) Certification of Chief Executive Officer.
31.2(1)	Rule 13a-14(a) Certification of Chief Financial Officer.
32.1(1)	Section 1350 Certification of Chief Executive Officer.
32.2(1)	Section 1350 Certification of Chief Financial Officer.

(1) Filed Herewith.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SCICLONE PHARMACEUTICALS, INC.
	(Registrant)
Date: November 8, 2010		/S/    GARY S. TITUS
		Gary S. Titus
		Senior Vice President, Finance and Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit Number	Exhibit
10.1(1)	Loan and Security Agreement by and among SciClone Pharmaceuticals International Ltd., Sciclone Pharmaceuticals International China Holding Ltd., and Silicon Valley Bank, dated as of October 1, 2010.
10.2(1)	License Agreement between Edward T. Wei, SciClone Pharmaceuticals, Inc. and SciClone Pharmaceuticals International Ltd. dated July 28, 1997.
31.1(1)	Rule 13a-14(a) Certification of Chief Executive Officer.
31.2(1)	Rule 13a-14(a) Certification of Chief Financial Officer.
32.1(1)	Section 1350 Certification of Chief Executive Officer.
32.2(1)	Section 1350 Certification of Chief Financial Officer.

(1) Filed Herewith.

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