Pharmacyclics 10Q 2013 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2013

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

For the transition period from to

Commission File Number: 000-26658

Pharmacyclics, Inc.

(Exact name of registrant as specified in its charter)



Delaware	94-3148201
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)



995 E. Arques Avenue Sunnyvale, CA	94085-4521
(Address of principal executive offices)	(Zip Code)



	(408) 774-0330
	(Registrant’s telephone number, including area code)


	(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 ý 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 ý No o

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

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

As of April 29, 2013, there were 72,783,040 shares of the registrant's Common Stock, par value $0.0001 per share, outstanding.

PHARMACYCLICS, INC.

Form 10-Q

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PHARMACYCLICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; in thousands, except share and per share amounts)



	March 31, 2013			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	502,526		$	307,433
Marketable securities	8,721			9,681
Accounts receivable	17,162			26,697
Prepaid expenses and other current assets	4,254			2,681
Total current assets	532,663			346,492
Property and equipment, net	9,478			6,403
Other assets	3,020			2,234
Total assets	$	545,161		$	355,129
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	15,798		$	4,607
Accrued liabilities	23,555			15,122
Income tax payable	—			1,389
Deferred revenue	8,036			8,139
Total current liabilities	47,389			29,257
Deferred revenue – non-current portion	59,879			62,562
Deferred rent	783			784
Total liabilities	108,051			92,603
Commitments and contingencies (Notes 4 and 9)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued and outstanding	—			—
Common stock, $0.0001 par value; 150,000,000 shares authorized at March 31, 2013 and December 31, 2012, respectively; shares issued and outstanding 72,778,875 and 70,216,386 at March 31, 2013 and December 31, 2012, respectively	7			7
Additional paid-in capital	772,624			546,129
Accumulated other comprehensive loss	(4		)	(4		)
Accumulated deficit	(335,517		)	(283,606		)
Total stockholders’ equity	437,110			262,526
Total liabilities and stockholders’ equity	$	545,161		$	355,129

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PHARMACYCLICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited; in thousands, except per share data)



	Three Months Ended
	March 31,
	2013			2012
Revenue:
License and milestone revenue	$	—		$	—
Collaboration services revenue	2,846			1,927
Total revenue	2,846			1,927
Operating expenses:
Research and development	35,784			15,828
General and administrative	20,026			4,061
Total operating expenses	55,810			19,889
Loss from operations	(52,964		)	(17,962		)
Interest income	76			61
Other income (expense), net	3			(5		)
Loss before income taxes	(52,885		)	(17,906		)
Income tax benefit	(974		)	(5,083		)
Net loss	$	(51,911	)	$	(12,823	)
Net loss per share:
Basic	$	(0.73	)	$	(0.19	)
Diluted	$	(0.73	)	$	(0.19	)
Weighted average shares used to compute
net loss per share:
Basic	70,933			68,848
Diluted	70,933			68,848

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PHARMACYCLICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited; in thousands)



	Three Months Ended
	March 31,
	2013			2012
Comprehensive loss, net of taxes
Net loss	$	(51,911	)	$	(12,823	)
Change in unrealized gain (loss) on marketable securities	—			7
Comprehensive loss	$	(51,911	)	$	(12,816	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PHARMACYCLICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in thousands)



	Three Months Ended
	March 31,
	2013			2012
Cash flows from operating activities:
Net loss	$	(51,911	)	$	(12,823	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	392			160
Amortization of premium on marketable securities, net	—			4
Stock-based compensation expense	23,578			3,485
Loss on property and equipment	110			—
Changes in assets and liabilities:
Accounts receivable	9,535			(11,670		)
Prepaid expenses and other assets	(2,725		)	159
Accounts payable	9,881			1,147
Accrued liabilities	8,252			1,183
Income taxes payable	(1,389		)	(5,323		)
Deferred revenue	(2,786		)	(1,789		)
Deferred rent	(1		)	57
Net cash used in operating activities	(7,064		)	(25,410		)
Cash flows from investing activities:
Purchase of property and equipment	(2,087		)	(592		)
Purchase of marketable securities	(1,200		)	—
Proceeds from sales of marketable securities	240			—
Proceeds from maturities of marketable securities	1,920			8,625
Net cash (used in) provided by investing activities	(1,127		)	8,033
Cash flows from financing activities:
Issuance of common stock, net of issuance costs	201,023			(847		)
Proceeds from exercise of stock options and stock purchase rights	2,261			1,479
Net cash provided by financing activities	203,284			632
Increase (decrease) in cash and cash equivalents	195,093			(16,745		)
Cash and cash equivalents at beginning of period	307,433			230,214
Cash and cash equivalents at end of period	$	502,526		$	213,469
Supplemental disclosure of non-cash investing and financing activities:
Receivable for stock option exercises	$	1		$	—
Property and equipment purchases included in Accounts payable and Accrued liabilities	$	2,373		$	246

The accompanying notes are an integral part of these condensed consolidated financial statements.

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PHARMACYCLICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 — The Company and Significant Accounting Policies

Change in Fiscal Year End

On November 14, 2012, the Board of Directors approved a change in the fiscal year end from June 30 to December 31, effective December 31, 2012. All references to "fiscal years", unless otherwise noted, refer to the twelve-month fiscal year, which prior to July 1, 2012, ended on June 30, and beginning on January 1, 2013, ends on December 31, of each year.

Company Overview

Pharmacyclics, Inc. ("the Company" or "Pharmacyclics") is a clinical-stage biopharmaceutical company focused on developing and commercializing innovative small-molecule drugs for the treatment of cancer and immune mediated diseases. The Company's mission and goal is: To build a viable biopharmaceutical company that designs, develops and commercializes novel therapies intended to improve quality of life, increase duration of life and resolve serious unmet medical healthcare needs; and to identify promising product candidates based on scientific development and administrational expertise, develop its products in a rapid, cost-efficient manner and to pursue commercialization and/or development partners when and where appropriate.

Presently, the Company has three product candidates in clinical development and several preclinical molecules in lead optimization. The Company is committed to high standards of ethics, scientific rigor, and operational efficiency as it moves each of these programs toward potential commercialization. To date, nearly all of the Company's resources have been dedicated to the research and development of its products, and it has not generated any commercial revenues from the sale of its products. The Company does not anticipate the generation of any product commercial revenue until it receives the necessary regulatory and marketing approvals to launch one of its products.

During the fiscal year ended June 30, 2012, the Company exited the development stage, as defined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 915, "Development Stage Entities," with the signing of the first significant collaboration with Janssen Biotech, Inc. and its affiliates (“Janssen”) (See Note 4), from which the Company received its first significant revenue from principal operations, reflective that the Company is no longer in the development stage.

Based upon the current status of its product development and plans, the Company believes that its existing cash, cash equivalents and marketable securities will be adequate to satisfy the Company's capital needs through at least the next twelve months. However, the process of developing and commercializing products requires significant research and development, preclinical testing and clinical trials, manufacturing arrangements as well as regulatory and marketing approvals. These activities, together with the Company's general and administrative expenses, are expected to result in significant operating expenditures until the commercialization of the Company's products, or partner collaborations, generate sufficient revenue to cover expenses. The Company expects that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. To-date, the Company has not generated any commercial revenue from sales of its products. The Company's ability to achieve or sustain profitability in the future depends upon its ability to successfully complete the development of its products, obtain required regulatory approvals and successfully manufacture and commercialize its products.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Pharmacyclics, Inc. and its wholly-owned subsidiaries, Pharmacyclics (Europe) Limited, Pharmacyclics Switzerland GmbH and Pharmacyclics Cayman Ltd. All intercompany accounts and transactions have been eliminated. The U.S. dollar is the functional currency for all of the Company's consolidated operations.

The interim condensed consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to Form 10-Q and, therefore, do not necessarily include all information and footnotes necessary for a fair statement of the Company's financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States. The December 31, 2012 condensed consolidated balance sheet data contained within this Form 10-Q was derived from audited consolidated financial statements included in the Company's Transition Report on Form 10-K for the transition period ended December 31, 2012, but does not include all disclosures required by accounting principles generally accepted in the United States.

In the opinion of management, the unaudited financial information for the interim periods presented reflects all normal and

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recurring adjustments necessary for a fair statement of results of operations, financial position and cash flows. These condensed consolidated financial statements should be read in conjunction with the financial statements included in the Company's Transition Report on Form 10-K for the transition period ended December 31, 2012. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company's condensed consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.

Significant Accounting Policies

The Company's significant accounting policies were described in Note 2 to its consolidated financial statements included in its Transition Report on Form 10-K for the transition period ended December 31, 2012. There have been no significant changes to the Company's accounting policies since December 31, 2012.

Concentration of credit risk

As of March 31, 2013, the Company's accounts receivable balance of $17,162,000 was primarily comprised of $17,102,000 due from Janssen associated with the reimbursement of certain costs under the collaboration agreement (See Note 4).

Reclassifications

Certain amounts within the condensed consolidated balance sheet for the prior period were reclassified to conform with the current period presentation. These reclassifications had no impact on the Company's previously reported financial position.

Note 2 - Basic and Diluted Net Income (Loss) Per Share

Basic net loss per share is computed using the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding stock options and shares to be purchased under the employee stock purchase plan. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock method. Under the treasury stock method, an increase in the fair market value of the Company's common stock can result in a greater dilutive effect from potentially dilutive securities.

The computations of basic and diluted net income (loss) per share are as follows (in thousands, except per share amounts):



	Three Months Ended March 31,
	2013			2012
Numerator:
Net loss	$	(51,911	)	$	(12,823	)
Denominator:
Weighted average common shares - basic and diluted	70,933			68,848
Net loss per share:
Basic	$	(0.73	)	$	(0.19	)
Diluted	$	(0.73	)	$	(0.19	)
Potentially dilutive securities excluded from net loss per share - diluted because their effect is anti-dilutive	5,340			7,907

Note 3 - Stock-Based Compensation and Stockholders’ Equity

Common Stock

In March 2013, the Company sold 2,200,000 shares of its common stock in an underwritten public offering at $94.20 per share for net proceeds of $201,023,000 after deducting expenses of the offering. The closing of the offering took place on March 13, 2013.

Stock Plans

The Company grants options to purchase its common stock pursuant to its 2004 Equity Incentive Award Plan.

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The components of stock-based compensation expense recognized in the condensed consolidated statements of operations for the three months ended March 31, 2013 and 2012 are as follows (in thousands):



	Three Months Ended
	March 31,
	2013		2012
Research and development	$	11,180	$	2,695
General and administrative	12,398		790
Total stock-based compensation	$	23,578	$	3,485

Stock-based compensation expense for the three months ended March 31, 2013 increased by $20,093,000 compared to the three months ended March 31, 2012 primarily due to the timing and accounting of grants for performance-based stock options, an increase in the Company's stock price resulting in a higher fair value for options granted and the growth in the Company’s employee base.

The following table summarizes the Company's stock option activity for the three months ended March 31, 2013 (in thousands, except per share amounts):



	Number of Shares		Weighted Average Exercise Price per Share
Balance at December 31, 2012	6,071		$	11.64
Exercised	(362	)	5.22
Granted	139		76.24
Forfeited	(81	)	14.94
Balance at March 31, 2013	5,767		$	13.55

The accounting grant date for employee stock options with performance obligations is the date on which the performance goals have been defined and a mutual understanding of the terms has been reached. Generally options with performance obligations vest over a four year period, with the goals set and agreed upon each year. Therefore, the table above does not include 1,314,971 performance options granted in current and prior fiscal years for which the performance criteria had not been established as of March 31, 2013.

At March 31, 2013, 3,066,151 shares were available for grant under the Company's 2004 Equity Incentive Award Plan.

There were no sales under the Employee Stock Purchase Plan ("Purchase Plan") in the three month periods ended March 31, 2013 and 2012. Shares available for future purchase under the Purchase Plan were 391,674 at March 31, 2013.

Additional paid-in capital increased by $226,495,000 during the three months ended March 31, 2013, as a result of net proceeds from the issuance of common stock in the public offering of $201,023,000, stock-based compensation expense of $23,578,000 and proceeds from the issuance of common stock upon exercise of stock options of $1,894,000.

Note 4 — Collaboration and Other Agreements

For the three months ended March 31, 2013 and 2012, the Company recognized revenue related to its collaboration and license arrangements as follows (in thousands):



	Three Months Ended
	March 31,
	2013		2012
Janssen	$	2,786	$	1,789
Les Laboratoires Servier ("Servier")	40		63
Other	20		75
Total	$	2,846	$	1,927

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Collaboration and License Agreement with Janssen Biotech, Inc.

In December 2011, the Company entered into a worldwide collaboration and license agreement with Janssen Biotech Inc. and its affiliates ("Janssen"), one of the Janssen Pharmaceutical Companies of Johnson & Johnson for the development and commercialization of ibrutinib (formerly known as PCI-32765), a novel, orally active, Bruton’s Tyrosine Kinase (“BTK”) inhibitor, and certain compounds structurally related to ibrutinib, for oncology and other indications, excluding all immune mediated diseases and inflammatory or conditions and all psychiatric or psychological diseases or conditions, in the U.S. and outside the U.S.

The collaboration provides Janssen with an exclusive license to exploit the underlying technology outside of the U.S. (the “License Territory”) and co-exclusively with Pharmacyclics in the U.S.

The collaboration has no fixed duration or expiration date and provided for payments by Janssen to the Company of a $150,000,000 non-refundable upfront payment upon execution, as well as potential future milestone payments of up to $825,000,000, based upon continued development progress ($250,000,000), regulatory progress ($225,000,000) and approval of the product in both the U.S. and the License Territory ($350,000,000). On April 11, 2013, the Company triggered a $50,000,000 milestone payment obligation from Janssen due to its achievement of one clinical milestone (see Note 11).

The development, regulatory and approval milestones represents non-refundable amounts that would be paid by Janssen to the Company if certain milestones are achieved in the future. The Company has elected to apply the guidance in ASC 605-28 to the milestones. These milestones, if achieved, are substantive as they relate solely to past performance, are commensurate with estimated enhancement of value associated with the achievement of each milestone as a result of the Company's performance, which are reasonable relative to the other deliverables and terms of the arrangement, and are unrelated to the delivery of any further elements under the arrangement.

The agreement includes a cost sharing arrangement for associated collaboration activities. Except in certain cases, in general Janssen is responsible for approximately 60% of collaboration costs and the Company is responsible for the remaining 40% of collaboration costs. In general, costs associated with commercialization will be included in determining pre-tax profit or pre-tax loss, which are to be shared by the parties 50/50.

The collaboration with Janssen provides the Company with an annual cap of its share of collaboration costs and pre-tax commercialization profits/losses for each calendar year until the third profitable calendar quarter for the product, as determined in the agreement. In the event that the Company's share of aggregate development costs in any given calendar year, together with any other amounts that become due from the Company, plus the Company's share of pre-tax loss (if any) for any calendar quarter in such calendar year, less the Company's share of pre-tax profit (if any) for any calendar quarter in such calendar year, exceeds $50,000,000, then amounts that are in excess of $50,000,000 (the “Excess Amounts”) are funded by Janssen. Under the Agreement, total Excess Amounts plus interest may not exceed $225,000,000. The Company recognizes Excess Amounts as a reduction to operating expenses as the Company's repayment of Excess Amounts to Janssen is contingent and would become payable only after the third profitable calendar quarter for the product. Further, Excess Amounts shall be reimbursable only from the Company's share of pre-tax profits (if any) after the third profitable calendar quarter for the product.

The total Excess Amounts plus interest may not exceed $225,000,000 at any given time. Interest shall be accrued on the outstanding balance with interest calculated at the average annual European Interbank Offered Rate (“EURIBOR”) for the EURO or average annual London Interbank Offered Rate (“LIBOR”) for U.S. Dollars as reported in the Wall Street Journal, plus 2%, calculated on the number of days from the date on which the Company's payment would be due to Janssen. The interest rate on outstanding Excess Amounts shall not exceed 5% per annum, and shall not in the aggregate exceed an outstanding balance of $25,000,000.

In the event the Excess Amounts plus interest reaches a maximum of $225,000,000, the Company shall be responsible for its share of development costs, together with any other amounts that become due from the Company, plus its share of any pre-tax loss beyond such maximum. For all calendar quarters following the Company's third profitable calendar quarter, as determined in the agreement, the Company can no longer add to Excess Amounts and shall be responsible for its own share of development costs along with its share of pre-tax losses incurred in such quarters. Janssen may recoup the Excess Amounts, together with interest from the Company's share of pre-tax profits (if any) in calendar quarters subsequent to its third profitable calendar quarter until the Excess Amounts and applicable interest has been fully repaid.

The Company's share of costs incurred under the collaboration with Janssen for the three months ended March 31, 2013 was $24,869,000. For the three months ended March 31, 2013 and March 31, 2012, the Company did not recognize Excess Amounts because the total costs incurred under the collaboration for the calendar year to date as of March 31, 2013 and March 31, 2012 did not exceed the $50,000,000 annual cap.

As of March 31, 2013, total Excess Amounts of $18,191,000 (which comprises the cumulative amount funded by Janssen to-date of $18,125,000 and interest of $66,000) would become payable once the Company reaches a third profitable calendar

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quarter for the product.

The agreement also includes a 50/50 net profit sharing arrangement for the commercialization of any products resulting from the collaboration. Both parties are responsible for the development, manufacturing and marketing of any products resulting from this agreement. Janssen has sole responsibility and exclusive rights to commercialize the products in the License Territory. The parties hold joint responsibility and co-exclusive rights to commercialize the products in the U.S., and Pharmacyclics will serve as the lead party in such effort. The Company continues to work with Janssen on protocols and the design, schedules and timing of trials.

In accordance with ASU No. 2009-13 (and as incorporated into ASC Topic 605-25), the Company identified all of the deliverables at the inception of the agreement. The significant deliverables were determined to be the license, committee services, development services and commercialization services. The commercialization services represent a contingent deliverable for which there is not a significant incremental discount.

The Company has determined that the license represents a separate unit of accounting as the license, which includes rights to the underlying technologies for ibrutinib, has standalone value apart from the committee and development services because the development, manufacturing and commercialization rights conveyed would permit JBI to perform all efforts necessary to bring the compound to commercialization and begin selling the drug upon regulatory approval. The Company has also determined that the committee and development services each represent individual units of accounting as they have standalone value from each other. The Company has determined its best estimate of selling prices for the license unit of accounting based on the income approach as defined in ASC 820-10-35-32. This measurement is based on the value indicated by current estimates about those future amounts and reflects management determined estimates and assumptions. These estimates and assumptions include, but are not limited to, how a market participant would use the license, estimated market opportunity and expected market share and assumed royalty rates that would be paid for sales resulting from products developed using the license, similar arrangements entered into by third parties and entity-specific factors such as the terms of the Company's previous collaborative agreement, the Company's pricing practices and pricing objectives, the likelihood that clinical trials will be successful, the likelihood that regulatory approval will be received and that the products will become commercialized and the markets served. These estimates and assumptions led to an expected future cash flow which was discounted based on estimated weighted average cost of capital of 12% and royalty rates ranging from 30% to 40%. The Company has also determined its best estimate of selling prices for the committee and development services, based on the nature of the services to be performed and estimates of the associated effort as well as estimated market rates for similar services. The arrangement consideration of $150,000,000 was allocated to the units of accounting based on the relative selling price method.

Of the $150,000,000 upfront payment received, $70,605,000 was allocated to the licenses, $14,982,000 to the committee services and $64,413,000 to the development services. The Company has recognized license revenue upon execution of the arrangement as the associated unit of accounting had been delivered pursuant to the terms of the agreement. At inception, the $14,982,000 and $64,413,000 allocated to committee and development services, respectively, is being recognized as revenue as the related services are provided over the estimated service periods of 17 years and 9 years, which are equivalent to the estimated remaining life of the underlying technology and the estimated remaining development period, respectively.

For the three months ended March 31, 2013, the Company recognized development costs under the collaboration as a component of research and development expense of $38,463,000, partially offset by a $16,291,000 reduction for Janssen's share of expenses incurred during the period under the cost sharing arrangement. The Company also recognized certain general and administrative expenses, including marketing and patent costs, under the collaboration agreement as a component of general and administrative expense of $3,508,000 for the three months ended March 31, 2013, partially offset by a $811,000 reduction for Janssen's share of expenses incurred during the period under the cost sharing arrangement. Accounts receivable at March 31, 2013 included $17,102,000 due from Janssen in connection with the cost sharing arrangement. As of December 31, 2012, the Company had $26,617,000 receivable from Janssen, of which $8,492,000 was related to cost sharing and $18,125,000 was related to Excess Amounts.

Total revenue recognized with respect to the Company's worldwide collaboration and license agreement with Janssen consisted of the following (in thousands):



	Three Months Ended
	March 31,
	2013		2012
License and milestone revenue	$	—	$	—
Collaboration services revenue	2,786		1,789
Total revenue	$	2,786	$	1,789

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At March 31, 2013, approximately $67,714,000 was included in deferred revenue related to the Janssen committee and development services, of which $59,879,000 was included in deferred revenue non-current. At December 31, 2012, approximately $70,500,000 was included in deferred revenue related to the Janssen committee and development services, of which $62,562,000 was included in deferred revenue non-current.

Collaboration and License Agreement with Servier

In April 2009, the Company entered into a collaboration and license agreement with Servier to research, develop and commercialize abexinostat (PCI-24781), an orally active, novel, small molecule inhibitor of pan-HDAC enzymes. Under the terms of the agreement, Servier acquired the exclusive right to develop and commercialize the pan-HDAC inhibitor product worldwide except for the United States and will pay development and regulatory milestones and a royalty to the Company on sales outside of the United States. Servier is solely responsible for conducting and paying for all development activities outside the United States. The Company continues to own all rights within the United States.

In May 2009, the Company received an upfront payment from Servier of $11,000,000 ($10,450,000 net of withholding taxes) and the Company received an additional $4,000,000 for research collaboration paid over a twenty-four months period through April 2011. The revenue related to these payments was recognized over the two-years period, which ended in April 2011.

Under this agreement with Servier, the Company is also eligible to receive up to $24,500,000 in milestone payments upon achievement of pre-specified events; including up to $10,500,000 million for the achievement of clinical development milestones ($7,000,000 of which was paid to the Company, in advance, during April 2011), up to $5,000,000 for the achievement of regulatory progress and up to $9,000,000 for regulatory approval of the pan HDAC product in major jurisdictions. In addition, Servier agreed to make royalty payments on net sales of the licensed product as defined in the agreement. In October 2011, the milestone related to the $7,000,000 advance payment was achieved and the Company recognized the amount as revenue.

Total revenue recognized with respect to the Company's collaboration and license agreement with Servier consisted of the following (in thousands):



	Three Months Ended
	March 31,
	2013		2012
License and milestone revenue	$	—	$	—
Collaboration services revenue	40		63
Total	$	40	$	63

License agreement with Novo Nordisk A/S

In October 2012, the Company entered into a license agreement with Novo Nordisk A/S ("Novo Nordisk"). Under the terms of the agreement, Novo Nordisk acquired the exclusive worldwide rights for the Company's small molecule Factor VIIa inhibitor, PCI-27483, in a restricted disease indication outside of oncology. Novo Nordisk will utilize PCI-27483 as an excipient in a product within Novo Nordisk's biopharmaceutical unit. Novo Nordisk is solely responsible for all further research and development activities within the restricted disease indication outside of oncology.

In connection with entering into the license agreement with Novo Nordisk, the Company received an upfront payment of $5,000,000 in October 2012. In addition, the Company may receive up to $55,000,000 based on the achievement of certain development, regulatory and sales milestones. Upon commercialization, the Company will also receive low single digit tiered royalties on Novo Nordisk's net sales of biopharmaceutical formulations utilizing the addition of PCI-27483. In connection with the agreement, during the three months ended December 31, 2012, Novo Nordisk purchased a preclinical supply of PCI-27483 in the amount of $803,000, of which $602,000 was recognized as revenue during the three months ended December 31, 2012 for supply delivered, where the right of return had elapsed and all four revenue criteria had been met. As of March 31, 2013, $201,000 of revenue was deferred related to the Company's sale of PCI-27483 to Novo Nordisk.

Celera Corporation

In April 2006, the Company acquired multiple small molecule drug candidates for the treatment of cancer and other diseases from Celera Genomics, an Applera Corporation business (now Celera Corporation - a subsidiary of Quest Diagnostics

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Incorporated). Future milestone payments under the agreement, as amended, could total as much as approximately $97,000,000, although the Company currently cannot predict if or when any of the milestones will be achieved. Approximately two-thirds of the milestone payments relate to the Company's HDAC inhibitor program and approximately one-third relates to the Company's Factor VIIa inhibitor program. Approximately 90% of the potential future milestone payments would be paid to Celera after obtaining regulatory approval in various countries. There were no milestone payments triggered either during the three months ended March 31, 2013 or the three months ended March 31, 2012 related to the Company's HDAC inhibitor or Factor VIIa inhibitor programs. In addition to the milestone payments, Celera will be entitled to single-digit royalty payments based on annual sales of drugs commercialized from the Company's HDAC inhibitor, Factor VIIa inhibitor and certain BTK inhibitor programs including ibrutinib.

For any BTK inhibitor product or Factor VIIa inhibitor product obtained from Celera, the agreement with Celera expires on a product-by-product and country-by-country basis. The term of the agreement for a given BTK inhibitor product shall expire in a given country upon the expiration of the last-to-expire Celera patent assigned to the Company that covers the manufacture, use, sale, offer for sale, or importation of such product in such country. For any HDAC inhibitor product obtained from Celera, the agreement with Celera expires on a product-by-product and country-by-country basis. The term of the agreement for a given HDAC inhibitor product shall expire in a given country upon the expiration of the last-to-expire Celera patent assigned to the Company that covers the sale of such product in such country.

The Company may terminate the agreement with Celera in its entirety, or with respect to one or more of the three classes of products (BTK inhibitor products, HDAC inhibitor products and Factor VIIa inhibitor products) obtained from Celera, at any time by giving Celera at least 60 days' prior written notice. If the Company terminates the agreement with respect to a particular class of products, ownership of the Celera intellectual property assigned to the Company relating to the products in the terminated product class will revert to Celera. If the Company terminates the agreement in its entirety, ownership of all of the Celera intellectual property assigned to the Company will revert to Celera.

The agreement with Celera may be terminated effective immediately upon a party's written notice to the other party for a breach by the other party that remains uncured for 90 days after notice of the breach is given to the breaching party. If the Company breaches the agreement only with respect to one or two of the three classes of products obtained from Celera, but not with respect to all three classes of products, and if the Company's breach remains uncured for 90 days after the Company has received notice of breach from Celera, Celera may terminate the agreement solely with respect to the class or classes of products affected by the Company's breach, but may not terminate the agreement with respect to the class or classes of products unaffected by the Company's breach.

Note 5 – Fair Value Measurements and Marketable Securities

The Company's marketable securities are classified as “available-for-sale”. The Company includes these investments in current assets and carries them at fair value. Unrealized gains and losses on available-for-sale securities are included in accumulated other income (loss). The amortized cost of debt securities is adjusted for the amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Gains and losses on securities sold are recorded based on the specific identification method and are included in interest expense and other income (expense), net in the statement of operations.

Management assesses whether declines in the fair value of marketable securities are other than temporary. If the decline is judged to be other than temporary, the cost basis of the individual security is written down to fair value and the amount of the write down is included in the statement of operations. In determining whether a decline is other than temporary, management considers various factors including the length of time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and the Company's intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.

The fair value of the Company's financial assets and liabilities is determined by using three levels of input which are defined as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities. At March 31, 2013, the Company's Level 1 assets were comprised of money market funds.

Level 2 - Observable inputs other than Level 1 prices 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. The Company's short-term investments primarily utilize broker quotes in markets with infrequent transactions for valuation of these securities. At March 31, 2013, the Company's Level 2 assets were

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comprised of U.S. agency securities.

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. At March 31, 2013, the Company did not hold any Level 3 assets.

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

The following is a summary of the Company's available-for-sale securities at March 31, 2013 and December 31, 2012, respectively (in thousands):



As of March 31, 2013	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
U.S. agency securities – FDIC insured	$	8,725	$	—	$	(4	)	$	8,721
Total marketable securities	$	8,725	$	—	$	(4	)	$	8,721



As of December 31, 2012	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
U.S. agency securities – FDIC insured	$	9,685	$	—	$	(4	)	$	9,681
Total marketable securities	$	9,685	$	—	$	(4	)	$	9,681

At March 31, 2013, the Company's marketable securities had the following remaining contractual maturities (in thousands):



	Amortized Cost		Estimated Fair Value
Less than one year	$	8,725	$	8,721

The following table sets forth the basis of fair value measurements for the Company's cash equivalents and available-for-sale securities as of March 31, 2013 and December 31, 2012 (in thousands):



	March 31, 2013
	Level 1		Level 2		Level 3		Fair value
Cash equivalents:
Money market funds	$	135,416	$	—	$	—	$	135,416
U.S. agency securities - FDIC insured	—		240		—		240
Marketable securities:
U.S. agency securities - FDIC insured	—		8,721		—		8,721
	$	135,416	$	8,961	$	—	$	144,377



	December 31, 2012
	Level 1		Level 2		Level 3		Fair value
Cash equivalents:
Money market funds	$	137,856	$	—	$	—	$	137,856
U.S. agency securities - FDIC insured	—		240		—		240
Marketable securities:
U.S. agency securities - FDIC insured	—		9,681		—		9,681
	$	137,856	$	9,921	$	—	$	147,777

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Note 6 – Balance Sheet Components

Property and equipment, net, consists of the following (in thousands):



	March 31, 2013			December 31, 2012
Equipment	$	8,581		$	8,523
Leasehold improvements	6,366			4,516
Furniture and fixtures	1,131			739
Construction in progress	1,870			1,192
	17,948			14,970
Less: Accumulated depreciation and amortization	(8,470		)	(8,567		)
	$	9,478		$	6,403

Accrued liabilities consist of the following (in thousands):



	March 31, 2013		December 31, 2012
Accrued clinical related	$	7,937	$	6,415
Accrued payroll and employee related expenses	5,728		2,934
Accrued contract manufacturing	3,615		3,126
Accrued marketing	1,107		—
Accrued outside services	1,047		1,115
Accrued other	4,121		1,532
	$	23,555	$	15,122

Deferred revenue consists of the following (in thousands):



Current portion:	March 31,		December 31,
	2013		2012
Deferred revenue related to Janssen	$	7,835	$	7,938
Deferred revenue related to Novo Nordisk	201		201
	$	8,036	$	8,139



Non-current portion:	March 31,		December 31,
	2013		2012
Deferred revenue from Janssen	$	59,879	$	62,562

Note 7 – Income Taxes

The income tax provision includes U.S. federal, state and local, and foreign income taxes and is based on the application of a forecasted annual income tax rate applied to the year-to-date pre-tax income (loss). In determining the estimated annual effective income tax rate, the Company analyzes various factors including projections of its annual earnings, taxing jurisdictions in which the earnings will be generated, the impact of state and local income taxes, its ability to use tax credits and net operating loss carryforwards and available tax planning alternatives. Discrete items including the effect of changes in tax laws, tax rates and

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certain circumstances with respect to valuation allowances or other unusual or non-recurring tax adjustments are reflected in the period in which they occur.

For the three months ended March 31, 2013, the Company recorded an income tax benefit of $974,000, or an estimated annual effective tax rate for the tax year ended June 30, 2013 of approximately 2.5%. The Company recorded income tax benefit of $5,083,000, or an estimated annual effective tax rate for the tax year ended June 30, 2012 of 1.9%, for the three months ended March 31, 2012. The difference between the estimated annual effective tax rate and the federal statutory rate of 35% was primarily attributable to non-deductible expenses offset by the use of federal net operating loss carryovers that are not subject to any use limitations. Income tax benefit for the three months ended March 31, 2013 was primarily related to the reversal of previously recorded Federal Alternative Minimum Tax offset by foreign tax expense.

The Company is required to reduce its deferred tax assets by a valuation allowance if it is more likely than not that some or all of the Company's deferred tax assets will not be realized. Management must use judgment in assessing the potential need for a valuation allowance, which requires an evaluation of both negative and positive evidence. The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. In determining the need for and amount of the valuation allowance, if any, the Company assesses the likelihood that the Company will be able to recover its deferred tax assets using historical levels of income, estimates of future income and tax planning strategies. As a result of historical cumulative losses, the Company determined that, based on all available evidence, there was substantial uncertainty as to whether the Company will recover recorded net deferred taxes in future periods. Accordingly, the Company recorded a valuation allowance against all of its net deferred tax assets at both March 31, 2013 and December 31, 2012. The Company intends to continue maintaining a full valuation allowance on its deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.

As of March 31, 2013 and December 31, 2012, the Company had unrecognized tax positions of approximately $3,253,000 and $2,845,000, respectively, that, if recognized, would benefit its effective tax rate. The Company does not expect any material change to the unrecognized tax benefits during the next twelve months. The Company is unable to make a reasonable estimate as to when cash settlements with the relevant taxing authorities will occur.

The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although there have been no such assessments historically. In the event the Company receives an assessment for interest and/or penalties, it would be classified in the financial statements as income tax expense. As of March 31, 2013, all tax years in the U.S. remain open due to the taxing authorities’ ability to adjust operating loss carry forwards.

During the three months ended March 31, 2013, the American Taxpayer Relief Act of 2012 was signed into law that reinstated the U.S. federal R&D tax credit retroactive to January 1, 2012. Because the law's effective enactment date is 2013, the impact to the Company of the reinstated credit were not recognized in 2012. The additional credits that will be reported within the 2013 consolidated financial statements will have no impact on operations due to the existence of a full valuation allowance on all deferred tax assets.

Note 8 – Related Party Transaction

The Company entered into a Consulting Agreement with Dr. Gwen Fyfe, a former member of its Board of Directors, prior to Dr. Fyfe joining its Board in December 2010. During the three months ended March 31, 2013, the Company did not make any payments to Dr. Fyfe for consulting services. During the three months ended March 31, 2012, the Company paid an insignificant amount to Dr. Fyfe for consulting services. In November 2011, the Company entered into an amendment (the “Amendment”) to the Consulting Agreement with Dr. Fyfe. The Amendment provided that Dr. Fyfe would receive a lump sum of $50,000 and that she will continue to provide limited consulting services to the Company for a period of two years. Payment of the $50,000 lump sum occurred in November 2011. In addition, the options to purchase 330,000 shares of the Company's common stock previously granted to Dr. Fyfe in connection with her consulting services continued to vest through November 30, 2011 and shall remain exercisable for a period of 2 years following the date of the Amendment. Dr. Fyfe did not stand for reelection at the Company's December 15, 2011 Annual Meeting of Stockholders. Options granted to Dr. Fyfe upon her initial election to the Board continued to vest through December 15, 2011; all such vested options and all additional options received by Dr. Fyfe in connection with her Board service shall remain exercisable for a period of three years from this date.

Note 9 – Commitments and Contingencies

Facilities Lease

As of March 31, 2013, the Company leases a total of 132,176 square feet under its facility lease agreements. Of the total square footage leased as of March 31, 2013, 79,776 square feet are leased under an operating lease that expires in November 2017, with an option to extend the lease term for an additional five years. As of March 31, 2013, the Company also leases 52,400 square feet, of which 32,000 square feet represents additional space that the Company exercised an option to lease during three months ended March 31, 2013, in a property adjacent to its existing corporate offices in Sunnyvale, California

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under an operating lease which expires in February 2023 and has an option to extend the lease term for an additional extend the term for an additional five years.

The Company recognizes rental expense on the facilities on a straight-line basis over the lease term. Differences between the straight line rent expense and rent payments are classified as deferred rent liability on the balance sheet. As of March 31, 2013, the Company's future minimum lease payments under non-cancelable operating leases are as follows:



Fiscal year	Operating Lease Commitments
2013 (remaining nine months)	$	1,282
2014	2,023
2015	2,091
2016	2,277
2017	1,996
Thereafter	4,629
Total	$	14,298

Purchase Commitments

The Company had non-cancelable purchase obligations for approximately $19,678,000 and $2,326,000 as of March 31, 2013 and December 31, 2012, respectively.

Excess Amounts under collaboration and license agreement with Janssen

The Company's worldwide collaboration and license agreement with Janssen provides the Company with an annual cap of its share of development costs and pre-tax losses for each calendar year until the third profitable calendar quarter for the product, as determined in the agreement and any Excess Amounts are funded by Janssen. Janssen may recoup the Excess Amounts, together with interest from the Company's share of pre-tax profits (if any) in calendar quarters subsequent to its third profitable calendar quarter until the Excess Amounts and applicable interest has been fully repaid. As of March 31, 2013, total Excess Amounts of $18,191,000 (which comprises the cumulative amount funded by Janssen to-date of $18,125,000 and interest of $66,000) would become payable once the Company reaches a third profitable calendar quarter for the product (see Note 4).

Legal Proceedings

The Company may be involved, from time to time, in legal proceedings and claims arising in the ordinary course of its business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. The Company accrues amounts, to the extent they can be reasonably estimated, that it believes are adequate to address any liabilities related to legal proceedings and other loss contingencies that the Company believes will result in a probable loss. While there can be no assurances as to the ultimate outcome of any legal proceeding or other loss contingency involving the Company, management does not believe any pending matter will be resolved in a manner that would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

Note 10 — Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board ("FASB") issued new accounting guidance in connection with disclosures about offsetting assets and liabilities. The update requires new disclosures about balance sheet offsetting and related arrangements. For derivatives and financial assets and liabilities, the amendments require disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to the offsetting requirements but not offset on the balance sheet. On January 31, 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarified that the scope of the disclosures is limited to include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required by the amendments should be provided retrospectively for all comparative periods presented. The Company's adoption of ASU 2013-01 during the three months ended March 31, 2013 did not have a material effect on its condensed consolidated financial statements.

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to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income (e.g., net periodic pension benefit cost), an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The Company's adoption of ASU 2013-02 during the quarter ended March 31, 2013 did not affect its results of operations or financial position.

Note 11 — Subsequent Events

Breakthrough Therapy Designation

On April 8, 2013, the Company announced that the U.S. Food and Drug Administration (FDA) granted a Breakthrough Therapy Designation for the Company's investigational oral agent ibrutinib as monotherapy for the treatment of chronic lymphocytic leukemia (CLL) or small lymphocytic lymphoma (SLL) patients with deletion of the short arm of chromosome 17 (deletion 17p). Previously, in February 2013, the Company announced that it was granted the Breakthrough Therapy Designation for ibrutinib as a monotherapy for the treatment of patients with relapsed or refractory mantle cell lymphoma (MCL) and as a monotherapy for the treatment of patients with Waldenstrom's macroglobulinemia (WM), both of which are B-cell malignancies.

The Breakthrough Therapy Designation is intended to expedite the development and review of a potential new drug for serious or life-threatening diseases where “preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development.” The designation of a drug as a Breakthrough Therapy was enacted as part of the 2012 Food and Drug Administration Safety and Innovation Act.

Milestone payment obligation from Janssen

On April 11, 2013, the Company announced that the fourth $50,000,000 milestone payment obligation from Janssen under the collaboration and license agreement had been triggered as a result of the enrollment of a fifth patient in its Phase III clinical trial of ibrutinib in a monotherapy trial using ibrutinib versus chlorambucil in elderly patients with newly diagnosed chronic lymphocytic leukemia/small lymphocytic leukemia (CLL/SLL). The Company will recognize this milestone payment from Janssen as milestone revenue during the three months ending June 30, 2013.

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

You should read the following discussion and analysis of our financial condition and results of operations together with our interim financial statements and the related notes appearing at the beginning of this report. The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the transition period ended December 31, 2012 and the year ended June 30, 2012 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Transition Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2013.

The following discussion contains forward-looking statements that involve risks and uncertainties. These statements relate to future events, such as our future clinical and product development, financial performance and regulatory review of our product candidates. Our actual results could differ materially from any future performance suggested in this report as a result of various factors, including those discussed elsewhere in this report, in our Transition Report on Form 10-K for the transition period ended December 31, 2012 and in our other Securities and Exchange Commission reports and filings. All forward-looking statements are based on information currently available to Pharmacyclics; and we assume no obligation to update such forward-looking statements. Stockholders are cautioned not to place undue reliance on such statements.

Change in Fiscal Year End

Company Overview

We are a clinical-stage biopharmaceutical company focused on developing and commercializing innovative small-molecule drugs for the treatment of cancer and immune mediated diseases. Our corporate mission statement reads as follows:

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To build a viable biopharmaceutical company that designs, develops and commercializes novel therapies intended to improve quality of life, increase duration of life and resolve serious unmet medical healthcare needs; to identify promising product candidates based on exceptional scientific development and administrational expertise, develop our products in a rapid, cost-efficient manner and to pursue commercialization and/or development partners when and where appropriate. We exist to make a difference for the better and these are important times to do that.

Presently, we have three product candidates in clinical development and several preclinical molecules in lead optimization or pre-clinical development. We are committed to high standards of ethics, scientific rigor, and operational efficiency as we move each of these programs toward potential commercialization. To date, nearly all of our resources have been dedicated to the research and development of our products, and we have not generated any commercial revenues from the sale of our products. We do not anticipate the generation of any product commercial revenue until we receive the necessary regulatory and marketing approvals to launch one of our products.

During the fiscal year ended June 30, 2012, we exited the development stage, as defined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 915, "Development Stage Entities," with the signing of our first significant collaboration with Janssen Biotech, Inc. and its affiliates (“Janssen”) (See Note 4), from which we received our first significant revenue from principal operations, reflective that we are no longer in the development stage.

The process of developing and commercializing our products requires significant research and development, preclinical testing and clinical trials, manufacturing arrangements as well as regulatory and marketing approvals. These activities, together with our general and administrative expenses, are expected to result in significant operating losses until the commercialization of our products, or partner collaborations, generate sufficient revenue to cover our expenses. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Our ability to achieve or sustain profitability in the future depends upon our ability to successfully complete the development of our products, obtain required regulatory approvals and successfully manufacture and commercialize our products.

Ibrutinib (also known as PCI-32765) - Bruton’s Tyrosine Kinase (“BTK”) Inhibitor for Oncology

Ibrutinib is an orally active selective irreversible inhibitor of BTK that we are developing for the treatment of patients with B-cell malignancies (lymphoma or leukemia). B-cell maturation is mediated by B-cell receptor (“BCR”) signal transduction and BTK is an essential part of the BCR signaling pathway. Recently, BTK has been demonstrated to affect a number of vital growth and survival processes in cancerous B-cells.

Ibrutinib Clinical Development Update

Our most recent clinical updates include the following:

At the American Association for Cancer Research ("AACR") Annual Meeting in April 2013 a Phase II study in high risk chronic lymphocytic leukemia ("CLL") subjects, sponsored by the National Heart, Lung and Blood Institute, was presented. This trial included an analysis of two CLL patient cohorts: the elderly, above 65 years of age, (n=24, of which 8 were treatment naive) and the high risk genetic group with a deletion of chromosome 17p (del 17p) (n=29, of which 15 were treatment naive). Many elderly patients with CLL are unable to tolerate aggressive therapies. Patients with deletion of chromosome 17p typically are poor responders to chemoimmunotherapy and have limited treatment options with no standard of care defined. Of all CLL patients enrolled in this trial, 72% had been characterized as Rai stage 3-4, indicating an advance stage, high risk patient population. The progression free survival probability for these patients at 12 months was estimated to be 94 percent. Most adverse events were mild and manageable and included diarrhea, fatigue and rash, severe events occurred in less than 13 percent of patients.

At the 2012 American Society of Hematology ("ASH") Annual Meeting in December 2012, we presented interim results of our Phase II study in relapse/refractory ("R/R") mantle cell lymphoma ("MCL") patients. This presentation showed an overall response rate ("ORR") in 110 evaluable MCL patients of 68%, including 22% complete responses ("CRs") and 46% partial responses (PRs), with an estimated median progression-free survival ("PFS") of 13.9 months. An analysis of a subset of 51 patients presented last year at ASH 2011 with longer follow up demonstrated an incremental improvement in the response rate over time. The ORR increased in this subset from 69% as reported at ASH in 2011 to an ORR of 75% as reported at ASH in 2012, with the CR rate increasing from 16% to 39% over the same period. The treatment emergent adverse events were consistent with safety data previously reported for ibrutinib monotherapy. The most common non-hematologic events were mild to moderate diarrhea and fatigue. The most common infections were respiratory. Severe adverse events were uncommon.

Updated data of our single agent Phase Ib/II study in treatment-naive and relapsed/refractory chronic lymphocytic leukemia/small lymphocytic lymphoma ("CLL/SLL") patients was also presented at ASH 2012. A multicenter, open-label, single agent Phase Ib/II study of ibrutinib monotherapy in either relapsed/refractory (n=85) or elderly treatment-naive (n=31) (65 years of age or older) CLL patients completed enrollment in July 2011. The study was designed to assess safety, tolerability, and efficacy of ibrutinib at two dose levels, 420 mg and 840 mg daily until progression or intolerability. The relapsed and

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refractory population contained a high risk subset (n=24), defined by patients who fail to respond or relapse within 24 months of chemoimmunotherapy. With a maximum follow up of 26 months, it was estimated that 96% of the treatment-naive and 75% of the relapsed-refractory, including high-risk, patients were without progression. Responses were independent of high risk genetic features that would predict poor outcome to standard chemotherapy. Continuous dosing was well tolerated with a reported lack of detrimental impact on immunoglobulins or hematologic parameters. Adverse events were predominantly Grade 2 or less in severity, with the most common being diarrhea, fatigue, upper respiratory tract infection, rash, nausea and arthralgias (joint pain). The majority of events were managed with over the counter medicines and outpatient care. Grade 3 and Grade 4 hematologic events, neutropenia (low white cell counts) and thrombocytopenia (low platelet counts), potentially related to ibrutinib occurred in 12% of patients. Of the 31 treatment-naive patients on the trial at the time of the analysis, there was only 1 patient that had discontinued due to disease progression.

Additionally at ASH 2012, findings were presented from a Phase II, single-center trial with 40 high risk CLL patients treated with 420 mg/day ibrutinib in combination with rituximab, an anti-CD20 monoclonal antibody sponsored by the M.D. Anderson Cancer Center. The high risk patients had one of the following characteristics, all predictive of poor outcome to standard chemotherapy: deletion in chromosome 17p, mutation in the tumor suppressor gene TP53, deletion in chromosome 11q or relapse less than 36 months after chemo-immunotherapy. The results after a median follow-up of 4.8 months were notable in these difficult to treat patients, with an overall response rate of 83%. Treatment was well tolerated, no new safety signals were noted, with Grade 3/4 adverse events that were reported as largely unrelated to ibrutinib or the combination, such as neutropenia (low white blood cell count), fatigue, insomnia, and bone aches. The most common Grade 3/4 infection was pneumonia.

We previously reported at the 2012 American Society of Clinical Oncology (ASCO) Annual Meeting in June 2012, results of Phase II combination studies that included ibrutinib. The PCYC-1109 study included a total of 27 patients with Chronic Lymphocytic Leukemia/Small Lymphocytic Lymphoma/Prolymphocytic Leukemia (“CLL/SLL/PLL”) treated with ibrutinib (420 mg) was followed by concomitant ofatumumab with continued ibrutinib until progression. The combination was well tolerated, as indicated by reports that the majority of adverse events were Grades 1/2. No new safety signals were identified. At the time of the analysis for the CLL/SLL/PLL patients, the overall response rate, as measured by IWCLL criteria, and the progression free survival probability were both 100% at the median follow-up of 9.8 months. Cohorts evaluating other therapeutic sequences with ofatumumab and ibrutinib are currently underway and enrollment has been completed on this study.

Results were also reported on the Phase II Study PCYC-1108 which had enrolled a total of 33 relapsed or refractory CLL patients, 30 of which were treated with a combination of bendamustine and rituximab ("BR"); 37% were considered refractory (treatment free interval ≤ 12 mo) to a purine analog (e.g. fludarabine) containing regimen and 13% refractory to bendamustine. The combination therapy was well tolerated and there were no discontinuations due to adverse events. At the median follow-up of 8.1 months, the ORR was 93%, progression free survival probability was 90%. This study was further updated during the European Hematology Association Annual Congress in June of 2012 with analysis of a small subset of relapse patients who receive ibrutinib in combination with fludarabine/cyclophosphamide/rituximab ("FCR"). At the median follow-up of 8.5 months all three patients had achieved an objective response, with two patients achieving minimal residual disease negative (“MRD-Negative”) complete responses and at the time of analysis all patients remained progression free.

In relapsed/refractory CLL/SLL patients we initiated RESONATE™ (PCYC-1112), which is a randomized, multi-center, open-label, pivotal Phase III trial of ibrutinib as a monotherapy. The target enrollment of 350 patients was achieved on April 3, 2013 and the study was closed for further enrollment on April 18, 2013 with an additional 41 patients allowed to participate who were in the screening process. The primary endpoint of this study is to demonstrate a clinically significant improvement in progression-free survival when compared to ofatumumab.

In frontline newly diagnosed elderly CLL/SLL patients we initiated a Phase III trial RESONATE™ -2 (PCYC-1115/1116). This trial is a randomized, multicenter, open-label study of ibrutinib as a monotherapy versus chlorambucil in patients 65 years or older with treatment naïve CLL/SLL. The study design is under a Special Protocol Assessment ("SPA") with the FDA. The study is designed to demonstrate superiority of ibrutinib with the primary endpoint of progression-free survival ("PFS") when compared to chlorambucil. This global study is open and Pharmacyclics plans to enroll 272 patients worldwide.

We also initiated the RESONATE™-17 trial (PCYC-1117), which is a single-arm, multicenter, open-label Phase II trial using ibrutinib as a monotherapy in patients who have deletion 17p and who did not respond to or relapsed after at least one prior treatment (a high unmet need population). The primary endpoint of the study will be overall response rate. The key secondary endpoints will be duration of response and other measures of clinical benefit. This global study is open and Pharmacyclics plans to enroll 111 patients worldwide.

At the ASH 2012 Annual Meeting, Pharmacyclics and its investigators gave a multitude of presentations showing research and clinical results of using ibrutinib in a variety of other B-cell malignancies. Preliminary results were reported from a multicenter, open-label, Phase II study of ibrutinib in 70 relapsed/refractory diffuse large B-cell lymphoma ("DLBCL") patients, which either had the Activated B-cell ("ABC") subtype or the Germinal center B-cell ("GCB") subtype of DLBCL

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(PCYC-1106). The ABC subtype growth and proliferation appears to be more driven by B-cell receptor signaling mechanism than the GCB subtype. The ORR in the heavily pre-treated population was 23% (16 of 70 patients). Responses were primarily in the ABC subtype with 12 of 29 patients (41%) responding (5 complete responses and 7 partial responses). In the 20 GCB patients only 1 patient (5%) had a partial response. This study supports the use of ABC DLBCL molecular subtyping as a biomarker for selection of patients for future ibrutinib studies. The safety profile was consistent with previous studies, with most common Grade 1/2 events gastrointestinal and fatigue.

At the ASH 2012 Annual Meeting, long term results on 16 relapsed/refractory evaluable follicular lymphoma ("FL") patients dosed with ibrutinib as monotherapy from the Phase I study (PCYC-04753) were presented. Patients were heavily pretreated with a median of 3 prior therapies and 44% had high-risk Follicular Lymphoma International Prognostic Index scores. The ORR in 16 subjects was 44% with 3 CRs and 4 PRs. For patients treated at greater or equal 5 mg/kg (n=9) the median PFS was reported as 19.6 months with an ORR=56%. The drug was well tolerated with no apparent cumulative toxicity upon extended dosing in this study.

At the ASH 2012 Annual Meeting, we also presented clinical results and biomarker studies on 13 multiple myeloma ("MM") patients accrued in the first cohort where ibrutinib was dosed as a monotherapy at 420 mg. Patients were heavily pretreated, with a median of 4 prior therapies (range 2 to 10). All patients previously had prior exposure to bortezomib, lenalidomide, and dexamethasone or prednisone and 92% had progressed following stem cell transplant. A total of 39% of the patients had deletion of chromosome 17p ("del 17p"). Signals of biologic and clinical activity were observed. Reductions in paraprotein of at least 50% were reported in 3 patients on ibrutinib monotherapy, and one patient went on to have a confirmed PR following addition of dexamethasone. As anticipated from pre-clinical studies, decreases of several biomarkers of bone metabolism, angiogenesis and chemotaxis were observed following the start of treatment. The most common treatment related adverse events were Grade 1/2 nausea and diarrhea. We have expanded the study to explore ibrutinib administration of a dose of 560 and 840 mg in combination with dexamethasone.

Waldenstrom's macroglobulinemia ("WM") is a subtype of lymphoplasmacytic lymphoma, and is considered an indolent B-cell malignancy. Pharmacyclics evaluated long-term data of WM patients from its Phase I study (PCYC-04753) which the Company initiated in February 2009. The Company observed objective responses in 3 of 4 patients. This early development led to a collaboration with Dr. Treon at the Dana Farber Cancer Institute in Boston. A preliminary look at the data demonstrated early onset of activity, and it appears that BTK is a key driver in the pathophysiology of Waldenstrom's disease. This study is continuing to enroll patients.

Ibrutinib (PCI-32765) Worldwide Collaboration with Janssen

In December 2011, we entered into a worldwide collaboration and license agreement with Janssen Biotech Inc. and its affiliates ("Janssen"), one of the Janssen Pharmaceutical Companies of Johnson & Johnson, for the development and commercialization of ibrutinib, a novel, orally active, first-in-class BTK inhibitor being developed for the treatment of hematological malignancies, including non-Hodgkin's lymphoma, chronic lymphocytic leukemia and multiple myeloma.

Pharmacyclics and Janssen will collaborate on the development of ibrutinib for oncology and other indications, excluding all immune mediated diseases or conditions and all psychiatric or psychological diseases or conditions. Each company will lead development for specific indications as stipulated in a global development plan. The agreement includes plans to launch multiple Phase III trials of ibrutinib over the next several years.

Following regulatory approval, both Pharmacyclics and Janssen will book revenue and co-commercialize ibrutinib. In the U.S., Pharmacyclics will book sales and take a lead role in U.S. commercial strategy development and both Pharmacyclics and Janssen will share in commercialization activities. Outside the United States, Janssen will book sales and lead and perform commercialization activities. Profits and losses from the commercialization activities will be equally split on a worldwide basis. Development and commercialization activities under the collaboration will be managed through a shared governance structure.

As of March 31, 2013, our partner Janssen has initiated, amongst others, the following studies:

•

Phase III study of ibrutinib in combination with bendamustine and rituximab in patients with R/R CLL/SLL, HELIOS (CLL3001). This trial is a randomized, multi-center, double blinded, placebo controlled trial of ibrutinib in combination with bendamustine and rituximab in R/R CLL/SLL patients who received at least one line of prior systemic therapy. The primary endpoint of the study is to demonstrate a clinically significant improvement in progression-free survival when compared to bendamustine and rituximab. This global study, conducted by Janssen, is open and Janssen plans to enroll 580 patients worldwide.

•

Phase III study of ibrutinib versus temsirolimus in R/R MCL patients, RAY (MCL3001). This trial is a randomized, multi-center, open-label trial of ibrutinib as a monotherapy versus temsirolimus in R/R MCL patients who received at least one prior rituximab-containing chemotherapy regimen. The primary endpoint of the study is progression free survival when compared to temsirolimus. This global study, conducted by Janssen outside the US, is open and Janssen

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plans to enroll 280 patients.

•

Phase III study of ibrutinib in combination with bendamustine and rituximab in patients with newly diagnosed MCL, SHINE (MCL3002). This trial is a randomized, multi-center, double-blinded, placebo-controlled trial of ibrutinib plus bendamustine and rituximab versus placebo plus bendamustine and rituximab in subjects with newly diagnosed MCL. The primary endpoint of the study is progression free survival when compared to bendamustine and rituximab. Janssen plans to enroll 520 patients in this study.

•

Phase II study of ibrutinib in patients with R/R MCL who progress after bortezomib therapy, SPARK (MCL2001). This is a single-arm, multi-center trial of ibrutinib as a monotherapy in R/R MCL patients who received at least one prior rituximab-containing chemotherapy regimen and who progressed after bortezomib therapy. The primary endpoint of the study is overall response rate, which is scheduled to be evaluated 6 months from the completion of enrollment. This global study, conducted by Janssen has completed enrollment of the planned 110 patients in April 2013.

•

Phase II study of ibrutinib in subjects with R/R follicular lymphoma (FLR2002). This is a multi-center, global study of ibrutinib in patients with chemoimmunotherapy-resistant FL, whose disease has relapsed from at least 2 prior lines of therapy, including at least 1 rituximab combination chemotherapy regimen. The primary endpoint of this study is objective response rate. This global study, conducted by Janssen, was opened in Q1'2013 and Janssen plans to enroll 110 patients.

•

Phase Ib/II dose escalating study of ibrutinib in combination with R-CHOP in patients with newly diagnosed CD20 positive B-cell Non Hodgkin Lymphoma (DLBCL, MCL, FL). The purpose of this study is to identify a safe and tolerable dose of ibrutinib in combination with R-CHOP; with an expansion in patients with DLBCL. This global, multi-center study, conducted by Janssen, is planned to enroll 33 patients.

Ibrutinib (PCI-32765) Breakthrough, Fast Track and Orphan Drug Designations

In the U.S., the FDA granted orphan drug designation to ibrutinib for the treatment of chronic lymphocytic leukemia on March 27, 2012 and for the treatment of mantle cell lymphoma on December 3, 2012. A U.S. orphan drug designation provides the drug developer with several benefits and incentives related to the orphan drug, including a 7-year period of U.S. marketing exclusivity if the drug is the first of its type approved for the specified indication. The FDA also granted Pharmacyclics with a Fast Track designation for ibrutinib for the treatment of chronic lymphocytic leukemia/small lymphocytic lymphoma on October 29, 2012 and for the treatment of mantle cell lymphoma on December 18, 2012. Fast Track is a process designed to facilitate the development, and expedite the review of drugs to treat serious and life-threatening conditions and address unmet medical needs for the condition.

The European Commission (“EU”) has adopted the decision on April 26, 2012 that ibrutinib for the treatment of chronic lymphocytic leukemia is designated as an orphan medicinal product. An EU orphan drug designation provides the drug developer with several benefits and incentives related to the orphan drug, including market exclusivity for 10 years after approval if the drug is the first of its type approved for the specified indication.

On February 12, 2013, we announced that the U.S. Food and Drug Administration ("FDA") granted Breakthrough Therapy Designation to our investigational oral agent ibrutinib monotherapy for the treatment of patients with R/R MCL and to ibrutinib monotherapy for the treatment of patients with WM, both of which are B-cell malignancies. On April 8, 2013, we announced that the FDA granted an additional Breakthrough Therapy Designation for the investigational oral agent ibrutinib as monotherapy for the treatment of CLL or SLL patients with deletion of the short arm of chromosome 17 (deletion 17p).

PCI-27483 - Factor VIIa Inhibitor

Our Factor VIIa inhibitor PCI-27483 is a novel first-in-human small molecule inhibitor that selectively targets FVIIa. As an inhibitor of FVIIa, PCI-27483 has two potential mechanisms of action: 1) inhibition of intracellular signaling involved in tumor growth and metastases and 2) inhibition of early coagulation processes associated with thromboembolism. PCI-27483 reduced pancreatic adenocarcinoma (PaCa) xenograft growth in mice at doses producing 2.5 - 3.0x change in prothrombin time.

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Factor VIIa PCI-27483 Clinical Development Update

A multicenter Phase I/II of PCI-27483, in patients with locally advanced or metastatic pancreatic cancer that are either receiving or are planned to receive gemcitabine therapy, has completed enrollment after a total of 42 patients enrolled. The Phase II portion of the study randomized patients to receive either gemcitabine alone or gemcitabine plus PCI-27483 (1.2 mg/kg twice daily). The objectives are to assess the safety of FVIIa Inhibitor PCI-27483 at pharmacologically active dose levels, to assess potential inhibition of tumor progression and to obtain initial information of the effects on the incidence of thromboembolic events. Data is expected to be published in the ASCO 2013 proceedings. Pharmacyclics is evaluating other alternatives for development of this agent.

Abexinostat (formerly PCI-24781) - Histone Deacetylase (“HDAC”) Inhibitor

Abexinostat is an orally dosed, broad spectrum, hydroxamic acid-based small molecule HDAC inhibitor that is under evaluation in Phase I and II clinical trials for refractory solid tumors and lymphoma by Pharmacyclics and its ex-U.S. partner, Les Laboratoires Servier of Paris, France (“Servier”). Abexinostat has shown promising anti-tumor activity in vitro and in vivo (Buggy et al, Mol Cancer Ther 2006; 5: 1309-17).

Abexinostat has been tested in several clinical trials in the U.S. by Pharmacyclics and globally by our partner Servier. In the U.S., Pharmacyclics has completed two Phase I studies using abexinostat as a single agent in patients with advanced solid tumors, a Phase I/II trial testing abexinostat single agent in patients with relapsed or refractory NHL and a Phase I trial in soft-tissue sarcoma patients (in combination with doxorubicin, an anti-tumor agent) co-sponsored by the Massachusetts General Hospital and Dana-Farber Cancer Institute. The results from the Phase II portion of the single agent NHL trial were presented in an oral presentation at the ASH 2012 Annual Meeting in Atlanta, and is expected to be updated in an oral presentation at the 12th International Conference on Malignant Lymphoma (ICML) in Lugano, Switzerland. In this trial,16 patients in multiply relapsed follicular lymphoma and 14 patients in relapsed mantle cell lymphoma were enrolled. Of the 14 evaluable patients in the follicular arm, one CR and 8 PRs were recorded for an ORR of 64%. 12 of the 14 patients (86%) had reductions in tumor burden with 5 patients achieving >75% reduction in tumor size. The responses were durable, with 89% of the follicular patients on study >8 months and 4 patients for >17 months. The median duration of response was 13 months and the median progression-free survival has not yet been reached. In the mantle cell arm, 3 PRs were seen for an ORR of 27%. The overall response rate across both arms was 48%. Abexinostat was well tolerated, with a safety profile consistent with this class of agents, < 20% Grade 3 or greater cytopenia (primarily platelets) reported. The results from the sarcoma trial were presented at the annual meeting of the Connective Tissue Oncology Society in November 2012 in Prague, Czech Republic and updated at the AACR Annual Meeting in April 2013. In this trial, the Phase I dose escalation has been completed with 22 patients enrolled. In the 17 patients evaluable for radiological response, 1 PR and 11 SD were noted. The clinical benefit was durable with seven patients completing 5 or more cycles and 2 completing 10 cycles (each cycle is 21 days). The toxicities for the combination were manageable and consistent for these agents, and the maximum tolerated dose in combination with doxorubicin was established. A Phase I dose escalation Investigator-sponsored trial of abexinostat in combination with the multi-targeted tyrosine kinase inhibitor pazopanib has been initiated at the University of California, San Francisco. Our collaboration partner for ex-U.S. markets, Servier, has initiated ten Phase I/II trials in Europe and Asia in lymphomas and solid tumors with abexinostat as single agent and in combination with other chemotherapeutic agents including cisplatin, liposomal doxorubicin and FOLFOX. Data on single agent abexinostat in NHL was presented as a poster at ASH. Further analysis of these trials and any updates may be released by Servier.

We are subject to risks common to pharmaceutical companies developing products, including risks inherent in our research, development and commercialization efforts, preclinical testing, clinical trials, uncertainty of regulatory and marketing approvals, uncertainty of market acceptance of our products, history of and expectation of future operating losses, reliance on collaborative partners, enforcement of patent and proprietary rights and the need for future capital. In order for a product to be commercialized, we must conduct preclinical tests and clinical trials, demonstrate efficacy and safety of our product candidates to the satisfaction of regulatory authorities, obtain marketing approval, enter into manufacturing, distribution and marketing arrangements, build a U.S. commercial capability, obtain market acceptance and, in many cases, obtain adequate coverage of and reimbursement for our products from government and private insurers. We cannot provide assurance that we will generate revenues or achieve and sustain profitability in the future.

Results of Operations

Revenue (in thousands):

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	Three Months Ended
	March 31,				Percent
	2013		2012		Change
License and milestone revenue	$	—	$	—	—	%
Collaboration services revenue	2,846		1,927		48	%
Total revenue	$	2,846	$	1,927	48	%

For the three months ended March 31, 2013, total revenue increased by $919,000 or 48% compared to the three months ended March 31, 2012 primarily due to an increase in development costs under the collaboration with Janssen which increases the amount of deferred revenue recognized.

For the three months ended March 31, 2013, total collaboration services revenue related to the collaboration agreement with Janssen was $2,786,000, compared to $1,789,000 for the three months ended March 31, 2012. As of March 31, 2013, approximately $67,714,000 was included in deferred revenue related to the committee and development services under the agreement with Janssen, of which $59,879,000 was included in deferred revenue non-current. At the inception of the collaboration agreement with Janssen, the $14,982,000 and $64,413,000 that was allocated to committee and development services, respectively, is being recognized as revenue as the related services are provided over the estimated service periods of 17 years and 9 years, which are equivalent to the estimated remaining life of the underlying technology and the estimated remaining development period, respectively.

Research and Development (in thousands):



	Three Months Ended				Percent
	March 31,				Change
	2013		2012
Research and development	$	35,784	$	15,828	126	%

The increase of 126% or $19,956,000 in research and development costs for the three months ended March 31, 2013, as compared with the three months ended March 31, 2012, is primarily due to an $8,485,000 increase in stock-based compensation expense (primarily due to the timing and accounting of grants for performance-based stock options, an increase in the our stock price resulting in a higher fair value for options granted and the growth in our employee base), an $8,240,000 increase in third party clinical trial costs largely attributable to costs associated with the expansion of our BTK program and increased enrollment in our clinical trials and an $8,156,000 increase in payroll and related expenses due to higher headcount. Partially offsetting these increases was a $4,810,000 increase in the reduction to research and development costs attributable to the Janssen development cost share for the quarter ended March 31, 2013 (see Note 4 to the condensed consolidated financial statements).

Average research and development headcount increased from 73 to 190 in the three months ended March 31, 2013 compared to the three months ended March 31, 2012. In the near term, we expect to hire additional research and development employees, as well as incur costs under our collaboration agreements as we continue to invest in the development of our products (see Note 4 to our condensed consolidated financial statements). Accordingly, we expect that our research and development expenses will continue to increase.

Research and development costs are identified as either directly attributed to one of our research and development programs or as an indirect cost, with only direct costs being tracked by specific program. Direct costs consist of personnel costs directly associated with a program, preclinical study costs, clinical trial costs, and related clinical drug and manufacturing costs, drug formulation costs, contract services and other research expenditures. Indirect costs consist of personnel costs not directly associated with a program, overhead and facility costs and other support service expenses. The following table summarizes our principal product development initiatives, including the related stages of development for each product, the direct costs attributable to each product and total indirect costs for each respective period. For a discussion of the risks and uncertainties associated with the timing and cost of completing a product development phase, see Item 1A, Risk Factors and the Risk Factors discussed in our Transition Report on Form 10-K for the transition period ended December 31, 2012.

Direct costs by program and indirect costs are as follows (in thousands):

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				Related R&D Expenses
				Three Months Ended March 31,
Product	Description	Phase of Development	Estimated Completion of Phase	2013		2012
BTK Inhibitors	Cancer/autoimmune	Phase I/II/III, Pre-Clinical	Unknown	$	19,831	$	10,621
HDAC Inhibitors	Cancer	Phase I/II	Unknown	518		380
Factor VIIa Inhibitor	Cancer	Phase I/II	Unknown	145		417
	Total direct costs			20,494		11,418
	Indirect costs			15,290		4,410
	Total research and development costs			$	35,784	$	15,828

General and Administrative (in thousands):



	Three Months Ended				Percent
	March 31,				Change
	2013		2012
General and administrative expenses	$	20,026	$	4,061	393	%

General and administrative costs increased by 393% or $15,965,000 in the three months ended March 31, 2013, compared to the three months ended March 31, 2012. The increase was primarily due to a $11,600,000 increased in stock-based compensation expense (primarily due to the timing and accounting of grants for performance-based stock options, an increase in our stock price resulting in a higher fair value for options granted and the growth in the our employee base), a $2,488,000 increase in marketing related expenses and a $1,863,000 increase in payroll and related expenses due to higher headcount. Partially offsetting these increases was a $760,000 increase in the reduction to general and administrative costs attributable to the Janssen development cost share (see Note 4 to the condensed consolidated financial statements). Average general and administrative headcount increased from 13 to 57 in the three months ended three months ended March 31, 2013 compared to the three months ended March 31, 2012.

Income tax benefit (in thousands):



	Three Months Ended
	March 31,
	2013			2012
Income tax benefit	$	(974	)	$	(5,083	)

For the three months ended March 31, 2013, we recorded an income tax benefit of $974,000, or an estimated annual effective tax rate for the tax year ended June 30, 2013 of approximately 2.5%. We recorded an income tax benefit of $5,083,000, or an estimated annual effective tax rate for the tax year ended June 30, 2012 of 1.9%, for the three months ended March 31, 2012. The difference between the estimated annual effective tax rate and the federal statutory rate of 35% was primarily attributable to non-deductible expenses offset by the use of federal net operating loss carryovers that are not subject to any use limitations. Income tax benefit for the three months ended March 31, 2013 was primarily related to the reversal of previously recorded Federal Alternative Minimum Tax offset by foreign tax expense.

Liquidity and Capital Resources

Our principal sources of working capital have been private and public equity financings as well as proceeds from collaborative research and development agreements. At March 31, 2013, we had $511,247,000 in cash, cash equivalents and marketable securities.

Net cash used in operating activities of $7,064,000 during the three months ended March 31, 2013 primarily consisted of net loss of $51,911,000 for the three months ended March 31, 2013, adjusted by $23,578,000 for stock-based compensation expense, a $9,535,000 decrease in accounts receivable, a $9,881,000 increase in accounts payable, and a $8,252,000 increase in accrued liabilities. These increases in cash flows from operating activities were partially offset by a $2,786,000 decrease in

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deferred revenue and a $2,725,000 increase in prepaid expenses and other assets. The decrease in accounts receivable was primarily due to a decrease in receivables from Janssen. The increase in accounts payable and accrued liabilities was primarily due to increased costs related to our clinical trials activities. The increase in prepaid expenses and other assets was primarily due to deposits paid during the period. For the three months ended March 31, 2012, net cash used in operating activities of $25,410,000 primarily consisted of the net loss of $12,823,000, adjusted by $3,485,000 for stock-based compensation expense, an $11,670,000 increase in accounts receivable primarily from Janssen for its share of costs under the cost sharing agreement and a $5,323,000 decrease in income taxes payable.

Net cash used in investing activities of $1,127,000 for the three months ended March 31, 2013 consisted primarily of $2,087,000 used to purchase property and equipment and $1,920,000 of proceeds from the maturities of marketable securities, partially offset by $1,200,000 used to purchase marketable securities. For the three months ended March 31, 2012, net cash provided by investing activities was $8,033,000 and consisted primarily of $8,625,000 of proceeds from maturities of marketable securities.

Net cash provided by financing activities of $203,284,000 for the three months ended March 31, 2013 consisted primarily of $201,023,000 of net proceeds from the issuance of shares in a public stock offering and $2,261,000 of proceeds from the issuance of common stock upon the exercise of stock options. For the three months ended March 31, 2012, cash provided by financing activities of $632,000 consisted primarily of $1,479,000 of proceeds from the issuance of common stock upon the exercise of stock options, partially offset by $847,000 paid for common stock offering costs.

In March 2013, we sold 2,200,000 shares of our common stock in an underwritten public offering at $94.20 per share for net proceeds of $201,023,000 after deducting expenses of the offering. The closing of the offering took place on March 13, 2013. We intend to use the net proceeds from this offering to accelerate commercial readiness for ibrutinib, to advance our clinical pipeline, including expanding clinical development of ibrutinib in additional indications, to evaluate strategic opportunities to potentially add synergistic assets and for general corporate purposes.

In December 2011, we received a $150,000,000 upfront payment from our collaboration and license agreement with Janssen. The collaboration and license agreement provided us with the potential to receive future milestone payments of up to $825,000,000, of which the three milestone payment obligations from Janssen of $50,000,000 each were triggered prior to the three months ended March 31, 2013. Additionally, a fourth milestone payment obligation from Janssen of $50,000,000 was triggered on April 11, 2013 (see Note 11 to the condensed consolidated financial statements). We may receive up to an additional $625,000,000 in development and regulatory milestone payments; for total potential upfront and milestone payments of $975,000,000. However, clinical development entails risks and we have no assurance as to whether or when the milestone targets might be achieved.

Based upon the current status of our product development plans and our collaboration with Janssen, we believe that our existing cash, cash equivalents and marketable securities will be adequate to satisfy our capital needs through at least the next twelve months. We expect research and development expenses, as a result of on-going and future clinical trials, to consume a large portion of our existing cash resources. We also anticipate the level of our capital expenditures to increase in the next twelve months. Changes in our research and development plans or other changes affecting our operating expenses may affect actual future consumption of existing cash resources as well. Due to our extensive drug programs we may need to raise additional capital to fund our operations in the future. We may raise additional funds through the public or private sale of securities, bank debt, partnership collaboration or otherwise. If we are unable to secure additional funds, whether through sale of our securities, debt or partnership collaborations, we will have to delay, reduce the scope of or discontinue one or more of our product development programs. Our actual capital requirements will depend on many factors, including the following:

• progress with preclinical studies and clinical trials;

• the time and costs involved in obtaining regulatory approval;

• continued progress of our research and development programs;

• our ability to maintain and establish collaborative arrangements with third parties;

• the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

• the amount and timing of capital equipment purchases; and

• competing technological and market developments.

Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. The factors described above will impact our future capital requirements and the adequacy of our available funds. If we are required to raise additional funds, we cannot be certain that such additional funding will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be highly dilutive, or otherwise disadvantageous, to existing stockholders and debt financing, if available,

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may involve restrictive covenants. Collaborative arrangements, if necessary to raise additional funds, may require us to relinquish rights to certain of our technologies, products or marketing territories. Our failure to raise capital when needed and on acceptable terms, would require us to reduce our operating expenses and would limit our ability to respond to competitive pressures or unanticipated requirements to develop our product candidates and to continue operations, any of which would have a material adverse effect on our business, financial condition and results of operations.

Contractual Obligations

The following table summarizes our primary non-cancelable contractual obligations as of March 31, 2013 (in thousands):



	Payments due by Period
Contractual Obligations	Total		Remaining nine months		2014		2015		2016		2017		Thereafter
Operating lease obligations	$	14,298	$	1,282	$	2,023	$	2,091	$	2,277	$	1,996	$	4,629
Purchase commitments (1)	19,678		19,678		—		—		—		—		—
Total	$	33,976	$	20,960	$	2,023	$	2,091	$	2,277	$	1,996	$	4,629

(1) Purchase commitments primarily consist of non-cancelable orders related to the expansion of our contract manufacturing facility, orders to purchase drug manufacturing equipment and other non-cancelable orders for contract manufacturing.

Off-Balance Sheet Arrangements

None

Critical Accounting Policies, Estimates and Judgments

There have been no material changes in our critical accounting policies, estimates and judgments during the three months ended March 31, 2013, compared with the disclosures in Part II, Item 7 of our Transition Report on Form 10-K for the transition period ended December 31, 2012.

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board ("FASB") issued new accounting guidance in connection with disclosures about offsetting assets and liabilities. The update requires new disclosures about balance sheet offsetting and related arrangements. For derivatives and financial assets and liabilities, the amendments require disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to the offsetting requirements but not offset on the balance sheet. On January 31, 2013, the FASB issued ASU 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, which clarified that the scope of the disclosures is limited to include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendments are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Disclosures required by the amendments should be provided retrospectively for all comparative periods presented. Our adoption of ASU 2013-01 during the three months ended March 31, 2013 did not have a material effect on our condensed consolidated financial statements.

In January 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income (e.g., net periodic pension benefit cost), an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. Our adoption of ASU 2013-02 during the quarter ended March 31, 2013 did not affect our results of operations or financial position.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There was no significant change in our exposure to market risk since December 31, 2012.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures: As required by Rule 13a-15 under the Securities Exchange Act of

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1934, as of the end of the first fiscal quarter of 2013, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Executive Vice President, Finance. Based upon that evaluation, our Chief Executive Officer and our Executive Vice President, Finance have concluded that our disclosure controls and procedures are adequate and effective to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Executive Vice President, Finance, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal controls over financial reporting: There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

An investment in our securities involves a high degree of risk. Anyone who is making an investment decision regarding our securities should carefully consider the following risk factors, as well as the other information contained or incorporated by reference in this report. The risks and uncertainties described below are those that we currently believe may materially affect our company or your investment. Other risks and uncertainties that we do not presently consider to be material, or of which we are not presently aware, may become important factors that adversely affect our security holders or us in the future. If any of the risks discussed below actually materialize, then our business, financial condition, operating results, cash flows and future prospects, or your investment in our securities, could be materially and adversely affected, resulting in a loss of all or part of your investment.

Risks Relating to Pharmacyclics

We may need substantial additional financing and we may have difficulty raising needed capital in the future.

We have expended and will continue to expend substantial funds to complete the research, development and clinical testing of our products. We may be unable to entirely fund these efforts with our current financial resources. We may also raise additional funds through the public or private sale of securities, bank debt, collaborations or otherwise. If we are unable to secure additional funds, whether through additional partnership collaborations, bank debt financings, or sale of our securities, we may have to delay, reduce the scope of or discontinue one or more of our product development programs. Based upon the current status of our product development plans, we believe that our cash, cash equivalents and marketable securities, will be adequate to satisfy our capital needs for at least the next twelve months. We may, however, choose to raise additional funds before then. Our actual capital requirements will depend on many factors, including:


•	progress with preclinical studies and clinical trials;


•	the time and costs involved in obtaining regulatory approval;


•	the timing of marketing authorization of any of our products granted by the FDA or other regulatory authority;


•	the timing of market launch of any of our products after grant of marketing authorization by the FDA or other regulatory agency;


•	the speed of market uptake and the timing and extent of demand for any of our products after grant of marketing authorization by the FDA or other regulatory agency;

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•	continued progress of our research and development programs;


•	our ability to establish and maintain collaborative arrangements with third parties;


•	the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;


•	the amount and timing of capital equipment purchases; and


•	competing technological and market developments.

We also expect to raise any necessary additional funds through the public or private sale of securities, bank debt financings, collaborative arrangements with corporate partners or other sources that may be highly dilutive, or otherwise disadvantageous, to existing stockholders or subject us to restrictive covenants. In addition, in the event that additional funds are obtained through arrangements with collaborative partners or other sources, such arrangements may require us to relinquish rights to some of our technologies, product candidates or products under development that we would otherwise seek to develop or commercialize ourselves. Additional funds may not be available on acceptable terms, if at all. Our failure to raise capital when needed and on acceptable terms would require us to reduce our operating expenses, delay or reduce the scope of or eliminate one or more of our research or development programs and would limit our ability to respond to competitive pressures or unanticipated requirements and to continue operations. Any one of the foregoing would have a material adverse effect on our business, financial condition and results of operations.

Failure to obtain product approvals or comply with ongoing governmental regulations could adversely affect our business.

The manufacture and marketing of our products and our research and development activities are subject to extensive regulation for safety, efficacy and quality by numerous government authorities in the United States and abroad. Before receiving FDA approval to market a product, we will have to demonstrate to the satisfaction of the FDA that the product is safe and effective for the patient population and for the diseases that will be treated. Clinical trials, and the manufacturing and marketing of products, are subject to the rigorous testing and approval process of the FDA and equivalent foreign regulatory authorities. The Federal Food, Drug and Cosmetic Act and other federal, state and foreign statutes and regulations govern and influence the testing, manufacture, labeling, advertising, distribution and promotion of drugs and medical devices. As a result, clinical trials and regulatory approval can take a number of years to accomplish and require the expenditure of substantial resources. Data obtained from clinical trials are susceptible to varying interpretations that could delay, limit or prevent regulatory approvals.

In addition, we may encounter delays or rejections based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. We may encounter similar delays in foreign countries. Our trials may be placed on clinical hold or otherwise suspended and we may be unable to complete such trials. Additionally, we may be unable to obtain requisite approvals from the FDA and foreign regulatory authorities and even if obtained, such approvals may not be received on a timely basis, or they may not cover the clinical uses that we specify.

Furthermore, regulatory approval may entail ongoing requirements for post-marketing studies. The manufacture and marketing of drugs are subject to continuing FDA and foreign regulatory review and later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions, including withdrawal of the product from the market. Any of the following events, if they were to occur, could delay or preclude us from further developing, marketing or realizing full commercial use of our products, which in turn would have a material adverse effect on our business, financial condition and results of operations:


•	failure to obtain and thereafter maintain requisite governmental approvals;


•	failure to obtain approvals for specific indications of our products under development;


•	a recurrence of serious and unanticipated adverse side effects;


•	identification of serious and unanticipated long-term adverse side effects in our products under development, that may not have been identified prior to approval; or


•	identification of previously unknown problems with the manufacturing or manufacturing processes for our products.

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Any regulatory approval that we receive for a product candidate may be subject to limitations on the indicated uses for which the product may be marketed. In addition, if the FDA and/or foreign regulatory agencies approve any of our product candidates, the labeling, packaging, adverse event reporting, storage, advertising and promotion of the product will be subject to extensive regulatory requirements. We and the manufacturers of our product candidates must also comply with the applicable FDA Good Manufacturing Practice (“GMP”) regulations, which include quality control and quality assurance requirements as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to ongoing periodic inspection by the FDA and corresponding state agencies, including unannounced inspections, and must be approved before they can be used in commercial manufacturing of our products. We or our present or future suppliers may be unable to comply with the applicable GMP regulations and other FDA regulatory requirements. Failure of our suppliers to follow current GMP practice or other regulatory requirements may lead to significant delays in the availability of products for commercial or clinical use and could subject us to fines, injunctions and civil penalties.

Fast Track designations for development of ibrutinib for the treatment of chronic lymphocytic leukemia/small lymphocytic lymphoma and for the treatment of mantle cell lymphoma or any other potential product candidate may not lead to a faster development or regulatory review or approval process, and it does not increase the likelihood that our product candidates will receive marketing approval.

If a drug is intended for the treatment of a serious or life-threatening condition and the drug demonstrates the potential to address unmet medical needs for this condition, the drug sponsor may apply for FDA Fast Track designation for a particular indication. Marketing applications filed with the FDA by sponsors of products in Fast Track development are intended to facilitate the development, and expedite the review of such drugs, but the Fast Track designation does not assure any such qualification or ultimate marketing approval by the FDA. The previous receipt of Fast Track designation for the development of ibrutinib for the treatment of chronic lymphocytic leukemia/small lymphocytic lymphoma and for the treatment of mantle cell lymphoma and any future designation for any other potential product candidate may not result in a faster development process, review or approval compared to drugs considered for approval under conventional FDA procedures. In addition, the FDA may withdraw any Fast Track designation at any time. We may seek Fast Track designation for other of our product candidates, but the FDA may not grant this status to any of our proposed product candidates.

Breakthrough Therapy Designation for our investigational oral agent ibrutinib monotherapy for the treatment of patients with relapsed or refractory mantle cell lymphoma (MCL), ibrutinib monotherapy for the treatment of patients with Waldenström's macroglobulinemia (WM), ibrutinib as monotherapy for the treatment of chronic lymphocytic leukemia (CLL) or small lymphocytic lymphoma (SLL) patients with deletion of the short arm of chromosome 17 (deletion 17p), or any other potential product candidate may not lead to a faster development or regulatory review or approval process, and it does not increase the likelihood that our product candidates will receive marketing approval.

If a drug is intended for the treatment of a serious or life-threatening condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development, the FDA may grant a Breakthrough Therapy Designation. Marketing applications filed with the FDA by sponsors of products with a Breakthrough Therapy Designation are intended to facilitate the development, and expedite the review of such drugs, but the Breakthrough Therapy Designation does not assure any such qualification or ultimate marketing approval by the FDA. The previous receipt of a Breakthrough Therapy Designation for the development of our investigational oral agent ibrutinib monotherapy for the treatment of patients with relapsed or refractory mantle cell lymphoma (MCL), to ibrutinib monotherapy for the treatment of patients with Waldenström's macroglobulinemia (WM), to ibrutinib as monotherapy for the treatment of chronic lymphocytic leukemia (CLL) or small lymphocytic lymphoma (SLL) patients with deletion of the short arm of chromosome 17 (deletion 17p) and any future designation for any other potential product candidate may not result in a faster development process, review or approval compared to drugs considered for approval under conventional FDA procedures. In addition, the FDA may withdraw any Breakthrough Therapy Designation at any time. We may seek a Breakthrough Therapy Designation for other of our product candidates, but the FDA may not grant this status to any of our proposed product candidates.

All of our drug candidates remain subject to clinical testing and regulatory approval. If we are unable to successfully develop and test our drug candidates, we will not be successful.

The success of our business depends primarily upon our ability, and the ability of our collaborators, if any, to develop and commercialize our drug candidates, including our BTK inhibitor ibrutinib (PCI-32765), successfully. Our drug candidates are in various stages of development and must satisfy rigorous standards of safety and efficacy before they can be approved by the FDA or comparable foreign regulatory authorities for sale. To satisfy these standards, we and/or our collaborators must allocate resources among our various development programs and must engage in expensive and lengthy testing of our drug candidates. Despite our efforts, our drug candidates may:

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•	cause, or may appear to have caused, serious adverse side effects (including death) or potentially dangerous drug interactions;


•	have dose limiting toxicities;


•	not show signs of efficacy in any disease as a single agent or in combination, or may only work in combination with other drugs;


•	cause resistance in patients that may diminish the clinical benefit;


•	not offer therapeutic or other improvement over existing competitive drugs; or


•	not be proven safe and effective in clinical trials.

The strength of our pipeline of drug candidates and potential drug candidates will depend in large part upon the outcomes of our ongoing and planned Phase II and Phase III clinical trials. Findings, including toxicology findings, in nonclinical studies conducted concurrently with clinical trials as well as results of our clinical trials could lead to abrupt changes in our development activities, including the possible cessation of development activities associated with a particular drug candidate or program, including our BTK inhibitor ibrutinib (PCI-32765). Furthermore, results from our clinical trials may not meet the level of statistical significance required by the FDA or other regulatory authorities for approval of a drug candidate.

We and many other companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in earlier-stage clinical trials. Accordingly, the results from the completed preclinical studies and clinical trials, positive results in preclinical studies and early clinical trials may not be replicated in later clinical trials, and ongoing clinical trials for our drug candidates may not be predictive of the results we may obtain in later−stage trials or of the likelihood of approval of a drug candidate for commercial sale. In addition, from time to time we report interim data from our clinical trials, including our BTK program and its effects on various types of cancers. Interim data are subject to change, and there can be no assurances that interim data will be confirmed upon the analysis of final data.

Serious adverse events may force us to limit or discontinue any of our drug development and commercialization programs.

Our ability to develop and commercialize any of our drug candidates or products may be adversely impacted by any serious adverse events that patients may experience when treated with our drug candidate or product. Severe bleeding events, including such events affecting the gastrointestinal tract or the central nervous system, have been reported in patients exposed to ibrutinib. To date these severe bleeding events have been uncommon and consistent with the expected rate in a patient population suffering from a blood cell malignancy, a population that often requires treatment with anti-platelet and anti-coagulant drugs. Although we have a monitoring plan in place should these events occur and although they are generally managed by temporary withdrawal of ibrutinib therapy, we cannot guarantee that severe bleeding events will not cause us to cease development of ibrutinib or withdraw the product from the market following any grant of marketing authorization by the FDA or other regulatory authority.

All of our product candidates are in development, and we cannot be certain that any of our products under development will be commercialized.

To be profitable, we must successfully research, develop, obtain regulatory approval for, manufacture, introduce, market and distribute our products under development. The time frame necessary to achieve these goals for any individual product is long and uncertain. Before we can sell any of our products under development, we must demonstrate to the satisfaction of the FDA and regulatory authorities in foreign markets through the submission of nonclinical (animal) studies and clinical (human) trials that each product is safe and effective for human use for each targeted disease. We have conducted and plan to continue to conduct extensive and costly clinical trials to assess the safety and effectiveness of our potential products. We cannot be certain that we will be permitted to begin or continue our planned clinical trials for our potential products, or if permitted, that our potential products will prove to be safe and produce their intended effects.

The completion rate of our clinical trials depends upon, among other factors, the rate of patient enrollment, the adequacy of patient follow-up and the completion of required clinical evaluations. Many factors affect patient enrollment, including the size of the patient population, the proximity of patients to clinical sites, the eligibility criteria for the trial, competing clinical trials and new drugs or procedures used for the conditions we are investigating. Other companies are conducting clinical trials and have announced plans for future trials that are seeking or are likely to seek patients with the same diseases that we are studying. We may experience delays in reaching planned level of patient enrollment in our clinical trials. Delays in planned patient enrollment may result in increased costs, and delays or termination of clinical trials, which could have a material adverse effect

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on us. Many factors can affect the adequacy of patient follow-up and completion of required clinical evaluations, including failure of patients to return for scheduled visits or failure of clinical sites to complete necessary documentation. Delays in or failure to obtain required clinical follow-up and completion of clinical evaluations could also have a material adverse effect on the timing and outcome of our clinical trials and product approvals.

Additionally, clinical trials require substantial administration and monitoring. We may fail to effectively oversee and monitor the various trials we have underway at any particular time, which would result in increased costs or delays of our clinical trials or compromise our ability to obtain product approvals.

Data already obtained from preclinical studies and clinical trials of our products under development do not necessarily predict the results that will be obtained from later preclinical studies and clinical trials. Moreover, data from clinical trials we are conducting are susceptible to varying interpretations that could delay, limit or prevent regulatory approval. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and effectiveness of a product under development could limit or prevent regulatory approval of the potential product and would materially harm our business. Our clinical trials may not demonstrate the sufficient levels of safety and efficacy necessary to obtain the requisite regulatory approval or may not result in marketable products.

We have a history of operating losses and we expect to continue to have losses in the future.

We have incurred significant operating losses since our inception in 1991 and, as of March 31, 2013, had an accumulated deficit of $335,517,000. We expect to continue to incur substantial additional operating losses until such time, if ever, as the commercialization of our products generates sufficient revenue to cover our expenses. Our product candidates are in various stages of development and the commercialization of those products may not occur. To date, we have not generated any commercial revenue from the sale of our products. Our sustaining profitability depends upon our ability, alone or with others, to successfully complete the development of our product candidates, and to obtain required regulatory approvals and to successfully manufacture and market our proposed products.

Acceptance of our products in the marketplace is uncertain, and failure to achieve market acceptance will harm our business.

Even if approved for marketing, our products may not achieve market acceptance. The degree of market acceptance will depend upon a number of factors, including:


•	the receipt of regulatory approvals for the desired indications, and the acceptance by physicians and patients of the clinical benefits that our products may offer;


•	the establishment and demonstration in the medical community of the safety, clinical efficacy and cost-effectiveness of our products and their potential advantages over existing therapeutic products;


•	marketing and distribution support;


•	the introduction, market penetration and pricing strategies of competing and future products;


•	coverage and reimbursement policies of governmental and other third- party payers such as insurance companies, health maintenance organizations and other plan administrators; and


•	physicians, patients, payers or the medical community in general may be unwilling to accept, purchase, utilize or recommend any of our products.

We may fail to adequately protect or enforce our intellectual property rights or secure rights to third-party patents.

Our success depends in part upon our ability to protect and defend our proprietary technology and product candidates through patents and trade secret protection. We, therefore, aggressively pursue, prosecute, protect and defend patent applications, issued patents, trade secrets, and licensed patent and trade secret rights covering certain aspects of our technology. The evaluation of the patentability of United States and foreign patent applications can take years to complete and can involve considerable expense and uncertainty.

We have a number of patents and patent applications related to our compounds but we cannot be certain that issued patents will be enforceable or provide adequate protection or that pending patent applications will issue as patents. Even if patents are issued and maintained, these patents may not be of adequate scope to benefit us, or may be held invalid and unenforceable against third parties. In addition, if we breach our agreements with our licensors and do not cure such breaches, we may lose

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rights under patents and other intellectual property licensed to us. Moreover, if our agreement with Celera is terminated by Celera under certain circumstances, our rights in our intellectual property acquired from Celera, including that related to ibrutinib, would revert to Celera and we would lose our right to commercialize such intellectual property.

We face risks and uncertainties related to our intellectual property rights. For example:


•	we may be unable to obtain or maintain patent or other intellectual property protection for any products or processes that we may develop;


•	third parties may obtain patents covering the manufacture, use or sale of these products, which may prevent us from commercializing any of our products under development globally or in certain regions; and


•	any future patents that we may obtain may not prevent other companies from competing with us by designing their products or conducting their activities so as to avoid the coverage of our patents.

The actual protection afforded by a patent varies depending on the product candidate and country and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal remedies in a particular country and the validity and enforceability of the patents under existing and future laws. Our ability to maintain or enhance our proprietary position for our product candidates will depend on our success in obtaining effective claims and enforcing those claims once granted. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against competitors with similar products. Due to the extensive amount of time required for the development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. Although we take steps to protect our proprietary rights and information, including the use of confidentiality and other agreements with our employees and consultants, and in our academic and commercial relationships, these steps may be inadequate, these agreements may be violated, or there may be no adequate remedy available for a violation. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Furthermore, our trade secrets may become known to our competitors even in the absence of any violation of our rights. Our competitors may independently develop substantially equivalent proprietary information and techniques, reverse engineer our information and techniques, or otherwise gain access to our proprietary technology. We may be unable to meaningfully protect our rights in unpatented proprietary technology.

Our success depends in large part on our ability to operate without infringing upon the patents or other proprietary rights of third parties.

If we infringe the patents of others, we may be prevented from commercializing our products or may be required to obtain licenses from these third parties. We may not be able to obtain alternative technologies or any required license on reasonable terms or at all. If we fail to obtain these licenses or alternative technologies, we may be unable to develop or commercialize some or all of our products. We own patents that claim our BTK inhibitor ibrutinib as a chemical entity. However, the existence of issued patents does not guarantee our right to practice the patented technology or commercialize the patented product. Third parties may have or obtain rights to patents which they may claim could be used to prevent or attempt to prevent us from commercializing our patented product candidates. If these other parties are successful in obtaining valid and enforceable patents, and establishing our infringement of those patents, we could be prevented from selling our BTK inhibitor ibrutinib or any of our other products unless we were able to obtain a license under such patents. If any license is needed it may not be available on commercially reasonable terms or at all. For example, we are aware of a third party patent application that contains claims covering a method of treating malignancies using a certain class of compounds that may encompass certain of our products, including ibrutinib. In the event that such claims are included in a patent granted on such patent application, we could be prevented from commercializing any such products for the treatment of malignancies unless we obtain sufficient rights under such patent from the patent owner or successfully challenge the validity and/or enforceability of such patent. Patents in the United States issue with a presumption of validity and enforceability and, therefore, there can be no assurance that any such challenge would be successful.

Furthermore, we use significant proprietary technology and rely on unpatented trade secrets and proprietary know-how to protect certain aspects of our production and other technologies. Our trade secrets may become known or independently discovered by our competitors.

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We are dependent on our collaboration agreement with Janssen to further develop and commercialize our BTK inhibitor ibrutinib (formerly PCI-32765) globally. The failure to maintain this agreement or the failure of Janssen to perform its obligations under this agreement, could negatively impact our business.

Pursuant to the terms of our collaboration and licensing agreement with Janssen, we granted Janssen a license to co-develop (with us) our BTK Inhibitor ibrutinib globally, to co-commercialize it (with us) in the United States, and to exclusively commercialize it outside of the United States, in each case for all non-immunology related indications. Under a global development plan, each party will be responsible for conducting certain clinical trials. The agreement includes a cost sharing arrangement for associated development activities. Except in certain cases, in general Janssen is responsible for approximately 60% of collaboration costs and we are responsible for the remaining 40% of collaboration costs. Upon commercialization, profits and losses will be shared 50/50.

The collaboration with Janssen provides us with an annual cap of our share of collaboration costs and pre-tax commercialization profits/losses for each calendar year until the third profitable calendar quarter for the product, as determined in the agreement. In the event that our share of aggregate development costs in any given calendar year, together with any other amounts that become due from us, plus our share of pre-tax loss (if any) for any calendar quarter in such calendar year, less our share of pre-tax profit (if any) for any calendar quarter in such calendar year, exceeds $50,000,000, then amounts that are in excess of $50,000,000 (the “Excess Amounts”) are funded by Janssen. Under the Agreement, total Excess Amounts plus interest may not exceed $225,000,000. As of March 31, 2013, total Excess Amounts were $18,191,000 (which comprises the cumulative amount funded by Janssen to-date of $18,125,000 and interest of $66,000). We cannot reasonably predict the amount and timing of potential future commitments under the Janssen collaboration and license agreement, including Excess Amounts, as the payments are contingent upon future events. See Note 4 to the condensed consolidated financial statements for more information about our collaboration and licensing agreement with Janssen.

We have limited control over the development or commercialization costs incurred by Janssen, and limited control over the implementation of development and commercial activities performed by them. Our costs and revenue are therefore tied to efforts made by ourselves and Janssen in developing and marketing our product. We have limited control over the amount of time and effort Janssen will devote to the development, manufacturing and commercialization of our BTK Inhibitor ibrutinib, and very limited control over the manner in which Janssen conducts its business with regard to obtaining regulatory and other approvals and commercializing the product, especially outside the United States. Accordingly, our revenue and financial position may be adversely affected if Janssen does not dedicate sufficient time to the development and commercialization of the BTK Inhibitor ibrutinib, fails to obtain regulatory approvals, or otherwise fails to comply with its obligations under the agreement.

We are subject to a number of other risks associated with our dependence on our collaboration and license agreement with Janssen, including:


•	We and Janssen could disagree as to future development plans and Janssen may delay future clinical trials or stop a future clinical trial;

•

There may be disputes between us and Janssen, including disagreements regarding the collaboration and license agreement, that may result in (1) the delay of or failure to achieve regulatory and commercial objectives that would result in milestone or profit share payments, (2) the delay or termination of any future development or commercialization of ibrutinib, and/or (3) costly litigation or arbitration that diverts our management's attention and resources;


•	Janssen may not provide us with timely and accurate information regarding supply forecasts, which could adversely impact our ability to comply with our supply obligations to Janssen and manage our own inventory of ibrutinib, as well as our ability to generate accurate financial forecasts;


•	Business combinations or significant changes in Janssen's business strategy may adversely affect Janssen's ability or willingness to perform its obligations under our collaboration agreement;


•	If Janssen is unsuccessful in performing clinical trials, or in obtaining regulatory approvals for or commercializing ibrutinib outside the U.S., we may not receive certain additional milestone payments or any profit payments under the collaboration and license agreement and our business prospects and financial results may be materially harmed;


•	Janssen may not comply with applicable regulatory requirements or guidelines with respect to developing or commercializing ibrutinib, which could adversely impact future development or sales of ibrutinib globally.

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The collaboration and license agreement is subject to early termination, including through Janssen's right to terminate without cause upon advance notice to us. If the agreement is terminated early, we may not be able to find another collaborator for the further development and commercialization of ibrutinib on acceptable terms, or at all, and we may be unable to pursue continued development and commercialization of ibrutinib on our own.

If our collaboration is unsuccessful or is terminated by Janssen, we might not effectively develop and market our BTK Inhibitor ibrutinib.

Integral to the success of our collaboration with Janssen is our ability to timely achieve certain milestones and obtain regulatory approvals. Our collaboration with Janssen may be unsuccessful. Under the terms of our agreement, Janssen may terminate its agreement with us without cause and upon short notice. Termination of our agreement would hinder our efforts to effectively develop and commercialize the BTK Inhibitor ibrutinib. There would be a delay in getting our product to market. Such delay would likely result in higher costs for us and could adversely affect any progress we have made in clinical trials.

We may have difficulty finding another collaboration partner on favorable terms if Janssen terminates our agreement. We might not be able to raise capital on our own. We do not have sufficient skilled personnel develop or market BTK Inhibitor ibrutinib. As we currently lack the resources to properly develop, market and commercialize the BTK Inhibitor ibrutinib, we may be unable to continue to develop the BTK Inhibitor ibrutinib without the continued assistance of Janssen.

We rely heavily on third parties for product and clinical development of our products.

We currently depend heavily and will continue to depend heavily in the future on third parties for support in product development and clinical development of our products. The termination of a significant number of our existing collaborative arrangements, or our inability to establish and maintain collaborative arrangements could have a material adverse effect on our ability to complete clinical development of our products. Given our limited resources, it may be necessary to establish partnerships with other pharmaceutical companies that have greater financial and technical resources in order to successfully develop and commercialize our products. Although we have entered into a global strategic alliance with Servier related to the research, development, and commercialization of abexinostat (formerly known as PCI-24781), there is no assurance that any additional collaborations can be entered into, and if entered into, such collaborations may require us to relinquish product rights that could affect the financial success of these products.

We engage clinical investigators and medical institutions to enroll subjects in our clinical trials and contract clinical research organizations, or CROs, for various aspects of our clinical development activities including clinical trial monitoring, data collection, safety monitoring and data management. As a result, we have had and continue to have less control over the conduct of clinical trials, the timing and completion of the trials, the required reporting of adverse events and the management of data developed through the trial than would be the case if we were relying entirely upon our own staff. Although we rely on CROs to conduct some of our clinical trials, we are responsible for confirming that each of our clinical trials is conducted in accordance with the investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require us to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that the data and results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities and requirements.

Outside parties may have staffing difficulties, may undergo changes in priorities or may become financially distressed, adversely affecting their willingness or ability to conduct our trials. We may experience unexpected cost increases that are beyond our control. Any failure of such CROs to successfully accomplish clinical trial monitoring, data collection, safety monitoring and data management and the other services they provide for us in a timely manner and in compliance with regulatory requirements could have a material adverse effect on our ability to complete clinical development of our products and obtain regulatory approval. Problems with the timeliness or quality of the work of a CRO may lead us to seek to terminate the relationship and use an alternate service provider. However, making such changes may be costly and may delay our trials, and contractual restrictions may make such a change difficult or impossible. Additionally, it may be difficult to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.

We lack the resources, capability and experience necessary to manufacture pharmaceuticals and thus rely heavily upon contract manufacturers.

We have no manufacturing facilities and we currently rely on third parties for manufacturing and storage activities related to all of our products in development. Our manufacturing strategy presents the following risks:


•	delays in scale-up to quantities needed for multiple clinical trials, or failure to manufacture such quantities to our specifications, or deliver such quantities on the dates we require, could cause delay or suspension of clinical trials, regulatory submissions and commercialization of our products in development;

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•	there is no guarantee that the supply of clinical materials can be maintained during the clinical development of our product candidates;


•	our current and future manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding regulatory agencies for compliance with strictly enforced GMP and similar standards in other countries. Failure to pass these inspections could have a material adverse effect on our ability to produce our products to support our operations;

•

if we need to change to other commercial manufacturing contractors, there is no guarantee that we will be able to locate a suitable replacement contractor. The FDA and comparable foreign regulators must approve these contractors prior to our use. This would require new testing and compliance inspections. The new manufacturers would have to demonstrate substantially equivalent processes for the production of our products;


•	our current manufacturers might not be able to fulfill our commercial needs, which would require us to seek new manufacturing arrangements and may result in substantial delays in meeting market demand; and


•	any disruption of the ability of our manufacturing contractors to supply necessary quantities of our products could have a material adverse effect on our ability to support our operations.


•	our current manufacturers may have insufficient capacity to support our requirements in the event of an increase in market demand.

Any of these factors could delay clinical trials or commercialization of our products under development and entail higher costs.

We face risk of harm caused by hazardous materials used in the manufacturing of our products.

The manufacturing processes for our products involve the use of hazardous, volatile and flammable materials capable of igniting and/or exploding if not handled properly. Although our manufacturing processes incorporate safety procedures designed to prevent or avoid the creation of conditions under which the materials could ignite and/or explode, we cannot be certain that such safety procedures will be followed or if followed will be adequate to mitigate or eliminate the risk of harm caused by fire and/or explosion during the manufacturing of any of our products. Any such event may incapacitate the manufacturing capability of any of our contract manufacturing organizations (CMOs). We have no assurance that we will avoid liability for harm caused by any such event. If we are found liable for damages or agree to pay damages in settlement of a claim against us for any harm caused by any such event, our insurance coverage may be inadequate or may not cover part or all of such damages. In addition, we do not have an alternate or back-up supply chain for the manufacturing and supply of any of our products. If such an event causes us to lose the operational capacity of any manufacturing element in the supply chain for any of our products, our ability to manufacture and supply the product will be substantially impaired or prevented, and we may be unable to supply enough product to support our development and/or commercialization programs, which may force us to curtail or discontinue our business operations.

We lack marketing, distribution and sales experience.

Although we intend to develop our marketing, sales and distribution functions, we currently lack the internal capability to commercialize our products. If any of our product candidates are approved by the FDA, we will need a drug sales force with technical expertise prior to the commercialization of any of our product candidates. We will incur substantial additional expenses in developing, training and managing such an organization. We may be unable to build such a sales force, the cost of establishing such a sales force may exceed any product revenue, or our direct marketing and sales efforts may be unsuccessful. In addition, we compete with many other companies that currently have extensive and well-funded marketing and sales operations. Our marketing and sales efforts may be unable to compete successfully against those of such other companies. We may need to enter into co-promotion or other licensing arrangements with larger pharmaceutical or biotechnology firms in order to increase the commercial success of our products. To the extent we enter into co-promotion or other licensing agreements, our product revenues are likely to be lower than if we directly marketed and sold our products, and some or all of the revenues we receive will depend upon the efforts of third parties, which may not be successful and may not be within our control. If we are unable to enter into co-promotion or other licensing agreements on acceptable terms or at all, we may not be able to successfully commercialize our existing and future product candidates. If we are not successful in commercializing our existing and future product candidates, either on our own or through collaborations with one or more third parties, our future product revenue will suffer and we may incur significant losses or become unable to continue the operation of our business.

If we lose or are unable to hire and retain qualified personnel, then we may not be able to develop our products or processes and obtain the required regulatory approvals.

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We are highly dependent on qualified scientific and management personnel. We will need to expand and effectively manage our managerial, operational, financial, development and other resources in order to successfully pursue our research, development and commercialization efforts for our existing and future product candidates. Our success depends on our continued ability to attract, retain and motivate highly qualified management and personnel with pre-clinical and clinical experience. We will need to hire additional personnel as we continue to expand our research and development and partnering activities.

We face intense competition from other companies and research and academic institutions for qualified personnel. We may not be able to attract or retain qualified management and scientific personnel in the future due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Francisco, California area. We are highly dependent on our senior executives. If any of our senior executives were to terminate their position with us, or we were to lose an additional senior executive officer, any of our senior scientists, a manager of one of our programs, or a significant number of any of our staff or we are unable to hire and retain qualified personnel, then our ability to develop and commercialize our products and processes, raise additional capital or implement our business strategy may be adversely affected or rendered impractical and our business may be harmed as a result.

Our business is subject to risks associated with international operations and collaborations.

The laws of foreign countries do not protect our intellectual property rights to the same extent as do the laws of the United States. In countries where we do not have and/or have not applied for patents on our products, we will be unable to prevent others from developing or selling similar products. In addition, in jurisdictions outside the United States where we acquire patent rights, we may be unable to prevent unlicensed parties from selling or importing products or technologies derived elsewhere using our patented technology.

Until we or our licensees obtain the required regulatory approvals for pharmaceuticals in any specific foreign country, we or our licensees will be unable to sell these products in that country. International regulatory authorities have imposed numerous and varying regulatory requirements and the approval procedures can involve additional testing. Approval by one regulatory authority does not ensure approval by any other regulatory authority.

We may have exposure to greater than anticipated tax liabilities.

Our income tax obligations are based on our corporate operating structure, including the manner in which we develop, value, and use our intellectual property and the scope of our international operations. The tax laws applicable to our international business activities, including the laws of the United States and other jurisdictions, are subject to interpretation. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, which could increase our worldwide effective tax rate and harm our financial position and results of operations. In addition, our future income taxes could be adversely affected by earnings being lower than anticipated in jurisdictions that have lower statutory tax rates and higher than anticipated in jurisdictions that have higher statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, or accounting principles. We are subject to regular review and audit by both U.S. federal and state and foreign tax authorities. Any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.

The enactment of legislation implementing changes in the U.S. taxation of international business activities or the adoption of other tax reform policies could materially affect our financial position, cash flows and results of operations.

The current administration has made public statements indicating that it has made international tax reform a priority, and key members of the U.S. Congress have conducted hearings and proposed a wide variety of potential changes. Certain changes to U.S. tax laws, including limitations on the ability to defer U.S. taxation on earnings outside of the United States until those earnings are repatriated to the United States, could affect the tax treatment of our foreign earnings, as well as cash and cash equivalent balances we currently maintain outside of the United States. Due to the expanding scale of our international business activities, any changes in the U.S. taxation of such activities may increase our worldwide effective tax rate and harm our financial position and results of operations.

We are exposed to fluctuations in foreign currency exchange rates, and an adverse change in foreign currency exchange rates could have a material adverse impact on our business, financial condition, cash flows and results of operations.

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All of our revenues and the majority of our expenses are denominated in U.S. dollars and as a result, we have not experienced significant foreign currency transaction gains and losses to date. We conduct some transactions in foreign currencies, primarily related to ex-U.S. clinical trial activities, and we expect to continue to do so. We have not entered into any agreements or transactions to hedge the risk associated with potential fluctuations in currencies; accordingly, we are subject to foreign currency exchange risk related to these ex-U.S. clinical trial activities. While we may enter into hedge or other agreements in the future to actively manage this risk, we do not believe this risk is material to our financial statements.

We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers.

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these or other claims. If we fail in defending such claims, in addition to paying monetary damages, we may face injunctions that restrict or preclude our access to important markets, intellectual property, or personnel. Any restriction or loss of access to markets, intellectual property, research personnel or work product that are key to our operations could hamper or negate our ability to commercialize certain potential drugs, which could severely harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

We may be subject to damages or injunctions resulting from employment discrimination or harassment claims that our employees or former employees bring against us.

Although we have developed and are in the process of implementing a program for compliance with federal and state civil rights laws and employment laws, including laws prohibiting any harassment or discrimination in the hiring, promotion, firing, or treatment of employees on the basis of age, race, color, ancestry, national origin, disability, medical condition, marital status, sexual orientation, gender, gender identity, religious denomination, pregnancy status, other classification, or any retaliation against employees for engaging in protected activity, we cannot guarantee that our compliance program will be sufficient or effective, that our employees will comply with our policies, that our employees will notify us of any violation of our policies, that we will have the ability to take appropriate and timely corrective action in response to any such violation, or that we will make decisions and take actions that will necessarily limit or avoid liability with respect to any employment discrimination, harassment or retaliation claim our employees may bring against us, including any claim under the federal Civil Rights Act of 1964 and 1991 (as amended), the California Fair Employment and Housing Act (“FEHA”), as amended, Section 1981 of the Civil Rights Acts of 1866, the federal Age Discrimination in Employment Act of 1967 (as amended) (“ADEA”), the Older Workers Benefits Protection Act, the Employee Retirement Income and Securities Act (“ERISA”), the Family and Medical Leave Act ("FMLA"), the California Family Rights Act ("CFRA"), the federal Americans with Disabilities Act of 1990 ("ADA"), the Lilly Ledbetter Fair Pay Act, the Immigration Reform and Control Act of 1986, the Equal Pay Act, of 1963, as amended, California Business and Professions Code 17200, any and all protections pursuant to California's Labor Code or the Fair Labor Standards Act (“FLSA”), Section 806 of the Sarbanes Oxley Act of 2002, and any federal or state constitutional rights and protections. Discrimination, harassment or retaliation claims brought by employees or former employees against their employers or former employers have increased substantially in recent years. In addition, the enactment of new federal and state laws, the amendment of existing federal and state laws, and the interpretation of existing or future laws by court decision could further expand the grounds on which employees and former employees may pursue claims of employment discrimination, harassment or retaliation. We cannot adequately predict whether our compliance program will effectively protect us from liability under present or future federal or state laws against employment discrimination, harassment or retaliation. If one or more of our employees brings a claim of employment discrimination, harassment or retaliation against us and if we are found liable for damages and/or an injunction is imposed on us or we agree to pay damages and/or accept an injunction in settlement of the claim, the payment of the damages amount or the curtailment of our activities consequent to the injunction could have a material adverse effect on our financial condition and impair or prevent us from continuing our business.

We may be subject to damages or injunctions resulting from qui tam or “whistleblower” actions that our employees or former employees bring against us.

Although we have developed and are in the process of implementing a program for compliance with all federal and state laws and regulations, we cannot guarantee that our compliance program will be sufficient or effective, that our employees will comply with our policies, that our employees will notify us of any violation of our policies, that we will have the ability to take appropriate and timely corrective action in response to any such violation, or that we will make decisions and take actions that will necessarily limit or avoid liability for qui tam or federal “whistleblower” claims that our employees or former employees may bring against us or that governmental authorities may prosecute against us based on information provided by our

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employees or former employees. Qui tam or “whistleblower” claims against employers brought by employees or former employees or governmental authorities based on information from employees or former employees have increased substantially in recent years. In any qui tam or “whistleblower” action that results in the payment of a fine imposed by a court or a settlement, the employee or former employee who brought the claim or furnished information allowing the governmental authority to prosecute the claim is rewarded with a percentage of the fine or settlement amount collected from the employer. The prospect of sharing in the proceeds of any fine collected from the employer motivates employees and former employees to bring qui tam or “whistleblower” claims or to furnish information to a governmental authority for the prosecution of such claims. In addition, the enactment of new federal and state laws, the amendment of existing federal and state laws, and the interpretation of existing or future laws by court decision could further expand the grounds on which employees and former employees may pursue qui tam or “whistleblower” claims. We cannot adequately predict whether our compliance program will effectively protect us from liability under present or future federal or state laws relating to qui tam or “whistleblower” claims that our employees or former employees may bring against us or that governmental authorities may prosecute against us on the basis of information provided by our employees or former employees. If one or more of our employees brings a qui tam or “whistleblower” claim against us or if a governmental authority prosecutes a claim against us on the basis of information provided by one or more of our employees or former employees, and if we are found liable and a fine and/or an injunction is imposed on us or we agree to pay a fine and/or accept an injunction in settlement of the claim, the payment of the fine and/or the curtailment of our activities consequent to the injunction could have a material adverse effect on our financial condition and impair or prevent us from continuing our business.

Our investments in marketable securities are subject to risks which may cause losses and affect the liquidity of these investments.

We invest funds in excess of those needed for working capital and operating expenses in marketable securities which may include corporate notes, certificates of deposit, government securities and other financial instruments. Significant declines in the value of these investments due to the operating performance of the companies we invest in or general economic or market conditions may result in the recognition of realized or impairment losses which could be material.

We may need to implement additional finance and accounting systems, procedures and controls to satisfy reporting requirements.

As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002, including Section 404, and the related rules and regulations of the Securities and Exchange Commission, including expanded disclosures and accelerated reporting requirements and more complex accounting rules. Compliance with Section 404 and other requirements will increase our costs and require additional management resources. We may need to continue to implement additional finance and accounting systems, procedures and controls to satisfy reporting requirements. While we were able to complete an unqualified assessment as to the adequacy of our internal control over financial reporting as of December 31, 2012, there is no assurance that future assessments of the adequacy of our internal control over financial reporting will be unqualified. If we are unable to obtain future unqualified reports as to the effectiveness of our internal control over financial reporting, investors could lose confidence in the reliability of our internal control over financial reporting, which could adversely affect our stock price.

Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable regulations.

The development, manufacturing, pricing, sales, coverage and reimbursement of our products, together with our general operations, are subject to extensive regulation by federal, state and other authorities within the United States and numerous entities outside of the United States. While we have developed and are implementing a corporate compliance program based on what we believe are the current best practices, we cannot provide any assurance that governmental authorities will find that our business practices comply with current or future administrative or judicial interpretations of potentially applicable laws and regulations. If we fail to comply with any of these laws and regulations, we could be subject to a range of regulatory actions, including suspension or termination of clinical trials, the failure to approve a product candidate, restrictions on our products or manufacturing processes, withdrawal of products from the market, significant fines, disqualification or debarment from participation in federally-funded health care programs or other sanctions or litigation, any of which events may have a significant adverse impact on our business.

Our facility in California is located near an earthquake fault, and an earthquake or other types of natural disasters or resource shortages could disrupt our operations and adversely affect results.

Important documents and records, such as hard copies of our laboratory books and records for our drug candidates and compounds, are located in our corporate headquarters at a single location in Sunnyvale, California, which is near active earthquake zones. We do not have a formal business continuity or disaster recovery plan, and could therefore experience a

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significant business interruption in the event of a natural disaster, such as an earthquake, drought or flood, or localized extended outages of critical utilities or transportation systems. In addition, California from time to time has experienced shortages of water, electric power and natural gas. Future shortages and conservation measures could disrupt our operations and cause expense, thus adversely affecting our business and financial results.

Risks Related to Our Common Stock

If our results do not meet our and analysts' forecasts and expectations, our stock price could decline.

Analysts who cover our business and operations provide valuations regarding our stock price and make recommendations whether to buy, hold or sell our stock. Our stock price may be dependent upon such valuations and recommendations. Analysts' valuations and recommendations are based primarily on our reported results and our and their forecasts and expectations concerning our future results regarding, for example, expenses, revenues, clinical trials, regulatory marketing approvals and competition. Our future results are subject to substantial uncertainty, and we may fail to meet or exceed our and analysts' forecasts and expectations as a result of a number of factors, including those discussed under the section entitled “Risks Related to Pharmacyclics” above. If our results do not meet our and analysts' forecasts and expectations, our stock price could decline as a result of analysts lowering their valuations and recommendations or otherwise.

Future equity issuances or a sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

Because we may need to raise additional capital in the future to continue to expand our business and our research and development activities, among other things, we may conduct additional equity offerings. If we or our stockholders sell substantial amounts of our common stock (including shares issued upon the exercise of options and warrants) in the public market, the market price of our common stock could fall. A decline in the market price of our common stock could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

If our officers, directors and largest stockholders choose to act together, they are able to control our management and operations, acting in their best interests and not necessarily those of other stockholders.

Our directors, executive officers and principal stockholders and their affiliates collectively have the ability to determine the election of all of our directors and to determine the outcome of most corporate actions requiring stockholder approval. They may exercise this ability in a manner that advances their best interests and not necessarily those of other stockholders.

Anti-takeover provisions in our charter documents and Delaware law could prevent or delay a change in control.

Our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. In addition, provisions of the Delaware General Corporation Law also restrict certain business combinations with interested stockholders. These provisions are intended to encourage potential acquirers to negotiate with us and allow our board of directors the opportunity to consider alternative proposals in the interest of maximizing stockholder value. However, these prohibitions may also discourage acquisition proposals or delay or prevent a change in control, which could harm our stock price.

The price of our common stock is volatile.

The market prices for securities of biotechnology companies, including ours, have historically been highly volatile. Our stock, like that of many other companies, has from time to time experienced significant price and volume fluctuations sometimes unrelated to operating performance. For example, during the period beginning January 1, 2011 and ending March 31, 2013, the sales price for one share of our common stock reached a high closing price of $94.20 per share and a low closing price of $4.88 per share. The market price of our common stock may fluctuate significantly due to a variety of factors, including:


•	the progress and results of our preclinical testing, clinical trials, product development and partnering activities;


•	quarterly fluctuations in our financial results;


•	the development of technological innovations or new therapeutic products by us, our competitors or others;


•	changes in governmental regulation;


•	the success or failure of our efforts to obtain marketing authorization for any of our products from the FDA or other regulatory authority;

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•	our ability to satisfy regulatory requirements for the maintenance of any marketing authorization granted by FDA or other regulatory authority for any of our products;


•	the emergence of drug safety issues that require us to add restrictions or warnings to the label or withdraw from the market any of our products after approval by the FDA or other regulatory authority;


•	developments in patent or other proprietary rights by us, our competitors or others;


•	developments and/or announcements by us, our competitors or others;


•	litigation;


•	public concern as to the safety of products developed by us, our competitors or others;


•	departure of key personnel;


•	ability to manufacture our products to commercial standards;


•	changes in the structure of healthcare payment systems and the coverage and reimbursement policies of governmental and other third-party payers;


•	our ability to successfully commercialize our products if they are approved;


•	comments by securities analysts; and


•	general market conditions in our industry.

In addition, if any of the risks described in this section entitled “Risk Factors” actually occur, there could be a dramatic and material adverse impact on the market price of our common stock.

Risks Related to Our Industry

We face rapid technological change and intense competition.

The pharmaceutical industry is subject to rapid and substantial technological change. Therapies designed by other companies to treat the conditions that are the focus of our products are currently in clinical trials. Developments by others may render our products under development or technologies noncompetitive or obsolete, or we may be unable to keep pace with technological developments or other market factors. Technological competition in the industry from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Many of these entities have significantly greater research and development capabilities than we do, as well as substantially more marketing, sales, manufacturing, financial and managerial resources. These entities represent significant competition for us. Acquisitions of, or investments in, competing pharmaceutical or biotechnology companies by large corporations could increase such competitors' financial, marketing, manufacturing and other resources. In addition, we may experience competition from companies that have acquired or may acquire technology from universities and other research institutions. As these companies develop their technologies, they may develop proprietary positions that compete with our products. We are engaged in the development of novel therapeutic technologies. Our resources are limited and we may experience technical challenges inherent in such novel technologies.

Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely different approach or means of accomplishing similar therapeutic effects than our products. Our competitors may develop products that are safer, more effective or less costly than our products and, therefore, present a serious competitive threat to our product offerings. Our competitors may price their products below ours, may receive better coverage and/or reimbursement or may have products that are more cost effective than ours.

The widespread acceptance of therapies that are alternatives to ours may limit market acceptance of our products even if commercialized. The diseases for which we are developing our therapeutic products can also be treated, in the case of cancer, by surgery, radiation, biologics and chemotherapy. These treatments are widely accepted in the medical community and have a long history of use. The established use of these competitive products may limit the potential for our products to receive widespread acceptance if commercialized. We may be unable to demonstrate any pharmacoeconomic advantage for our products compared to established or standard-of-care therapies for our target patient populations. In addition, many of our target patient populations can present with indolent, or slowly progressing, disease. It may be difficult for us to show that treatment with our products provides a significant improvement in clinical outcome compared to the avoidance of treatment, or

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watching for the progression of disease, in such patients. Payers may decide that the potential improvement our products provide to clinical outcomes in our target patient populations is not adequate to justify the costs of treatment with our products. If payers do not view our products as offering a better balance between clinical benefit and treatment cost compared to standard-of-care therapies, the profitability of our products may be severely reduced.

If our products are not accepted by the market or if users of our products are unable to obtain adequate coverage of and reimbursement for our products from government and other third-party payers, our revenue and profitability will suffer.

Our ability to commercialize our products successfully will depend in significant part on the extent to which appropriate coverage of and reimbursement for our products and related treatments are obtained from governmental authorities, private health insurers and other organizations, such as HMOs. Third-party payers are increasingly challenging the prices charged for medical products and services. We cannot provide any assurances that third- party payers will consider our products cost-effective or provide coverage of and reimbursement for our products, in whole or in part.

Uncertainty exists as to the coverage and reimbursement status of newly approved medical products and services and newly approved indications for existing products. Third-party payers may conclude that our products are less safe, less clinically effective, or less cost-effective than existing products, and third-party payers may not approve our products for coverage and reimbursement. If we are unable to obtain adequate coverage of and reimbursement for our products from third-party payers, physicians may limit how much or under what circumstances they will prescribe or administer them. Such reduction or limitation in use of our products could cause our sales to suffer. Even if third-party payers make reimbursement available, payment levels may not be sufficient to make the sale of our products profitable.

Also, the trend towards managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of medical services and products, may result in inadequate coverage of and reimbursement for our products. Many third-party payers, including in particular HMOs, are pursuing various ways to reduce pharmaceutical costs, including, for instance, the use of formularies. The market for our products depends on access to such formularies, which are lists of medications for which third-party payers provide reimbursement. These formularies are increasingly restricted, and pharmaceutical companies face significant competition in their efforts to place their products on formularies of HMOs and other third-party payers. This increased competition has led to a downward pricing pressure in the industry. The cost containment measures that third-party payers are instituting could have a material adverse effect on our ability to operate profitably.

Current health care laws and regulations, including the recently enacted health care reform, as well as future legislative or regulatory changes to the healthcare system, may affect our ability to sell our products profitably.

In the United States, there has been recent legislation, as well as legislative and regulatory proposals, changing the healthcare system in ways that may affect our future revenue and profitability, and the future revenue and profitability of our potential customers, suppliers and collaborative partners, and the availability of capital. Federal and state lawmakers regularly propose and, at times, enact legislation that would result in significant changes to the healthcare system and, in particular, that are intended to contain or reduce the costs of medical products and services.

The most significant recent health care legislation is the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or the “Healthcare Reform Act”, which President Obama signed into law in March 2010. This law substantially changes how health care is funded by the state and federal government as well as private insurers, and significantly impacts the pharmaceutical industry. Though the full effect of the Healthcare Reform Act on pharmaceutical companies has yet to be seen, the changes that may affect our business include those governing enrollment in federal healthcare programs, reimbursement changes, new governmental programs, and fraud and abuse enforcements. The Healthcare Reform Act takes effect in stages through 2018.

Certain aspects of the Health Care Reform Act are likely to adversely affect pharmaceutical manufacturers in particular. For example, in 2011, the Healthcare Reform Act imposed non-deductible annual flat fees on pharmaceutical manufacturers and importers based upon relative market share. Furthermore, as part of the Healthcare Reform Act closing a funding gap in the Medicare Part D prescription drug program, certain pharmaceutical manufacturers will be required to provide a 50% discount on drugs dispensed to beneficiaries within this funding gap.

There also have been and likely will continue to be legislative and regulatory proposals at the state and federal levels that could bring about significant changes to the Medicaid drug rebate program and other federal pharmaceutical pricing and rebate programs. Given these and other recent federal and state government initiatives directed at lowering the total cost of health care, federal and state lawmakers will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid programs. These efforts could adversely affect our business by, among other possibilities, limiting the prices that can be charged for drugs we develop or the amount of reimbursement available for these

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products from governmental agencies or third-party payers, limiting the profits that pharmaceutical companies may earn on certain sales, increasing the tax obligations on pharmaceutical companies, increasing our rebate liability, or limiting our commercial opportunity. We cannot predict the impact on our business of any legislation or regulations that may be adopted in the future. Any cost containment measures and other healthcare system reforms that are adopted could have a material adverse effect on our ability to operate profitably.

We may need to change our business practices to comply with health care fraud and abuse regulations, and our failure to comply with such laws could adversely affect our business, financial condition and results of operations.

Our operations will be directly, or indirectly through our customers, subject to various state and federal fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and False Claims Act. These laws may impact, among other things, our proposed sales, marketing and education programs.

The federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as the Medicare and Medicaid programs. Several courts have interpreted the statute's intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the statute has been violated. The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements, Congress authorized the Department of Health and Human Services, Office of Inspector General (“OIG”) to issue a series of regulations, known as the “safe harbors.” These safe harbors set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG. Penalties for violations of the federal Anti-Kickback Statute include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many states have also adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.

The federal False Claims Act prohibits persons from knowingly filing or causing to be filed a false claim to, or the knowing use of false statements to obtain payment from, the federal government. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, sometimes known as “relators” or, more commonly, as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. The frequency of filing of qui tam actions has increased significantly in recent years, causing greater numbers of healthcare companies to have to defend a False Claim action. In addition, under current case law of the federal courts, the False Claims Act prohibits as a false claim any claim for payment submitted to or paid by the federal government for utilization of a prescription drug consequent to off-label promotion of the drug in violation of the Food, Drug and Cosmetics Act (FDCA). When an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of between $5,500 to $11,000 for each separate false claim, and face exclusion from Medicare, Medicaid, and other federal health programs. Various states have also enacted laws modeled after the federal False Claims Act.

In addition to the laws described above, the Health Insurance Portability and Accountability Act of 1996 created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payers. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from government sponsored programs. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines or imprisonment.

If our operations are found to be in violation of any of the laws described above and other applicable state and federal fraud and abuse laws, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from government healthcare programs, and the curtailment or restructuring of our operations.

Our business exposes us to product liability claims.

The testing, manufacture, marketing and sale of our products involve an inherent risk that product liability claims will be asserted against us. We face the risk that the use of our products in human clinical trials will result in adverse effects. If we complete clinical testing for our products and receive regulatory approval to market our products, we will mark our products

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with warnings that identify the known potential adverse effects and the patients who should not receive our product. We cannot ensure that physicians and patients will comply with these warnings. In addition, unexpected adverse effects may occur even with use of our products that receive approval for commercial sale. Although we are insured against such risks in connection with clinical trials, our present product liability insurance may be inadequate. A successful product liability claim in excess of our insurance coverage could have a material adverse effect on our business, financial condition and results of operations. Any successful product liability claim may prevent us from obtaining adequate product liability insurance in the future on commercially desirable or reasonable terms. In addition, product liability coverage may cease to be available in sufficient amounts or at an acceptable cost. An inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of our pharmaceutical products. A product liability claim or recall would have a material adverse effect on our reputation, business, financial condition and results of operations.

Our business involves environmental risks.

In connection with our research and development activities and our manufacture of materials and products, we are subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens and wastes. Although we believe that we have complied with the applicable laws, regulations and policies in all material respects and have not been required to correct any material noncompliance, we may be required to incur significant costs to comply with environmental and health and safety regulations in the future. Our research and development involves the controlled use of hazardous materials, including but not limited to certain hazardous chemicals and radioactive materials. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, we cannot completely eliminate the risk of contamination or injury from these materials. In the event of such an occurrence, we could be held liable for any damages that result and any such liability could exceed our resources.

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

Not Applicable.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits

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31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.1	Section 1350 Certifications of CEO and Principal Financial Officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	Pharmacyclics, Inc.

	(Registrant)

Dated: May 7, 2013	By:	/s/ ROBERT W. DUGGAN
		Robert W. Duggan
		Chairman of the Board and Chief Executive Officer
		(Principal Executive Officer)



Dated: May 7, 2013	By:	/s/ JOSHUA T. BRUMM
		Joshua T. Brumm
		Executive Vice President, Finance
		(Principal Financial and Accounting Officer)

Table of Contents

EXHIBITS INDEX



Exhibit Number	Description
31.1	Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.1	Section 1350 Certifications of CEO and Principal Financial Officer
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Pharmacyclics (PCYC) Inactive 10-Q2013 Q1 Quarterly report

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