Pharmacyclics 10Q 2014 Q1 Quarterly report

Pharmacyclics (PCYC) Inactive 10-Q2014 Q1 Quarterly report

Content analysis

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, 2014

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 28, 2014 there were 75,032,044 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, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	678,625		$	623,956
Marketable securities	11,431			11,672
Accounts receivable, net	27,013			11,044
Receivable from collaboration partners	1,047			51,957
Inventory	28,714			12,603
Advances to manufacturers	14,838			20,316
Prepaid expenses and other current assets	11,352			9,253
Total current assets	773,020			740,801
Property and equipment, net	29,800			25,471
Other assets	2,940			2,479
Total assets	$	805,760		$	768,751
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,230		$	4,026
Accrued liabilities	63,161			71,188
Payable to collaboration partner	17,890			3,388
Income tax payable	30			1,448
Deferred revenue - current portion	12,862			7,581
Total current liabilities	95,173			87,631
Deferred revenue - non-current portion	44,648			52,025
Other long-term liabilities	1,568			1,472
Total liabilities	141,389			141,128
Commitments and contingencies (Notes 3 and 11)
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, 2014 and December 31, 2013, respectively; shares issued and outstanding 75,025,090 and 74,167,169 at March 31, 2014 and December 31, 2013, respectively	8			7
Additional paid-in capital	862,693			844,220
Accumulated other comprehensive loss	(9		)	(8		)
Accumulated deficit	(198,321		)	(216,596		)
Total stockholders’ equity	664,371			627,623
Total liabilities and stockholders’ equity	$	805,760		$	768,751

The accompanying notes are an integral part of these unaudited 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,
	2014			2013
Revenue:
License and milestone revenue	$	60,000		$	—
Product revenue, net	56,179			—
Collaboration services revenue	3,198			2,846
Total revenue	119,377			2,846
Costs and expenses:
Cost of goods sold	6,110			—
Research and development	35,292			35,784
Selling, general and administrative	34,715			20,026
Costs of collaboration (see Note 3)	25,035			—
Total costs and expenses	101,152			55,810
Income (loss) from operations	18,225			(52,964		)
Interest income	80			76
Other income (expense), net	(42		)	3
Income (loss) before income taxes	18,263			(52,885		)
Income tax benefit	(12		)	(974		)
Net income (loss)	$	18,275		$	(51,911	)
Net income (loss) per share:
Basic	$	0.24		$	(0.73	)
Diluted	$	0.23		$	(0.73	)
Weighted average shares used to compute net income (loss) per share:
Basic	74,754			70,933
Diluted	78,064			70,933

The accompanying notes are an integral part of these unaudited 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,
	2014			2013
Comprehensive income (loss), net of taxes
Net income (loss)	$	18,275		$	(51,911	)
Change in unrealized gain (loss) on marketable securities	(1		)	—
Comprehensive income (loss)	$	18,274		$	(51,911	)

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

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PHARMACYCLICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in thousands)



	Three Months Ended
	March 31,
	2014			2013
Cash flows from operating activities:
Net income (loss)	$	18,275		$	(51,911	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	911			392
Stock-based compensation expense	12,986			23,578
Loss on property and equipment	—			110
Changes in assets and liabilities:
Accounts receivable, net	(15,969		)	—
Receivable from collaboration partners	50,910			9,535
Inventory	(15,799		)	—
Advances to manufacturers	5,478			—
Prepaid expenses and other assets	(2,564		)	(2,725		)
Accounts payable	(2,806		)	9,881
Accrued liabilities	(7,046		)	8,252
Payable to collaboration partners	14,502			—
Income taxes payable	(1,418		)	(1,389		)
Deferred revenue	(2,096		)	(2,786		)
Other long-term liabilities	96			(1		)
Net cash provided by (used in) operating activities	55,460			(7,064		)
Cash flows from investing activities:
Purchase of property and equipment	(6,211		)	(2,087		)
Purchase of marketable securities	(2,640		)	(1,200		)
Proceeds from sales of marketable securities	—			240
Proceeds from maturities of marketable securities	2,880			1,920
Net cash used in investing activities	(5,971		)	(1,127		)
Cash flows from financing activities:
Issuance of common stock, net of issuance costs	—			201,023
Proceeds from exercise of stock options and stock purchase rights	5,180			2,261
Net cash provided by financing activities	5,180			203,284
Increase in cash and cash equivalents	54,669			195,093
Cash and cash equivalents at beginning of period	623,956			307,433
Cash and cash equivalents at end of period	$	678,625		$	502,526
Supplemental disclosure of non-cash investing and financing activities:
Receivable for stock option exercises	$	5		$	1
Property and equipment purchases included in Accounts payable and Accrued liabilities	3,068			2,373

The accompanying notes are an integral part of these unaudited 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

Company Overview

Pharmacyclics, Inc. ("Pharmacyclics" or the "Company") is a biopharmaceutical company that designs, develops and commercializes therapies with a focus on product candidates that are small-molecule drugs for the treatment of cancer and immune-mediated diseases.

On February 12, 2014, the U.S. Food and Drug Administration (FDA) approved IMBRUVICA^TM (ibrutinib, PCI-32765) under accelerated approval as a single agent for the treatment of patients with CLL who have received at least one prior therapy, the second indication for IMBRUVICA^TM. IMBRUVICA^TM first came to market on November 13, 2013, when the FDA approved IMBRUVICA^TM under accelerated approval as a single agent for the treatment of patients with mantle cell lymphoma (MCL) who have received at least one prior therapy. The FDA approval for these indications was based on overall response rate (ORR). Improvements in survival or disease-related symptoms has not been established. IMBRUVICA^TM is the first once-daily, single-agent, oral kinase inhibitor for patients with MCL and patients with CLL who in each case have received one prior therapy and is being jointly developed and commercialized by Pharmacyclics and Janssen Biotech, Inc. and its affiliates ("Janssen"), one of the Janssen Pharmaceutical companies of Johnson & Johnson.

In addition to IMBRUVICA^TM (ibrutinib), Pharmacyclics has three other product candidates in clinical development and several preclinical molecules in lead optimization.

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, Pharmacyclics Cayman Ltd. and Pharmacyclics (Shanghai) Management Consulting Service Limited. 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 Article 10 of Regulation S-X which governs quarterly reporting 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 ("GAAP"). The December 31, 2013 condensed consolidated balance sheet data contained within this Form 10-Q was derived from audited consolidated financial statements included in the Company's Form 10-K for the year ended December 31, 2013, 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 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 Form 10-K for the year ended December 31, 2013. 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.

Reclassification

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

Significant Accounting Policies

In connection with the Company's commercial launch of IMBRUVICA^TM on November 13, 2013, it implemented the following significant accounting policies and estimates that are used in the determination of product revenue, net:

Revenue recognition

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Product revenue, net is recognized in accordance with the FASB Accounting Standards Codification (ASC) 605, Revenue Recognition, when the following criteria have been met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price is fixed or determinable and (4) collectability is reasonably assured. Revenues are deferred for fees received before earned or until no further obligations exist. The Company exercises judgment in determining that collectability is reasonably assured or that services have been delivered in accordance with the arrangement. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. The Company assesses collectability based primarily on the customer's payment history and on the creditworthiness of the customer.

Product Revenue, Net

Product revenue, net consists of U.S. sales of IMBRUVICA^TM and is recognized once all four revenue recognition criteria described above have been met. The Company sells IMBRUVICA^TM to specialty pharmacies ("SP") that sells to individual patients, specialty distributors ("SD") that sells to hospital pharmacies, and to direct customers. The Company recognizes revenue from sales of IMBRUVICA^TM when the product’s title and risk of loss transfers to the customer. The Company determined that it has the ability to make reasonable estimates of product returns in order to recognize revenue at the time that title and risk of loss transfers to the customer based on the following factors: (1) the Company believes that it has sufficient insight into the distribution channel at the SP's and SD's in order to ascertain their inventory level and dispense data, (2) due to the price of the Company's product and limited patient population, its SP and SD customers have not built up significant levels of inventory, nor does the Company expect they will do so for the foreseeable future, (3) inventory on hand at the Company's SP customers was generally less than two weeks as of March 31, 2014, (4) there have been no product returns to-date since the Company's commercial launch of IMBRUVICA^TM on November 13, 2013 and (5) the Company believes there is limited risk of return of inventory in the channel due to expiration based on the shelf life of inventory in the channel.

The Company recognizes product revenue net of adjustments for customer credits, including estimated government rebates and charge-backs, returns, prompt payment discounts, patient assistance programs, and Medicare Part D coverage gap reimbursements. Each of the above adjustments are recorded at the time of revenue recognition, resulting in a reduction in product revenue, net and an increase in accrued expenses or a reduction in accounts receivable, net. The above adjustments require significant estimates, judgment and information obtained from external sources. If management's estimates differ from actuals, the Company will record adjustments that would affect product revenue, net in the period of adjustment.

Gross-to-net sales adjustments

Rebates

The Company records an allowance for rebates including mandated discounts under the Medicaid Drug Rebate Program. The allowance for rebates is based upon contractual agreements or legal requirements with public sector benefit providers, including Medicaid. The allowance for rebates represents the estimated amounts owed to such public sector benefit providers, including Medicaid, based on the estimated rebate percentage of forecasted eligible Medicaid sales. The estimated rebate percentage is based on statutory discount rates and expected utilization. The forecasted eligible Medicaid sales represents those sales made by the Company that will ultimately be consumed by patients covered by Medicaid. To estimate the allowance for rebates, the Company uses the estimated patient mix information which is provided by our specialty pharmacy customers, as well as third party sources. Rebates are generally invoiced and paid in arrears. As such, the allowance for rebates consists of an estimate of the amount expected to be incurred for the current quarter's shipments to patients, plus an accrual balance for estimated unpaid rebates from prior periods. The allowance for rebates is recorded within Accrued liabilities in the condensed consolidated balance sheets.

Charge-backs

Charge-backs are discounts that result from the difference between the prices at which the Company sells IMBRUVICA^TM to direct customers and the sales price ultimately paid to wholesalers under fixed price contracts by third-party payers. Such third-party payers, which primarily consist of the U.S. Department of Defense, U.S. Department of Veteran's Affairs (VA), Public Health Services (PHS), and other Federal Government institutions purchasing via the Federal Supply Schedule, purchase products through wholesalers at a lower price provided for in fixed price contracts and the wholesalers then charge the Company the difference between their acquisition cost and the lower program price. Charge-backs are recorded as a reduction to accounts receivable, net in the condensed consolidated balance sheets.

Product Returns

Consistent with industry practice, the Company generally offers its customers a limited right to return. The Company generally allows for the return of product that is a few months prior to and up to a few months after the product expiration date.

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Additionally, the Company considers several other factors in the estimation process including the expiration dates of product shipped, third party data in monitoring channel inventory levels, shelf life of the product, prescription trends and other relevant factors. Provisions for estimated product returns are recorded within Accrued liabilities in the condensed consolidated balance sheets.

Medicare Part D coverage gap

Medicare Part D, also known as the Medicare prescription drug benefit, is a federal program to subsidize the costs of prescription drugs for Medicare beneficiaries in the United States. The Medicare Part D prescription drug benefit mandates that drug manufacturers fund 50% of the Medicare Part D insurance coverage gap for prescription drugs sold to eligible patients. Funding of the Medicare Part D gap is invoiced and paid in arrears. As such, the allowance for Medicare Part D consists of an estimate of the amount expected to be incurred for the current quarter's shipments to patients, plus an accrual balance for estimated shipments remaining in the channel at period end which are estimated to ship to Medicare Part D patients. The allowance for rebates is recorded within Accrued liabilities in the condensed consolidated balance sheets.

Prompt payment discounts

The Company generally offers cash discounts to its customers, generally a 2% discount applied to the invoice amount, as an incentive for prompt payment. The Company expects that all of its customers to whom it offers cash discounts for prompt payment to take advantage of the full amount of the 2% discount. The Company records the prompt-payment discount as a reduction to Accounts receivable, net in the condensed consolidated balance sheets.

Co-payment assistance

Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The Company accrues for co-payment assistance based on actual program participation and estimates of program redemption using data provided by third-party administrators.

Donations to Third-Party Patient Assistance Foundations

The Company provides cash donations to independent third-party patient assistance foundations that, in turn, make grants to help qualifying patients meet their out-of-pocket costs (including co-pay payments or co-insurance obligations) in connection with their use of the Company's products as well as those of other pharmaceutical and biotechnology companies. These independent patient assistance foundations maintain their own patient eligibility criteria and independently determine for which medicinal products patients can receive financial assistance. Given the non-reciprocal nature of these transactions with parties who are not considered direct or indirect customers, and for which the Company does not receive any consideration, and the fact that the donation of cash does not have any conditions attached to the donation, the Company accounts for the cash donations as a component of selling, general and administrative expenses in the condensed consolidated statements of operations.

For a complete listing of the Company's significant accounting policies, please see Note 2 to its consolidated financial statements included in its Form 10-K for the year ended December 31, 2013.

Concentration of credit risk

Financial instruments that potentially subject the Company to credit risk consist principally of cash, cash equivalents, marketable securities, accounts receivable and receivables from collaboration partners. The Company places its cash and cash equivalents with high-credit quality financial institutions and invests in debt instruments of financial institutions, corporations and government entities with strong credit ratings. The Company's management believes it has established guidelines relative to credit quality, diversification and maturities that maintain safety and liquidity.

The Company sells IMBRUVICA^TM to direct customers and through a limited number of specialty pharmacies and specialty distributors. The Company continuously monitors the creditworthiness of its customers and has internal policies regarding customer credit limits. The Company's policy is to estimate the allowance for doubtful accounts based on the credit worthiness of its customers, historical payment patterns, the aging of accounts receivable balances and general economic conditions. As of March 31, 2014, the Company had no allowance for doubtful accounts. For the three months ended March 31, 2014, 5 individual customers accounted for 30%, 16% , 15%, 11%, and 10% of accounts receivable, net, respectively.

Note 2 - Product Revenue, Net

Product revenue, net consists of revenue recorded on the sale of IMBRUVICA^TM which was approved by the FDA and commercially launched by the Company on November 13, 2013 for MCL. On February 12, 2014, the FDA approved and the

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Company launched IMBRUVICA^TM for CLL. All product sales during three months ended March 31, 2014 were shipped to specialty pharmacies, specialty distributors and direct customers in the United States.

The following table summarizes the provisions, and credits/payments, for product revenue, net adjustments (in thousands):



	Total
Balance as of December 31, 2013	$	1,206
Provision related to current period sales	8,639
Credits/payments	(2,095		)
Balance as of March 31, 2014	$	7,750

The following table sets forth customers who represented 10% or more of the Company's product revenue, net for the three months ended March 31, 2014:



	Three Months Ended
Customer	March 31, 2014
A	29	%
B	19	%
C	13	%
D	12	%

Note 3 - Collaboration and Other Agreements

The Company recognized revenue related to its collaboration and license arrangements as follows (in thousands):



	Three Months Ended March 31,
	2014		2013
Janssen	$	63,135	$	2,786
Les Laboratoires Servier ("Servier")	63		40
Other	—		20
Total	$	63,198	$	2,846

Collaboration and License Agreement with Janssen Biotech, Inc.

Background

In December 2011, the Company entered into a worldwide collaboration and license agreement (the "Agreement") with Janssen for the development and commercialization of IMBRUVICA^TM, a novel, orally active, selective covalent inhibitor of Bruton’s Tyrosine Kinase ("BTK"), and certain compounds structurally related to IMBRUVICA^TM, for oncology and other indications, excluding all immune and inflammatory mediated diseases 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). As of March 31, 2014, $445,000,000 in milestone

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payments have been earned by the Company under the Agreement and it may receive up to an additional $380,000,000 in development, regulatory and approval milestone payments. However, clinical development entails risks and we have no assurance as to whether or when the milestone targets might be achieved.

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 development costs and the Company is responsible for the remaining 40% of collaboration development costs. In general, costs associated with commercialization will be included in determining pre-tax profit or pre-tax loss, which are to be shared 50% by the Company and 50% by Janssen.

The collaboration with Janssen provides the Company with an annual cap of its share of IMBRUVICA^TM related research and development expenses and selling, general and administrative expenses offset by pre-tax commercial profits for each calendar year. 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 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 the cumulative interest on Excess Amounts shall not in the aggregate exceed $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 only 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 recognizes Excess Amounts as a reduction to costs and 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 as a reduction of the Company's share of pre-tax profits (if any) after the third profitable quarter for the product.

The Agreement also provides that any net profits from the commercialization of products resulting from the collaboration will be shared 50% by the Company and 50% by Janssen. Both parties are responsible for the development, manufacturing and marketing of any products resulting from the 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 IMBRUVICA^TM, has standalone value apart from the committee and development services because the development, manufacturing and commercialization rights conveyed would permit Janssen 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

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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.

Janssen Collaboration Revenue

Total revenue recognized with respect to the Agreement consisted of the following (in thousands):



	Three Months Ended March 31,
	2014		2013
License and milestone revenue	$	60,000	$	—
Collaboration services revenue	3,135		2,786
Total	$	63,135	$	2,786

For the three months ended March 31, 2014, the Company recognized $60,000,000 of milestone revenue under its collaboration agreement with Janssen. As previously announced, the $60,000,000 milestone payment to the Company was triggered on February 12, 2014 as a result of the FDA approval of IMBRUVICA^TM as a single agent for the treatment of patients with chronic lymphocytic leukemia (“CLL”) who have received at least one prior therapy.

As of March 31, 2014, total deferred revenue related to committee and development services under the Agreement with Janssen was $56,946,000, of which $44,648,000 was included in deferred revenue non-current portion.

Janssen Collaboration Cost Sharing and Excess Amounts

The Company recognized development costs under the collaboration as a component of research and development expense in the condensed consolidated statements of operations. The Company also recognized certain selling, general and administrative expenses under the collaboration, including marketing costs, patent costs and the Company's share of pre-tax commercial losses on sales of IMBRUVICA^TMas a component of selling, general and administrative in the condensed consolidated statements of operations. Expenses which were charged to the collaboration are as follows (in thousands):

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	Three Months Ended
	March 31,
	2014			2013

Collaboration expenses, unadjusted	$	32,365		$	38,463
Decrease for cost sharing	(7,963		)	(16,291		)
Research and development	$	24,402		$	22,172

Collaboration expenses, unadjusted	$	18,220		$	3,508
Decrease for cost sharing	(55		)	(811		)
Selling, general and administrative	$	18,165		$	2,697

During the three months ended March 31, 2014 and the three months ended March 31, 2013, the Company's share of costs under the Agreement was calculated as follows:



	Three Months Ended
	March 31,
	2014		2013
Research and development	$	24,402	$	22,172
Selling, general and administrative	18,165		2,697
	42,567		24,869
Less: Pharmacyclics' 50% share of net product revenue less cost of goods sold	25,035		—
Total net costs for IMBRUVICA^TM under the Agreement ⁽¹⁾	$	17,532	$	24,869

⁽¹⁾ The Company's total share of net costs under the Agreement did not exceed the $50,000,000 annual cap provided for in the Agreement. As such, no Excess Amounts were recorded for the three months ended March 31, 2014 and March 31, 2013.

For the three months ended March 31, 2014, Janssen's 50% share from net product revenue less cost of goods sold of IMBRUVICA^TM of $25,035,000 was included in Costs of collaboration in the Company's condensed consolidated statements of operations. Janssen's share was calculated as follows:



	Three Months Ended
	March 31, 2014
Product revenue, net	$	56,179
Less: Cost of goods sold	6,110
	50,069
Janssen's share of pre-tax profits	50		%
Total Cost of Collaboration (Janssen's 50% share as per the Agreement)	$	25,035
Pharmacyclics' 50% share of net product revenue less cost of goods sold	$	25,035

As of March 31, 2014, the Company had $1,047,000 receivable from Janssen which primarily was related to materials and product purchases. As of December 31, 2013, the Company had $50,230,000 receivable from Janssen related to Excess Amounts and $1,607,000 due from Janssen related to value added taxes. The receivable from Janssen is included within receivable from collaboration partners on the condensed consolidated balance sheets.

As of March 31, 2014, the Company had $17,890,000 payable to Janssen which primarily consisted of amounts due for Janssen's share of pre-tax profits. As of December 31, 2013, the Company had $3,142,000 payable to Janssen under the cost sharing arrangement and $246,000 due to Janssen related to value added taxes. The payable to Janssen is included within payable to collaboration partner on the condensed consolidated balance sheets.

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As of March 31, 2014, total Excess Amounts of $135,634,000 (which comprises the cumulative amount funded by Janssen to-date of $134,261,000 and interest of $1,373,000) would become payable once the Company reaches a 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.

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 for the achievement of 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,
	2014		2013
Collaboration services revenue	$	63	$	40
Total	$	63	$	40

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 as an excipient in a product containing a Novo Nordisk active pharmaceutical ingredient for 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.

On June 28, 2013, the Company entered into an amended and restated license agreement with Novo Nordisk to expand the scope of the license granted by the Company to Novo Nordisk in October 2012. Under the amended and restated license agreement with Novo Nordisk, the Company has no additional obligations related to the delivery of the license.

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 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

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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. To date, no milestone payments have been triggered related to the Company's HDAC inhibitor or Factor VIIa programs.

In addition to the milestone payments, the Company is required to make single-digit royalty payments based on annual sales of IMBRUVICA^TM and would be required to make single-digit royalty payments based on annual sales of drugs commercialized from the Company's HDAC inhibitor, Factor VIIa inhibitor and certain other BTK inhibitor programs. For the three months ended March 31, 2014, the Company recognized royalty expense under the Celera agreement of approximately $3,931,000 on net product sales of IMBRUVICA^TMin the United States. Royalty expense related to net product sales of IMBRUVICA^TM is included within cost of goods sold in the condensed consolidated statement of operations. No royalty expense was recognized under the Celera agreement for the three months ended March 31, 2013.

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 4 - Inventory

Inventories consist of raw materials, work-in-process and finished goods related to the production of IMBRUVICA^TM. Raw materials include IMBRUVICA^TM active pharmaceutical ingredient (API). Work-in-process includes third-party manufacturing and associated labor costs relating to the Company’s personnel involved in the production process. Included in inventories are raw materials and work-in-process that may be used as clinical products, which are charged to research and development expense when the product enters the research and development process.

The components of inventory are as follows (in thousands):



	March 31,		December 31,
	2014		2013
Raw materials	$	14,899	$	8,007
Work-in-process	11,651		3,489
Finished goods	2,164		1,107
	$	28,714	$	12,603

The Company records cash advances that it pays prior to the receipt of inventory as advances to manufacturers in the condensed consolidated balance sheets. The cash advances may be forfeited if the Company terminates the scheduled production. The Company expects the carrying value of the advances to manufacturers to be fully realized.

Note 5 – Fair Value Measurements and Marketable Securities

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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 comprehensive 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 in the condensed consolidated statements of operations. Gains and losses on securities sold are recorded based on the specific identification method and are included in other income (expense), net in the condensed consolidated statements 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, 2014, the Company's Level 1 assets were comprised of U.S. treasury securities and 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, 2014, the Company's Level 2 assets were 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, 2014, 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, 2014 and December 31, 2013, respectively (in thousands):



As of March 31, 2014	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
U.S. agency securities – FDIC insured	$	11,440	$	—	$	(9	)	$	11,431
Total marketable securities	$	11,440	$	—	$	(9	)	$	11,431



As of December 31, 2013	Amortized Cost		Unrealized Gain		Unrealized Loss			Estimated Fair Value
U.S. agency securities – FDIC insured	$	11,680	$	—	$	(8	)	$	11,672
Total marketable securities	$	11,680	$	—	$	(8	)	$	11,672

At March 31, 2014, the Company's marketable securities had the following remaining contractual maturities (in thousands):



	Amortized Cost		Estimated Fair Value
Less than one year	$	11,440	$	11,431

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, 2014 and December 31, 2013 (in thousands):

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	March 31, 2014
	Level 1		Level 2		Level 3		Fair value
Cash equivalents:
U.S. treasury bills	$	474,985	$	—	$	—	$	474,985
Money market funds	79,304		—		—		79,304
U.S. agency securities - FDIC insured	—		240		—		240
Marketable securities:
U.S. agency securities - FDIC insured	—		11,431		—		11,431
	$	554,289	$	11,671	$	—	$	565,960



	December 31, 2013
	Level 1		Level 2		Level 3		Fair value
Cash equivalents:
U.S. treasury bills	$	269,488	$	—	$	—	$	269,488
Money market funds	129,193		—		—		129,193
U.S. agency securities - FDIC insured	—		240		—		240
Marketable securities:
U.S. agency securities - FDIC insured	—		11,672		—		11,672
	$	398,681	$	11,912	$	—	$	410,593

Note 6 – Balance Sheet Components

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



	March 31, 2014			December 31, 2013
Equipment	$	12,559		$	11,827
Leasehold improvements	5,528			5,493
Furniture and fixtures	1,278			1,278
Construction in progress	19,065			14,592
	38,430			33,190
Less: Accumulated depreciation and amortization	(8,630		)	(7,719		)
	$	29,800		$	25,471

Accrued liabilities consist of the following (in thousands):

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	March 31, 2014		December 31, 2013
Accrued clinical related	$	17,166	$	17,062
Accrued payroll and employee related expenses	16,006		20,500
Accrued inventory	1,528		7,592
Gross to net accruals	5,995		905
Accrued contract manufacturing	1,256		1,556
Accrued royalty	4,167		949
Accrued outside services	3,583		5,077
Accrued property and equipment purchases	3,028		4,039
Accrued value added taxes	1,654		7,041
Accrued other	8,778		6,467
	$	63,161	$	71,188

Deferred revenue consists of the following (in thousands):



Current portion:	March 31,		December 31,
	2014		2013
Deferred revenue related to Janssen	$	12,297	$	7,505
Deferred revenue related to net product sales	565		76
	$	12,862	$	7,581


Non-current portion:	March 31,		December 31,
	2014		2013
Deferred revenue from Janssen	$	44,648	$	52,025

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, the tax 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 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, 2014, the Company recorded an income tax benefit of $12,000 compared to an income tax benefit of $974,000 for the three months ended March 31, 2013. The difference between the estimated annual effective tax rate and the federal statutory rate of 35% was primarily attributable to discrete benefits recorded in the period. For the three months ended March 31, 2014, no tax benefit has been recorded under an effective tax rate method as no benefit is expected to be realized for the current year given the Company's full valuation allowance position and also based on the Company's estimate of a tax provision for the year ending December 31, 2014. For the three months ended March 31, 2013, the income tax benefit was primarily related to the reversal of previously recorded Federal Alternative Minimum Tax partially offset by foreign tax expense.

The Company recorded a valuation allowance against all of its net deferred tax assets at both March 31, 2014 and December 31, 2013. 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. However, considering the Company's current assessment of the probability of earning future milestones under its collaboration agreements and income from potential future sales of IMBRUVICA^TM, there is a reasonable possibility that, within the next year, sufficient positive evidence may become available to reach a conclusion that a significant portion of the valuation allowance will no longer be needed. As such, the Company may release a significant portion of its valuation allowance against its deferred tax assets within the next 12 months. This release would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period such release is recorded.

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The total amount of the unrecognized tax benefits if recognized would be an adjustment to the amount of deferred tax assets reported. 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, 2014, all tax years in the U.S. remain open due to the taxing authorities' ability to adjust operating loss carry forwards. The Company does not expect any material changes to the unrecognized tax benefits reported above 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.

During the year ended December 31, 2013, the Company was notified by the Internal Revenue Service (IRS) that it will be audited for the tax years ended June 30, 2012 and 2011. As of March 31, 2014, no adjustments have been proposed by the IRS.

Note 8 – Commitments and Contingencies

Facilities Lease

As of March 31, 2014, the Company leases 132,176 square feet for its corporate headquarters in Sunnyvale, California. Of this total space, 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. The remaining 52,400 square feet, of which 32,000 square feet represents additional space that the Company exercised an option to lease during the year ended December 31, 2013, is leased under an operating lease which expires in February 2023 and has an option to extend the lease term for an additional five years. In addition, during the year ended December 31, 2013, the Company entered into an agreement to lease approximately 7,500 square feet for its Pharmacyclics Switzerland GmbH office under an agreement that expires in May 2015. During the year ended December 31, 2013, the Company entered into an agreement to lease 7,000 square feet of office space in South San Francisco, California under an operating lease which expires in September 2014.

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, 2014, the Company's future minimum lease payments under non-cancelable operating leases are as follows:



Fiscal year	Operating Lease Commitments
2014 (remaining nine months)	$	1,677
2015	2,092
2016	2,161
2017	2,112
2018	857
2019	882
Thereafter	2,890
Total	$	12,671

Purchase Commitments

The Company had non-cancelable purchase obligations for approximately $12,840,000 and $34,800,000 as of March 31, 2014 and December 31, 2013, respectively.

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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. As of March 31, 2014, total Excess Amounts of $135,634,000 (which is comprised of the cumulative amount funded by Janssen to-date of $134,261,000 and interest of $1,373,000) would become payable once the Company reaches a third profitable calendar quarter for the product (see Note 3). 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 quarter for the product until the Excess Amounts and applicable interest has been fully repaid.

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 condensed consolidated financial position, results of operations or cash flows.

Note 9 - Basic and Diluted Net Income (Loss) Per Share

Basic net income (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, including performance-based stock options for which performance criteria have been achieved, restricted stock units 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,
	2014		2013
Numerator:
Net income (loss)	$	18,275	$	(51,911	)
Denominator:
Weighted average common shares - basic	74,754		70,933
Effect of dilutive securities:
Employee stock options	3,306		—
Employee stock purchase plan	4		—
Restricted stock units	—		—
Weighted average common shares - diluted	78,064		70,933
Net income (loss) per share:
Basic	$	0.24	$	(0.73	)
Diluted	$	0.23	$	(0.73	)
Potentially dilutive securities excluded from net income (loss) per share - diluted because their effect is anti-dilutive	658		5,340

Note 10 - Stock-Based Compensation and Stockholders’ Equity

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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

Pursuant to its 2004 Equity Incentive Award Plan, the Company grants time-based and performance-based stock options, restricted stock units and performance-based restricted stock units.

Stock-based compensation expense recognized in the condensed consolidated statements of operations was as follows (in thousands):



	Three Months Ended
	March 31,
	2014		2013
Cost of goods sold	$	417	$	—
Research and development	5,535		11,180
Selling, general and administrative	7,034		12,398
Total stock-based compensation	$	12,986	$	23,578

The following table summarizes the Company's stock option activity for the three months ended March 31, 2014 (in thousands, except per share amounts):



	Number of Shares		Weighted Average Exercise Price per Share
Balance at December 31, 2013	5,111		$	23.54
Exercised	(858	)	6.03
Granted	580		74.03
Forfeited	(54	)	51.01
Balance at March 31, 2014	4,779		$	33.10

The following table summarizes all of the Company's restricted stock unit activity for the three months ended March 31, 2014 (in thousands, except per share amounts):

The accounting grant date for employee stock options and restricted stock units with performance obligations is the date on which the performance goals have been defined and a mutual understanding of the terms has been reached. The Company's time-based stock option awards and restricted stock units typically vest over a four-year period subject to the employee’s continued service. The Company's performance-based stock options and performance-based restricted stock units granted to executive officers typically vest over a four-year period and five-year period, respectively, subject to the satisfaction of performance criteria established annually for such executive as determined by the Compensation Committee after reviewing the performance reports. The tables above do not include 554,000 performance stock options and 50,000 performance based restricted stock units granted in current and prior fiscal years for which the performance criteria had not been established as of March 31, 2014.

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At March 31, 2014, 2,618,294 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") during the three months ended March 31, 2014 and three months ended March 31, 2013. Shares available for future purchase under the Purchase Plan were 526,922 at March 31, 2014.

Additional paid-in capital increased by $18,473,000 during the three months ended March 31, 2014 as a result of stock-based compensation expense of $13,297,000 and the issuance of common stock upon exercise of stock options of $5,176,000.

Note 11 – Recent Accounting Pronouncements

During the fiscal first quarter of 2013, the FASB issued amended guidance clarifying the release of accumulated Foreign Currency Translation from Accumulated Other Comprehensive Income ("AOCI") into current year Net Earnings. The amendment requires that when the parent company ceases to have a controlling interest in a subsidiary or a business within a foreign entity the parent is to release accumulated Foreign Currency Translation from AOCI. This update is required to be adopted for all annual periods and interim reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this standard did not have a material impact on the Company's results of operations, cash flows or financial position.

In July 2013, FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)." The amendments in this ASU provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU do not require new recurring disclosures. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on the Company's results of operations, cash flows or financial position.

Note 12 – Subsequent Events

Supplemental New Drug Application Filing

On April 8, 2014, the Company announced that it has submitted a supplemental New Drug Application (sNDA) to the U.S. Food and Drug Administration (FDA), based on data from the randomized, multi-center, open-label Phase III RESONATE^TM study, PCYC-1112, a head-to-head comparison of single agent IMBRUVICA^TM (ibrutinib) versus ofatumumab in 391 patients with chronic lymphocytic leukemia (CLL) or small lymphocytic lymphoma (SLL), who had received at least one prior therapy. IMBRUVICA^TM is being jointly developed and commercialized by Pharmacyclics and Janssen Biotech, Inc.

Acquisition of Technology

On April 15, 2014, the Company entered into an agreement with a third party to acquire technology assets in the amount of $9,250,000 in cash.

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 year ended December 31, 2013 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Form 10-K filed with the Securities and Exchange Commission on February 26, 2014.

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 Form 10-K for the year ended December 31, 2013 and in our other Securities and Exchange Commission reports and filings. All forward-looking statements are based on

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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.

Company Overview

We are focused on developing and commercializing innovative small-molecule drugs for the treatment of cancer and immune mediated diseases. Our 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. To identify and control promising product candidates based on 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 just that.

In addition to IMBRUVICA^TM, Pharmacyclics has three other product candidates in clinical development and several preclinical molecules in lead optimization. We are committed to high standards of ethics, scientific rigor, and operational efficiency as we move each of these programs toward potential commercialization.

In December 2011, we entered into a worldwide collaboration and license agreement ("Agreement") with Janssen, for the development and commercialization of ibrutinib, a novel, orally active, first-in-class BTK inhibitor which has been and continues to be developed for the treatment of hematological malignancies, including non-Hodgkin lymphoma (NHL), CLL and multiple myeloma (MM). Under the Agreement, we received our first significant revenue in the form of milestone payments during the year ended June 30, 2012. Together with our partner Janssen, Pharmacyclics is commercializing IMBRUVICA^TM in the United States.

In 2006, we 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 Incorporated), including technology and intellectual property relating to drugs that target histone deacetylase ("HDAC") enzymes (specific and multiple isoforms), a Factor VIIa inhibitor targeting a tumor signaling pathway involved in angiogenesis, tumor growth and metastases and B-cell associated tyrosine kinase inhibitors potentially useful for the treatment of lymphomas/leukemias, anti-inflammatory and autoimmune diseases.

Status of Products Currently in Pre-Clinical and Clinical Development

The table below summarizes our pre-clinical programs and clinical product candidates and their stage of development:

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Product Candidates	Disease Indication	Development Status⁽¹⁾
IMBRUVICA BTK Inhibitor	B-cell lymphomas:	Multiple trials (Phase I, II, III) in treatment naive and in relapsed/refractory patients
	• Chronic lymphocytic leukemia
	• Small lymphocytic lymphoma
	• Mantle cell lymphoma
	• Diffuse large B-cell lymphoma
	• Follicular lymphoma
	• Multiple myeloma
	• Waldenstrom's macroglobulinemia
	• Marginal zone lymphoma
BTK Inhibitor	Autoimmune and anti-inflammatory disease	Preclinical testing, Phase I initiation
Abexinostat HDAC Inhibitor (PCI-24781)	Relapsed/refractory lymphomas and solid tumors	Multiple trials (Phase I, II)
Factor VIIa Inhibitor (PCI-27483)	Cancer	Multiple trials (Phase I, II)

⁽¹⁾ "Phase I" means initial human clinical trials designed to establish the safety, dose tolerance, pharmacokinetics (i.e., absorption, metabolism, excretion) and pharmacodynamics (i.e. biological markers for activity) of a compound. "Phase II" means human clinical trials designed to establish safety, optimal dosage and preliminary activity of a compound in a patient population. "Phase III" means human clinical trials designed to establish the safety and efficacy of a compound. These are the most important trials required by the Food and Drug Administration ("FDA") and are done to rigorously establish the clinical benefit and safety profile of a drug in a particular patient population. "Preclinical" means the stage of drug development prior to human clinical trials in which a molecule is optimized for "drug like" properties and evaluated for efficacy, pharmacokinetics, pharmacodynamics and safety.

Marketed Product - IMBRUVICA^TM (ibrutinib)

IMBRUVICA^TM is approved by the U.S. Food and Drug Administration as a single agent for the treatment of patients with MCL and patients with CLL who in each case have received at least one prior therapy. The FDA approval for these indications was based on ORR. An improvement in survival or disease-related symptoms has not been established. IMBRUVICA^TM is a new agent that inhibits the function of Bruton's tyrosine kinase (BTK). BTK is a key signaling molecule of the B-cell receptor signaling complex that plays an important role in the survival of malignant B-cells. IMBRUVICA^TM blocks signals that stimulate malignant B-cells to grow and divide uncontrollably.

The following information can be found on the prescribing information for IMBRUVICA^TM:

The approval in MCL was based on the results of a multi-center, international, single-arm trial of 111 patients with previously treated mantle cell lymphoma. Tumor response was assessed according to the revised International Working Group (IWG) for NHL criteria. The efficacy results demonstrated a 65.8% overall response rate (95% Confidence Interval (CI): 56.2, 74.5); 17% of patients achieved a complete response and 49% of patients achieved a partial response. The median duration of response was 17.5 months (95% CI: 15.8, not reached). The approval in CLL was based on the results of a Phase Ib/II, open-label, multi-center, international, single-arm trial of 48 patients with relapsed or refractory CLL who received 420 mg of IMBRUVICA^TM daily. The primary endpoint was safety and a secondary endpoint was ORR, which was assessed by a modified version of the International Working Group on CLL (IWCLL) criteria by an Independent Review Committee. The efficacy results demonstrated a 58.3 percent ORR (95% confidence interval (CI) (%), 43.2, 72.4), all partial responses. The duration of response (DOR) ranged from 5.6 to 24.2+ months. The median DOR was not reached.

IMBRUVICA^TM (ibrutinib) - Selected Clinical Trial Updates

Chronic Lymphocytic Leukemia/ Small Lymphocytic Lymphoma (CLL/SLL)


•	RESONATE™ (PCYC-1112): Phase III study of IMBRUVICA^TM versus ofatumumab in patients with relapsed/refractory (R/R) CLL/SLL was initiated in the second quarter of 2012. This is a randomized, multi-center, open-label

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Phase III trial of IMBRUVICA^TM as a monotherapy. This 391 patient study met its primary end point of PFS as well as a key secondary endpoint of overall survival at the pre-planned interim analysis in January 2014. We have filed the study data with the FDA in April 2014.

•

RESONATE™-17 (PCYC-1117): Open label, single arm, Phase II study of IMBRUVICA^TM as a mono-therapy in patients with CLL who have deletion of chromosome 17p and who did not respond to or relapsed after at least one prior treatment (a high unmet need population) was initiated in the first quarter of 2013. The primary endpoint of the study is overall response rate (ORR). This global study completed its enrollment of 145 patients in the third quarter of 2013, more than two quarters ahead of schedule. Patients will be followed for 12 months after the enrollment of the last patient for an assessment of ORR.

•

RESONATE™-2 (PCYC-1115): Phase III study of IMBRUVICA^TM versus chlorambucil in newly diagnosed elderly CLL/SLL patients was initiated in the first quarter of 2013. This is a randomized, multicenter, open-label trial of IMBRUVICA^TM as a monotherapy versus chlorambucil in patients 65 years or older with treatment naïve CLL/SLL. The study design was agreed upon with the FDA under a Special Protocol Assessment (SPA). The primary objective of the study is to demonstrate a clinically significant improvement in PFS when compared to chlorambucil. Pharmacyclics has completed enrollment of 273 patients worldwide in February 2014, approximately 9 months ahead of the original schedule.

•

HELIOS (CLL3001): Phase III study of IMBRUVICA^TM in combination with bendamustine and rituximab in patients with R/R CLL/SLL was initiated in the third quarter of 2012. This is a randomized, multi-center, double-blinded, placebo-controlled trial of IMBRUVICA^TM in combination with bendamustine and rituximab versus placebo in combination with bendamustine and rituximab (BR) in R/R CLL/SLL patients who have received at least one line of prior therapy. The primary objective of the study is to demonstrate a clinically significant improvement in PFS when compared to bendamustine and rituximab. This study completed enrollment of 578 patients worldwide during the first quarter of 2014.

•

BRILLIANCE (CLL3002): Phase III study of IMBRUVICA^TM versus rituximab in patients with R/R CLL/SLL was initiated in the fourth quarter of 2013. This is a randomized, open-label, multi-center study to evaluate the efficacy and safety of versus rituximab in adult Chinese patients with R/R CLL or SLL with active disease requiring treatment, who have failed at least 1 prior line of therapy and are not considered appropriate candidates for treatment or retreatment with purine analog-based therapy or combination chemoimmunotherapy. The primary objective of the study is to demonstrate a clinically significant improvement in PFS. The enrollment target of this study is 150 patients.

•

Third party sponsored: Phase III study of IMBRUVICA^TM versus IMBRUVICA^TM + rituximab versus bendamustine + rituximab in frontline newly diagnosed elderly (≥ 65 Years of Age) CLL/SLL patients (Alliance A041202) was initiated by the National Cancer Institute in the fourth quarter of 2013. This is a randomized, multi-center study designed to evaluate the improvement in PFS of IMBRUVICA^TM with or without rituximab vs bendamustine and rituximab. Secondary outcome measures include overall survival and duration of response. The enrollment target of this multi-center study is 523 patients, enrollment initiated during the first quarter of 2014.

•

Third party sponsored: Phase III study in treatment naive, young fit patients with CLL, comparing the combination of IMBRUVICA^TM and Rituxan to chemo immunotherapy of FCR (fludarabine, cyclophosphamide, and rituximab), (ECOG1912), was initiated by the Eastern Cooperative Oncology Group in the first quarter of 2014. This is a randomized study designed to evaluate the improvement in PFS of IMBRUVICA^TM with rituximab vs FCR. Secondary outcome measures include overall survival and adverse events. The enrollment target of this multi-center study is 519 patients.

•

Third party sponsored: Phase III study in untreated, intermediate and high-risk patients with CLL, comparing monotherapy IMBRUVICA^TM to placebo or no therapy, (CLL12), was initiated by the German Study Group in the first quarter of 2014. This is a randomized study designed to evaluate the improvement in event-free survival (EFS) of IMBRUVICA^TM vs. watch and waiting. Secondary outcome measures include ORR and PFS. The enrollment target of this multi-center study is 302 patients.

Mantle Cell Lymphoma (MCL)

•

RAY (MCL3001): Phase III study of IMBRUVICA^TM versus temsirolimus in R/R MCL patients was initiated in the fourth quarter of 2012. This is a randomized, multi-center, open-label trial of IMBRUVICA^TM 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 PFS. The enrollment target of this global study was 280 patients. This trial completed enrollment in Q4 of 2013.

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•

SHINE (MCL3002): Phase III study of IMBRUVICA^TM in combination with BR in elderly patients with newly diagnosed MCL was initiated in the second quarter of 2013. This is a randomized, multi-center, double-blinded, placebo-controlled trial of IMBRUVICA^TM plus BR versus placebo plus BR in patients 65 years or older with newly diagnosed MCL. The primary endpoint of the study is PFS. The enrollment target of this global study is 520 patients.

Diffuse Large B-cell Lymphoma (DLBCL)

•

PHOENIX (DBL3001): Phase III study of IMBRUVICA^TM in combination with R-CHOP (rituximab, cyclophosphamide, doxorubicin, vincristine, and prednisone) in patients with newly diagnosed non-GCB subtype of DLBCL was initiated in the third quarter of 2013. This is a randomized, multi-center, double-blinded, controlled trial of IMBRUVICA^TM plus rituximab, cyclophosphamide, doxorubicin, vincristine, and prednisone (R-CHOP) versus R-CHOP in patients with newly diagnosed non-GCB subtype DLBCL. The primary endpoint of the study is to demonstrate a clinically significant improvement in event-free survival when compared to R-CHOP. The enrollment target of this global study is 800 patients.

Follicular Lymphoma (FL)


•	PCYC 1125: Phase II multicenter, open-label, study of IMBRUVICA^TM, in combination with Rituximab in previously untreated subjects with follicular lymphoma was initiated in the fourth quarter of 2013. The primary endpoint of this study is overall response rate. The enrollment target of this study is 80 patients.

•

DAWN (FLR2002): Phase II study of IMBRUVICA^TM in patients with R/R FL was initiated in the second quarter of 2013. This is a multi-center, open-label, single-arm, global trial of IMBRUVICA^TM 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 overall response rate. The enrollment target of this global study is 110 patients.

•

SELENE (FLR3001): Phase III study of IMBRUVICA^TM in patients with R/R indolent Non-Hodgkin’s Lymphoma (iNHL) was initiated in the first quarter of 2014. This is a randomized, multi-center, placebo-controlled Phase III trial of in combination with either BR or RCHOP in patients with previously treated indolent Non-Hodgkin Lymphoma (iNHL). The primary endpoint of this study is progression free survival. The enrollment target of this global study is 400 patients.

Marginal Zone Lymphoma (MZL)


•	PCYC-1121: Phase II study of IMBRUVICA^TM in patients with R/R marginal zone lymphoma was initiated in the fourth quarter of 2013. This is a multicenter, open-label, monotherapy study to evaluate the safety and efficacy of IMBRUVICA^TM in patients with R/R marginal zone lymphoma. The primary endpoint of this study is overall response rate and the enrollment target of this study is 60 patients.

Waldenstrom's Macroglobulinemia (WM)

•

Third party sponsored: Phase II study of IMBRUVICA^TM in patients with R/R Waldenstrom's Macroglobulinemia was initiated in the second quarter of 2012. This is a multicenter, open label study of monotherapy IMBRUVICA^TM in patients with WM who failed at least one prior therapy. The primary endpoint of this study is ORR. The study will also assess the safety and tolerability of IMBRUVICA^TM as well as progression-free survival. This study is sponsored by the Dana-Farber Cancer Institute and completed enrollment of 63 patients with data recently presented at ASH 2013 and included in the “Best of ASH”.

Multiple Myeloma (MM)

•

PCYC-1111: Phase II study of IMBRUVICA^TM in patients with R/R multiple myeloma was initiated in the first quarter of 2012. This is a Phase II, multi-center, open-label trial designed to assess the safety and efficacy of IMBRUVICA^TM as a single agent and in combination with dexamethasone in patients with R/R MM. At this time, an expansion of cohorts 1, 2 and 3 (420mg, 560mg with dexamethasone, and 840mg) is not planned due to the fact that the protocol-defined response rate was not achieved. The Company is expanding the fourth dosing cohorts (840mg with dexamethasone) as it crossed a minimum pre-defined boundary of efficacy. The clinical development focus of IMBRUVICA^TM in this indication will be in combination therapies.


•	PCYC-1119: Phase I/IIb study of IMBRUVICA^TM in combination with carfilzomib in patients with R/R MM was initiated in the third quarter of 2013. The Phase I portion of this study is a dose escalation study designed to assess the safety and recommended Phase IIb dose of IMBRUVICA^TM and carfilzomib. The Phase IIb portion will be a

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randomized, double-blind, placebo controlled study to evaluate the efficacy of IMBRUVICA^TM and carfilzomib versus carfilzomib and placebo. The primary endpoint of the Phase IIb portion of the study is progression-free survival. The enrollment target of this study is 176 patients.

IMBRUVICA^TM (ibrutinib) - Regulatory Update

On October 30, 2013, Janssen-Cilag International NV (Janssen) announced it has submitted a Marketing Authorization Application (MAA) to the European Medicines Agency (EMA) for ibrutinib for the treatment of adult patients with relapsed or refractory chronic lymphocytic leukemia (CLL)/small lymphocytic leukemia (SLL) or relapsed or refractory mantle cell lymphoma (MCL).

On November 13, 2013, the Food and Drug Administration (FDA) approved IMBRUVICA^TM (ibrutinib, PCI-32765) monotherapy for the treatment of patients with mantle cell lymphoma (MCL) who have received at least one prior therapy. This indication is based on overall response rate (ORR). An improvement in survival or disease-related symptoms has not been established.

On February 12, 2014 the FDA approved IMBRUVICA^TM as a single agent for the treatment of patients with chronic lymphocytic leukemia (CLL) who have received at least one prior therapy. This indication is based on overall response rate (ORR). An improvement in survival or disease-related symptoms has not been established.

IMBRUVICA^TM (ibrutinib) - Breakthrough, Fast Track and Orphan Drug Designations

In the U.S., the FDA granted orphan drug designation to IMBRUVICA^TM for the following orphan diseases: CLL on April 6, 2012, MCL on December 3, 2012, MM on May 16, 2013, SLL on May 30, 2013, WM on October 15, 2013 and DLBCL on October 23, 2013. 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 IMBRUVICA^TM for the treatment of CLL/SLL on October 29, 2012 and for the treatment of MCL 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") adopted the decision that IMBRUVICA^TM is designated as an orphan medicinal product for the following diseases, CLL on April 26, 2012, MCL on March 12, 2013, and DLBCL on November 13, 2013. 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 8, 2013, the U.S. Food and Drug Administration (FDA) granted Breakthrough Therapy Designation to the investigational oral agent IMBRUVICA^TM monotherapy for the treatment of patients with relapsed or refractory MCL and to IMBRUVICA^TM monotherapy for the treatment of patients with WM, both of which are B-cell malignancies. On March 18, 2013, Pharmacyclics announced that the FDA granted an additional Breakthrough Therapy Designation for the investigational oral agent IMBRUVICA^TM as monotherapy for the treatment of CLL/SLL patients with deletion of the short arm of chromosome 17 (deletion 17p). Patients harboring a deletion within chromosome 17 are poor responders to chemoimmunotherapy and have limited treatment options. The presence of deletion 17p is one of the worst prognostic factors in patients with CLL.

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.

Collaboration and License Agreement with Janssen Biotech, Inc.

In December 2011, we entered into the Agreement with Janssen for the development and commercialization of IMBRUVICA^TM, and certain compounds structurally related to IMBRUVICA^TM, 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. Each company is leading development for specific indications as stipulated in a global development plan.

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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 us 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). As of March 31, 2014, $445,000,000 in milestone payments had been earned by us under the Agreement and we may receive up to an additional $380,000,000 in development, regulatory and approval milestone payments.

During the three months ended March 31, 2014, we announced that the FDA approved IMBRUVICA^TM as a single agent for the treatment of patients with CLL who have received at least one prior therapy. This approval of IMBRUVICA^TM in CLL triggered a $60,000,000 milestone payment to us under the Agreement.

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 development costs and we are responsible for the remaining 40% of collaboration development costs. In general, costs associated with commercialization will be included in determining pre-tax profit or pre-tax loss, which are to be shared 50% by us and 50% by Janssen.

The collaboration with Janssen provides us with an annual cap of our share of collaboration costs and pre-tax commercialization 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. The total Excess Amounts plus interest may not exceed $225,000,000. 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 our payment would be due to Janssen. The interest rate on outstanding Excess Amounts shall not exceed 5% per annum, and the cumulative interest on Excess Amounts shall not in the aggregate exceed $25,000,000.

In the event the Excess Amounts reach a maximum of $225,000,000, we shall be responsible for our share of development costs, together with any other amounts that become due from us, plus our share of any pre-tax loss beyond such maximum.

For all calendar quarters following the third profitable calendar quarter for the product, as determined in the Agreement, we can no longer add to Excess Amounts and shall be responsible for our own share of development costs along with our share of pre-tax losses incurred in such quarters. Janssen may recoup the Excess Amounts, together with interest from our share of pre-tax profits (if any) in subsequent calendar quarters until the Excess Amounts and applicable interest has been fully repaid.

We recognize Excess Amounts as a reduction to costs and expenses as our 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 our share of pre-tax profits (if any) after the third profitable calendar quarter for the product.

Pharmacyclics recognizes product revenue and takes a lead role in U.S. commercial strategy development and both Pharmacyclics and Janssen share in commercialization activities. Under the Agreement, following any regulatory approval outside the United States, Janssen will recognize product revenue and lead and perform commercialization activities. The Agreement also provides that pre-tax profits or pre-tax losses from the commercialization of any products resulting from the collaboration are shared 50% by us and 50% by Janssen.

For the three months ended March 31, 2014, Janssen's 50% share from product revenues, net less cost of goods sold of IMBRUVICA^TM of $25,035,000 was included in costs of collaboration in our condensed consolidated statements of operations.

Both parties have responsibilities for the development, manufacturing and marketing of products resulting from the Agreement. Janssen has the 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. We continue to work with Janssen on protocols and the design, schedules and timing of trials. Development and commercialization activities under the collaboration are managed through a shared governance structure.

PCI-27483 - Factor VIIa Inhibitor

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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. Pharmacyclics is currently defining the next steps for the 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 has been evaluated 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. Results from this 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. A Phase II study was undertaken in relapsed/refractory FL and mantle-cell lymphoma (MCL). The results from this study were presented in poster at the 12th International Conference on Malignant Lymphoma ("IMCL") in Lugano, Switzerland (June 19-22, 2013). Pharmacyclics is currently defining the next steps for the development of this agent.

Our collaboration partner for ex-U.S. markets, Servier, has initiated a multitude of 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. 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 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 have incurred significant operating losses since our inception in 1991 and we expect to continue to incur substantial additional operating losses until such time, if ever, as the commercialization of IMBRUVICA^TM or our other product candidates generates sufficient revenue to cover our expenses. We commercially launched IMBRUVICA^TM on November 13, 2013.

Results of Operations

Total Revenue (in thousands):



	Three Months Ended March 31,				Increase/		Percent
	2014		2013		(Decrease)		Change

License and milestone revenue	$	60,000	$	—	$	60,000	N/A
Product revenue, net	56,179		—		56,179		N/A
Collaboration services revenue	3,198		2,846		352		12	%
Total revenue	$	119,377	$	2,846	$	116,531	N/A

Total revenue increased by $116,531,000 for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily due to an $60,000,000 increase in milestone revenue earned under the worldwide collaboration and license agreement with Janssen ("Agreement"), a $56,179,000 increase in product revenue, net due to sales of IMBRUVICA^TM and a $352,000 increase in collaboration services revenue primarily related to the Janssen agreement.

License and milestone revenue

For the three months ended March 31, 2014, license and milestone revenue was comprised of $60,000,000 of milestone revenue earned under our collaboration and license agreement with Janssen. As previously announced, the $60,000,000

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milestone payment to us from Janssen was triggered on February 12, 2014 as a result of the FDA approval of IMBRUVICA^TM as a single agent for the treatment of patients with chronic lymphocytic leukemia (“CLL”) who have received at least one prior therapy.

Product revenue, net

Product revenue, net consists of revenue recorded on sales of IMBRUVICA^TM. IMBRUVICA^TM has been approved by the U.S. Food and Drug Administration (FDA) and is currently marketed in the United States as a single agent for the treatment of patients with MCL and patients with CLL who in each case have received at least one prior therapy. IMBRUVICA^TM received approval from the FDA for MCL on November 13, 2013 and for CLL on February 12, 2014. The three months ended March 31, 2014 represented the first full quarter of product sales for IMBRUVICA^TM and the first full quarter for the company as a commercial organization.

We recognize revenue from the sale of IMBRUVICA^TM when the product’s title and risk of loss transfers to the customer. We derive product revenue, net based on net sales to our specialty pharmacy, specialty distributor and direct customers, less estimated government rebates, charge-backs, returns reserve and prompt payment discounts.

Collaboration services revenue

Collaboration services revenue increased by $352,000 or 12% for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily due to higher development efforts under our worldwide collaboration and license agreement with Janssen (the "Agreement") which increased the amount of deferred revenue recognized. In December 2011, we entered into the Agreement which provided for a $150,000,000 non-refundable upfront payment upon execution (see Note 3 to the condensed consolidated financial statements). The revenue related to the upfront payment was allocated $70,605,000 to the licenses, $14,982,000 to the committee services and $64,413,000 to the development services. Since 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. As of March 31, 2014, approximately $56,946,000 was included in deferred revenue related to the committee and development services, of which $44,648,000 was included in deferred revenue non-current.

Cost of goods sold (in thousands):



	Three Months Ended March 31,				Increase/		Percent
	2014		2013		(Decrease)		Change

Cost of goods sold	$	6,110	$	—	$	6,110	N/A

Cost of goods sold includes third-party manufacturing costs of products sold, fixed manufacturing overhead, royalty fees, and other indirect costs such as employee compensation. For the three months ended March 31, 2014, cost of goods sold included $3,931,000 of royalty expense incurred under the Celera agreement (see Note 3 to the condensed consolidated financial statements).

We began capitalizing inventory during the three months ended December 31, 2013 in connection with the FDA’s approval of IMBRUVICA^TM in such quarter, as the related costs were expected to be recoverable through the commercialization of the product. As of December 31, 2013, inventory related costs of $16,100,000 incurred prior to FDA approval were recorded as research and development expenses in our statements of operations, of which $14,500,000 was remaining on hand as of March 31, 2014. We expect to sell the remaining pre-commercialization inventory on hand over the next 15 to 18 months. Subsequent to the utilization of all our pre-commercialization inventory, we estimate cost of goods sold as a percentage of product revenue, net will be in the range of high single digit to low double digit percentage. The range is impacted by our estimate of materials costs from our suppliers as well the level of our fixed overhead costs estimated in relation to our future sales levels.

Research and development (in thousands):

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	Three Months Ended March 31,				Increase/			Percent
	2014		2013		(Decrease)			Change
Research and development	$	35,292	$	35,784	$	(492	)	(1	)%

Research and development expense decreased by $492,000, or 1% for the three months ended March 31, 2014 compared to the three months ended March 31, 2013, primarily due to a $9,800,000 decrease in pre-FDA approval drug manufacturing costs and a $5,600,000 decrease in stock-based compensation expense, partially offset by an $8,300,000 decrease in the reimbursement of expenses under the Janssen agreement, a $2,700,000 increase in payroll and related expenses, a $2,000,000 increase in third party clinical trial costs, and a $1,500,000 increase in expenses related to investigator sponsored trials.

Average research and development headcount increased from 185 to 277 for the three months ended March 31, 2014 compared to the three months ended March 31, 2013. In the near term, we intend 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 3 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 Form 10-K for the year ended December 31, 2013.

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



			R&D Expenses
			Three Months Ended March 31,
Product	Description	Phase of Development	2014		2013
BTK Inhibitors	Cancer/autoimmune	Phase I/II/III, Pre-clinical	$	23,424	$	19,831
HDAC Inhibitors	Cancer	Phase I/II	59		518
Factor VIIa Inhibitor	Cancer	Phase II	9		145
	Total direct costs		23,492		20,494
	Indirect costs		11,800		15,290
	Research and development		$	35,292	$	35,784

Selling, general and administrative (in thousands):



	Three Months Ended March 31,				Increase/		Percent
	2014		2013		(Decrease)		Change
Selling, general and administrative	$	34,715	$	20,026	$	14,689	73	%

Selling, general and administrative expense for the three months ended March 31, 2014 increased by $14,689,000, or 73%, compared to the three months ended March 31, 2013. The increase was primarily due to a $9,900,000 increase in payroll and related expenses due to the build-up of our commercial organization and a $4,000,000 increase in our donations to third-party patient assistance foundations.

The average selling, general and administrative headcount increased from 61 to 222 in the three months ended March 31, 2014 compared to the three months ended March 31, 2013. In the near term, we intend to hire additional sales, marketing, and other administrative employees, as well as incur costs under our collaboration agreements as we continue to commercialize our products.

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Costs of collaboration (in thousands):



	Three Months Ended March 31,				Increase/		Percent
	2014		2013		(Decrease)		Change
Costs of collaboration	$	25,035	$	—	$	25,035	N/A

In connection with the Janssen agreement, net profits from the commercialization of products resulting from the collaboration, including IMBRUVICA^TM, are shared 50% by us and 50% by Janssen (see Note 3 to the condensed consolidated financial statements).

For the three months ended March 31, 2014, Janssen's share of profits from net product revenue less cost of goods sold of IMBRUVICA^TM of $25,035,000 was included in costs of collaboration in our condensed consolidated statements of operations.

Income tax benefit (in thousands):



	Three Months Ended March 31,						Increase/		Percent
	2014			2013			(Decrease)		Change
Income tax benefit	$	(12	)	$	(974	)	$	962	(99	)%

The income tax benefit for the three months ended March 31, 2014 and the three months ended March 31, 2013 was calculated based upon the application of a forecasted annual income tax rate applied to the year-to-date pre-tax income (loss), except that for the 2014 period, no tax benefit has been recorded under an effective tax rate method as no benefit is expected to be realized for the current year given our full valuation allowance position and also based on our estimate of a tax provision for the year ending December 31, 2014.

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, 2014, we had $690,056,000 in cash, cash equivalents and marketable securities.

Net cash provided by operating activities of $55,460,000 during the three months ended March 31, 2014 primarily consisted of net income of $18,275,000, adjusted by $12,986,000 for stock-based compensation expense, a $50,910,000 decrease in the receivable from collaboration partners and a $14,502,000 increase in the payable to collaboration partners. The increase in cash provided by operating activities were partially offset by an increase in trade receivable of $15,969,000 due to sales of IMBRUVICA^TMduring the three months ended March 31, 2014, an increase in inventory of $15,799,000 to meet customer demand and a decrease in accrued liabilities of $7,046,000 primarily due to the payment of bonuses during the three months ended March 31, 2014 and the timing of payments for inventory purchases.

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 the receivable from collaboration partner, 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 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.

Net cash used in investing activities of $5,971,000 for the three months ended March 31, 2014 consisted primarily of $6,211,000 used to purchase property and equipment, $2,640,000 used to purchase marketable securities, partially offset by $2,880,000 of proceeds from maturities of marketable securities.

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.

Net cash provided by financing activities of $5,180,000 for the three months ended March 31, 2014 consisted of $5,180,000 of proceeds from the issuance of common stock upon the exercise of stock options.

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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.

During the three months ended March 31, 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.

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. As of March 31, 2014, $445,000,000 in milestone payments have been earned by us under the Agreement and we may receive up to an additional $380,000,000 in development, regulatory and approval milestone payments. However, clinical development entails risks and we have no assurance as to whether or when the milestone targets might be achieved (See Note 3 to the condensed consolidated financial statements for additional information).

We anticipate that our capital requirements will increase in 2014 as we continue to incur costs for the full year impact of the commercial launch of IMBRUVICA^TM in the U.S., to conduct sales and marketing, to manufacture additional commercial product and also to further develop IMBRUVICA^TM and our other product candidates.

Under the Janssen Agreement, we have a $50,000,000 annual cap on our share of collaboration 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. In the event that we achieve a third profitable calendar quarter from sales of IMBRUVICA^TM, which was commercially launched during the year ended December 31, 2013, or in the event that we fully utilize the maximum Excess Amounts provided for in the Agreement, we will no longer receive Excess Amounts and our cash expenditures will increase. Further, Excess Amounts will become payable to Janssen together with interest from our share of pre-tax profits (if any) in calendar quarters subsequent to our third profitable calendar quarter until the Excess Amounts and applicable interest has been fully repaid (see Note 3 to the condensed consolidated financial statements).

Based upon the current status of our product development and plans, 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. Our actual capital requirements will depend on many factors, including the following:


•	our ability to successfully market IMBRUVICA^TM;


•	the amount of sales of IMBRUVICA^TM and any other products that we may commercialize


•	the timing of achieving a third profitable calendar quarter for the product, under the Janssen agreement, which would trigger the repayment of Excess Amounts


•	the costs of obtaining clinical and commercial supplies of IMBRUVICA^TM


•	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 favorable 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, 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 costs and expenses and would limit our ability to respond to competitive

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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, 2014 (in thousands):



	Payments due by Period
Contractual Obligations ⁽¹⁾	Total		Remaining nine months		2015		2016		2017		2018		2019		Thereafter
Operating lease obligations	$	12,671	$	1,677	$	2,092	$	2,161	$	2,112	$	857	$	882	$	2,890
Purchase commitments⁽²⁾	12,840		12,840		—		—		—		—		—		—
Total	$	25,511	$	14,517	$	2,092	$	2,161	$	2,112	$	857	$	882	$	2,890

⁽¹⁾ Excluded from the above table are Excess Amounts under the collaboration and license agreement with Janssen. Our worldwide collaboration and license agreement with Janssen provides us with an annual cap on our 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. As of March 31, 2014, total Excess Amounts of $135,634,000 (which comprises the cumulative amount funded by Janssen to date of $134,261,000 and interest of $1,373,000) would become payable once we reach a third profitable quarter for the product (see Note 3 to the condensed consolidated financial statements). Janssen may recoup the Excess Amounts, together with interest from our share of pre-tax profits (if any) in calendar quarters subsequent to its third profitable quarter for the product until the Excess Amounts and applicable interest has been fully repaid.

⁽²⁾ 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

In connection with our commercial launch of IMBRUVICA^TM on November 13, 2013, we implemented the following critical accounting policies and estimates that are used in the determination of product revenue, net:

Revenue Recognition

Product revenue, net is recognized in accordance with the FASB Accounting Standards Codification (ASC) 605, Revenue Recognition, when the following criteria have been met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price is fixed or determinable and (4) collectability is reasonably assured. Revenues are deferred for fees received before earned or until no further obligations exist. We exercise judgment in determining that collectability is reasonably assured or that services have been delivered in accordance with the arrangement. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the customer's payment history and on the creditworthiness of the customer.

Product Revenue, Net

Product revenue, net consists of U.S. sales of IMBRUVICA^TM and is recognized once all four revenue recognition criteria described above have been met. We sell IMBRUVICA^TM to specialty pharmacies ("SP") that sell to individual patients, specialty distributors ("SD") that sell to hospital pharmacies, and to direct customers. We recognize revenue from sales of IMBRUVICA^TM when the product’s title and risk of loss transfers to the customer. We determined that we have the ability to make reasonable estimates of product returns in order to recognize revenue at the time that title and risk of loss transfers to the customer based on the following factors: (1) we believe that we have sufficient insight into the distribution channel at the SP's and SD's in order to ascertain their inventory level and dispense data, (2) due to the price of our product and limited patient population, our SP and SD customers have not built up significant levels of inventory, nor do we expect they will do so for the foreseeable future, (3) inventory on hand at our SP customers was generally less than two weeks as of March 31, 2014, (4) there have been no product returns to-date since our launch of IMBRUVICA^TM on November 13, 2013 and (5) we believe there is limited risk of return of inventory in the channel due to expiration, based on the shelf life of inventory in the channel.

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We recognize product revenue net of adjustments for customer credits, including estimated government rebates and charge-backs, returns, prompt payment discounts, patient assistance programs, and Medicare Part D coverage gap reimbursements. Each of the above adjustments are recorded at the time of revenue recognition, resulting in a reduction in product revenue, net and an increase in accrued expenses or a reduction in accounts receivable, net. The above adjustments require significant estimates, judgment and information obtained from external sources. If our estimates differ from actuals, we will record adjustments that would affect product revenue, net in the period of adjustment.

The following table summarizes the provisions, and credits/payments, for these adjustments (in thousands):



	Total
Balance as of December 31, 2013	$	1,206
Provision related to current period sales	8,639
Credits/payments	(2,095		)
Balance as of March 31, 2014	$	7,750

Gross-to-net sales adjustments

Rebates

We record an allowance for rebates including mandated discounts under the Medicaid Drug Rebate Program. The allowance for rebates is based upon contractual agreements or legal requirements with public sector benefit providers, including Medicaid. The allowance for rebates represents the estimated amounts owed to such public sector benefit providers, including Medicaid, based on the estimated rebate percentage of forecasted eligible Medicaid sales. The estimated rebate percentage is based on statutory discount rates and expected utilization. The forecasted eligible Medicaid sales represents those sales made by us that will ultimately be consumed by patients covered by Medicaid. To estimate the allowance for rebates, we use estimated patient mix information which is provided by our specialty pharmacy customers, as well as third party sources. Rebates are generally invoiced and paid in arrears. As such, the allowance for rebates consists of an estimate of the amount expected to be incurred for the current quarter's shipments to patients, plus an accrual balance for estimated unpaid rebates from prior periods. The allowance for rebates is recorded within Accrued liabilities in the condensed consolidated balance sheets.

Charge-backs

Charge-backs are discounts that result from the difference between the prices at which we sell IMBRUVICA^TM to direct customers and the sales price ultimately paid to wholesalers under fixed price contracts by third-party payers. Such third-party payers, which primarily consist of the U.S. Department of Defense, U.S. Department of Veteran's Affairs (VA), Public Health Services (PHS), and other Federal Government institutions purchasing via the Federal Supply Schedule, purchase products through wholesalers at a lower price provided for in fixed price contracts and the wholesalers then charge us the difference between their acquisition cost and the lower program price. Charge-backs are recorded as a reduction to Accounts receivable, net in the condensed consolidated balance sheets.

Product Returns

Consistent with industry practice, we generally offer customers a limited right to return. We generally allow for the return of product that is a few months prior to and up to a few months after the product expiration date. Additionally, we consider several other factors in the estimation process including the expiration dates of product shipped, third party data in monitoring channel inventory levels, shelf life of the product, prescription trends and other relevant factors. Provisions for estimated product returns are recorded within Accrued liabilities in the condensed consolidated balance sheets.

Medicare Part D coverage gap

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Prompt payment discounts

We generally offer cash discounts to our customers, generally a 2% discount applied to the invoice amount, as an incentive for prompt payment. We expect that all of our customers to whom we offer cash discounts for prompt payment to take advantage of the full amount of the 2% discount. We record the prompt-payment discount as a reduction to Accounts receivable, net in the condensed consolidated balance sheets.

Co-payment assistance

Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. We accrue for co-payment assistance based on actual program participation and estimates of program redemption using data provided by a third-party administrator.

Donations to Third-Party Patient Assistance Foundations

We provide cash donations to independent third-party patient assistance foundations that, in turn, make grants to help qualifying patients meet their out-of-pocket costs (including co-pay payments or co-insurance obligations) in connection with their use of our products as well as those of other pharmaceutical and biotechnology companies. These independent patient assistance foundations maintain their own patient eligibility criteria and independently determine for which medicinal products patients can receive financial assistance. Given the non-reciprocal nature of these transactions with parties who are not considered direct or indirect customers, and for which we do not receive any consideration, and the fact that the donation of cash does not have any conditions attached to the donation, we account for the cash donations as a component of selling, general and administrative expenses in the condensed consolidated statements of operations.

For a complete listing of our critical accounting policies, estimates and judgments, please see Item 7 to our consolidated financial statements included in our Form 10-K for the year ended December 31, 2013.

Recent Accounting Pronouncements

During the fiscal first quarter of 2013, the FASB issued amended guidance clarifying the release of accumulated Foreign Currency Translation from Accumulated Other Comprehensive Income ("AOCI") into current year Net Earnings. The amendment requires that when the parent company ceases to have a controlling interest in a subsidiary or a business within a foreign entity the parent is to release accumulated Foreign Currency Translation from AOCI. This update is required to be adopted for all annual periods and interim reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this standard did not have a material impact on our results of operations, cash flows or financial position.

In July 2013, FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)." The amendments in this ASU provide guidance on the financial statements presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. An unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with certain exceptions, in which case such an unrecognized tax benefit should be presented in the financial statements as a liability. The amendments in this ASU do not require new recurring disclosures. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on our results of operations, cash flows 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, 2013.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures: As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this Quarterly Report on Form 10-Q, 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 Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer 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 Chief Financial Officer 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

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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.

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

IMBRUVICA^TM (ibrutinib) is only approved in two indications.

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On November 13, 2013, we obtained approval from the United States Food and Drug Administration, or FDA, to market IMBRUVICA^TM to treat patients with Mantle Cell Lymphoma (MCL) and on February 12, 2014 to treat patients with chronic lymphocytic leukemia (CLL), who in each case have received at least one prior therapy. These are the only marketing approvals for IMBRUVICA^TM we have received anywhere in the world.

Our prospects are largely dependent on (a) successful commercialization of IMBRUVICA^TM in the U.S. to treat patients with MCL and patients with CLL who in each case have received at least one prior therapy, (b) obtaining regulatory approval of, and successfully commercializing, IMBRUVICA^TM outside the U.S. to treat patients with MCL and patients with CLL, and (c) obtaining regulatory approval of, and successfully commercializing, IMBRUVICA^TM both in and outside the U.S. to treat other indications. If we are unsuccessful in achieving any one or more of these critical business objectives, our ability to generate significant revenue or achieve profitability will be adversely affected and our business may fail.

The commercialization of IMBRUVICA^TM for the treatment of patients with MCL and patients with CLL who in each case have received at least one prior therapy, or any other patient populations for which IMBRUVICA^TM may subsequently be approved may not be successful for a number of reasons, including:


•	we and our collaborative partner, Janssen, may face unexpected challenges from competitors with potential new therapeutic options and also in overcoming the inertia of new upcoming novel therapies such as IMBRUVICA^TM;


•	new safety issues or concerns with respect to IMBRUVICA^TM being reported that may impact or narrow the approved indications;


•	our limited experience in marketing IMBRUVICA^TM for any patient population;


•	reimbursement and coverage policies of government and private payers such as Medicare, Medicaid, insurance companies, health maintenance organizations and other plan administrators;


•	the relative price of IMBRUVICA^TM as compared to alternative treatment options;


•	changed or increased legal or regulatory restrictions and our ability to comply with such restrictions;


•	changes to the label for IMBRUVICA^TM that further restrict how we and Janssen market IMBRUVICA^TM, from any other on-going or future studies, including any requirement to undertake post-marketing studies;


•	we may not have adequate long term financial or other resources to successfully commercialize IMBRUVICA^TM; and


•	we and Janssen may not be able to obtain adequate commercial supplies of IMBRUVICA^TM to meet demand or at an acceptable cost or other manufacturing issues, including a potential recall of IMBRUVICA^TM.

If the commercialization of IMBRUVICA^TM is unsuccessful, our ability to generate revenue from product sales and achieve profitability will be adversely affected.

Our success will depend on our ability to effectively and profitably commercialize IMBRUVICA^TM.

Our success will depend on our ability to effectively and profitably commercialize IMBRUVICA^TM, which will include our ability to:


•	create market demand for IMBRUVICA^TM through education, marketing and sales activities;


•	achieve market acceptance and generate product sales;


•	receive adequate levels of reimbursement from third-party payers, such as federal government payers and private insurance programs;


•	comply with post-marketing requirements established by the U.S. Food and Drug Administration, or FDA, for IMBRUVICA^TM, and any other requirements established by the FDA in the future;


•	conduct the post-marketing studies required by the FDA;


•	comply with other healthcare regulatory requirements;


•	ensure that the active pharmaceutical ingredient, or API, for IMBRUVICA^TM and the finished product are manufactured in sufficient quantities and in compliance with requirements of the FDA and similar foreign regulatory agencies and with an acceptable quality and pricing level in order to meet commercial demand; and

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•	ensure that the entire supply chain for IMBRUVICA^TM - from API to finished product - efficiently and consistently delivers IMBRUVICA^TM to our customers.

Prior to commercialization of IMBRUVICA^TM, we have not had any commercial products. While many members of our management and key personnel that have been working together to commercialize IMBRUVICA^TMsince FDA approval on November 13, 2013 have significant experience launching and commercializing drugs at other companies, we still cannot be certain that we will continue to be successful. If we are unable to continue to successfully commercialize IMBRUVICA^TM, our ability to generate product sales will be severely limited, which will have a material adverse impact on our business, financial condition, and results of operations.

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

Although approved for marketing for the treatment of patients with MCL and patients with CLL, who in each case have received at least one prior therapy, IMBRUVICA^TM may not achieve robust market acceptance. The degree of market acceptance for IMBRUVICA^TM and our other product candidates will depend upon a number of factors, including:


•	the receipt of regulatory approvals for additional indications of IMBRUVICA^TM and the desired indications for our other product candidates, and the acceptance by physicians and patients of the clinical benefits that IMBRUVICA^TM and our other product candidates may offer;


•	the establishment and demonstration in the medical community of the safety, clinical efficacy and cost-effectiveness of IMBRUVICA^TM and our other product candidates 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 IMBRUVICA^TM or any of our other product candidates.

If growth in sales of our product is slow or perceived to be slow in the first few months after product launch, future sales of the product may be reduced.

We have commercially launched IMBRUVICA^TM for the treatment of patients with MCL and patients with CLL, who in each case have received at least one prior therapy. The growth in sales of IMBRUVICA^TM during the months immediately following the product’s commercial launch, as reported by us and/or market analysts, may be or may be perceived to be slow, flat or negative. Historically, the speed and size of the growth in sales of a new pharmaceutical product during the first few months of sales will define or have a lasting impact on the future sales performance of the product. We cannot guarantee that the growth in sales of IMBRUVICA^TM will be reported or perceived to be strong during the months immediately following the product’s commercial launch. If during the months immediately following the product’s commercial launch the growth in sales of IMBRUVICA^TM is reported and/or perceived to be slow, flat or negative, IMBRUVICA^TM likely would not generate the interest or momentum necessary for the product to reach its full potential over time, causing a lasting reduction in the sales performance of IMBRUVICA^TM and a commensurate diminution of the value of our business.

If we are unable to obtain marketing approvals for IMBRUVICA^TM outside the United States, or if we are significantly delayed or limited in doing so, our results of operations and business will be materially and adversely affected and our stock price would likely decline.

In October 2013, our partner Janssen filed a Marketing Authorization Application, or MAA, for IMBRUVICA^TM in the European Union, and the European Medicines Agency, or EMA, accepted the filing for review. By and also through our partner Janssen, we also plan to seek regulatory approval of IMBRUVICA^TM in approximately 50 additional territories.

Despite the FDA’s approval of IMBRUVICA^TM, we cannot assure you or predict with any certainty that any other foreign regulatory authority will grant marketing approval for IMBRUVICA^TM, or the expected timeframe of any such approval. The review and potential approval of IMBRUVICA^TM carries many risks and uncertainties, and our regulatory submissions outside of the United States may not be satisfactory to the applicable regulatory authorities, including with regard to demonstrating adequate safety and efficacy for regulatory approval. We have made, and expect to make in the future, assumptions, estimations, calculations and decisions as part of our analyses of data and regulatory submissions, and the applicable regulatory

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authorities may not accept or agree with our assumptions, estimations, calculations, decisions or analyses or may interpret or weigh the importance of data differently.

Furthermore, as was the case with FDA approval, other regulatory approvals, even if obtained, may be limited to specific indications, limit the type of patients in which the drug may be used, or otherwise require specific warning or labeling language, any of which might reduce the commercial potential of IMBRUVICA^TM. As with the FDA’s approval of IMBRUVICA^TM, regulatory authorities in other territories may condition IMBRUVICA^TM marketing approval on the conduct of specific post-marketing studies to further evaluate safety and efficacy in particular and/or general patient populations. The results of these studies, discovery of previously unknown issues involving safety or efficacy or failure to comply with post-approval regulatory requirements, including requirements with respect to manufacturing practices, reporting of adverse events, advertising, promotion and marketing, may result in restrictions on the marketing of IMBRUVICA^TM or the withdrawal of IMBRUVICA^TM from the market.

We are subject to certain healthcare laws, regulation and enforcement that may impact the commercialization of IMBRUVICA^TM and our product candidates. Failure to comply with such laws, regulations and enforcement could subject us to significant fines and penalties and result in a material adverse effect on our results of operations and financial condition.

We are subject to several healthcare regulations and enforcement by the federal government and the states in which we conduct our business. These laws may impact, among other things, the viability of the corporation as a whole, and more specifically, the sales, marketing and education programs for IMBRUVICA^TM or any of our potential future product candidates that may be approved for commercial sale. The most significant healthcare laws, regulations and enforcement areas are as follows:

•

the federal Health Insurance Portability and Accountability Act of 1996, as amended by the Health Information Technology for Economic and Clinical Health Act (collectively, "HIPAA"), as amended by the Health Information for Economic and Clinical Health Act of 2009 ("HITECH") which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information;

•

the federal healthcare programs’ Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;


•	federal False Claims Act which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent;


•	the Federal Food, Drug, and Cosmetic Act, which, among other things, strictly regulates drug product marketing, prohibits manufacturers from marketing drug products for off-label use, and regulates the distribution of drug samples;


•	the Foreign Corrupt Practices Act, which among other things, prohibits bribery of non-US government (i.e., foreign) officials;


•	the PhRMA Code on Interactions with Healthcare Professionals (codified into law in California), which among other things, governs appropriate interactions between pharmaceutical manufacturers and healthcare professionals;


•	federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters; and


•	state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including federal government payers and commercial insurers.

Additionally, the compliance environment is changing, with more states, such as California and Massachusetts, mandating implementation of compliance programs, compliance with industry ethics codes, and spending limits, and other states, such as Vermont, District of Columbia, and Minnesota limiting the provision of and/or requiring reporting to state governments of gifts, compensation, and other remuneration to healthcare professionals. Moreover, Section 6002 of the Patient Protection and Affordable Care Act, or PPACA, includes new requirements for pharmaceuticals manufacturers, among others, to report certain financial arrangements with physicians and teaching hospitals, as defined in PPACA, including reporting any payment or “transfer of value” made or distributed to teaching hospitals, prescribers, and other healthcare providers and reporting any ownership and investment interests held by physicians and their immediate family members and applicable group purchasing organizations during the preceding calendar year. Section 6002 of PPACA includes in its reporting requirements a broad range of transfers of value (such as, for example, consulting fees, charitable contributions, payments for research, and grants) and

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excludes a transfer of anything the value of which is less than $10, unless the aggregate amount of such transfers of value to a recipient exceeds $100 annually. On February 8, 2013, the Centers for Medicare and Medicaid Services, or CMS, released the final rule implementing Section 6002 of PPACA. Under the rule, drug manufacturers are required to track payments or transfers of value to recipients beginning on August 1, 2013, and annually report payments, transfers for value, and investments interests beginning on March 31, 2014. Under the rule, with our product approval on November 13, 2013 for MCL, we will commence data capture from May 12, 2014, 6 months from product registration, for reporting by March 31, 2015. Several states currently have similar laws and more states may enact similar legislation. Reporting and potential public disclosure of these expenses may make it more difficult to recruit physicians for assistance with activities that would be helpful to our business. Tracking and reporting the required expenses may result in considerable expense and additional resources.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, the exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results.

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 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.

Our business practices, which comply with current health care fraud and abuse laws and regulations, may need to be adjusted to comply with evolving laws and regulations, and our failure to comply with such evolving laws and regulations 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

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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 an 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.

Even though we have obtained approval to market IMBRUVICA^TM in the United States, we are subject to ongoing regulatory obligations and review, including post-approval requirements that could result in the withdrawal of IMBRUVICA^TM from the market.

IMBRUVICA^TM was approved for treating patients with MCL and patients with CLL, who in each case have received at least one prior therapy, under the FDA’s priority review program which provides for an expedited review for drugs that may offer significant improvement in treatment or provide treatment where no satisfactory alternative therapy exists. Even though we have obtained approval to market IMBRUVICA^TM in the United States, we are subject to extensive ongoing obligations and continued regulatory review from the FDA and other applicable regulatory agencies, such as continued adverse event reporting requirements and the requirement to have our promotional materials pre-cleared by the FDA. There may also be additional FDA post-marketing obligations, all of which may result in significant expense and limit our ability to commercialize IMBRUVICA^TM in the United States or potentially other jurisdictions.

We and our contract manufacturers are also required to comply with cGMP regulations which include requirements relating to quality control and quality assurance. Further, regulatory agencies must approve these manufacturing facilities before they can be used to manufacture IMBRUVICA^TM. In addition, regulatory agencies subject an approved product, its manufacturer and the manufacturer’s facilities to periodic review and inspections. The subsequent discovery of previously unknown problems with IMBRUVICA^TM, including adverse events of unanticipated severity or frequency, or problems with the facilities where IMBRUVICA^TM is manufactured, may result in restrictions on the marketing of IMBRUVICA^TM, up to and including withdrawal of IMBRUVICA^TM from the market. If our contract manufacturing facilities or our suppliers fail to comply with applicable regulatory requirements, such noncompliance could result in regulatory action and additional costs to us. Failure to

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comply with applicable FDA and other regulatory requirements may subject us to administrative or judicially imposed sanctions, including:


•	issuance of Form FDA 483 or Warning Letters by the FDA or notices of noncompliance from other regulatory agencies;


•	imposition of fines and other civil penalties;


•	criminal prosecutions;


•	injunctions, suspensions or revocations of regulatory approvals;


•	suspension of any ongoing clinical trials;


•	total or partial suspension of manufacturing;


•	refusal by the FDA to approve pending applications or supplements to approved applications filed by us;


•	refusals to permit drugs to be imported into or exported from the United States;


•	restrictions on operations, including costly new manufacturing requirements; and


•	product recalls or seizures.

The policies of the FDA and other regulatory agencies may change and additional government regulations may be enacted that could prevent or delay regulatory approval of IMBRUVICA^TM in other indications or further restrict or regulate post-approval activities. We cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are not able to maintain regulatory compliance, we or Janssen might not be permitted to market IMBRUVICA^TM and our business would suffer.

If any promotional activities that we undertake fail to comply with the regulations and guidelines of the FDA and applicable foreign regulatory agencies, we may be subject to warnings or enforcement actions that could harm our business.

Physicians may prescribe drugs for uses that are not described in the drug’s labeling or for uses that differ from those tested in clinical studies and approved by the FDA or foreign regulatory authorities. Regulatory authorities generally do not regulate the behavior of physicians in their choice of treatments. Regulatory authorities do, however, restrict communications on the subject of off-label use. Companies cannot actively promote approved drugs for off-label uses but may in some jurisdictions and under specified conditions disseminate articles published in peer-reviewed journals that discuss off-label uses of approved products to physicians. To the extent allowed, we may in the future disseminate peer-reviewed articles on our products to physicians. If our promotional activities for IMBRUVICA^TM and any other potential future product candidate for which we may receive regulatory approval fail to comply with these regulations or guidelines, we may be subject to warnings from, or enforcement by, these authorities.

Our failure to continue to manage and maintain a distribution network could compromise the distribution of IMBRUVICA^TM.

We have contracted with a third-party logistics company to warehouse IMBRUVICA^TM and distribute it to wholesalers, distributors, pharmacies, hospitals, and other drug suppliers that ultimately distribute IMBRUVICA^TM directly to patients. Our third-party logistics company will also provide billing, collection and returns services. This distribution network requires significant coordination with our market access, finance, quality and manufacturing teams.

Failure to maintain our contracts with our third-party logistics company, wholesalers, distributors, pharmacies, hospitals or other drug suppliers, or the inability or failure of any of them to adequately perform under the contracts, could negatively impact the distribution of IMBRUVICA^TM. Failure to coordinate financial systems could also negatively impact our ability to accurately report and forecast product revenue. If we are unable to effectively establish and manage the distribution process, sales of IMBRUVICA^TM could be severely compromised and our business, financial condition and results of operations would be harmed.

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 for the commercialization, manufacturing, marketing and sales of IMBRUVICA^TM and to complete the research, development and clinical testing of investigational uses of

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IMBRUVICA^TM and additional products. We may be unable to entirely fund these efforts with our current financial resources. We may also raise from time to time 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:


•	the level of sales of IMBRUVICA^TM;


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


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


•	continued progress of our research and development programs;


•	progress with preclinical studies and clinical trials;


•	the time and costs involved in obtaining regulatory approval;


•	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 may require us to reduce our costs and 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 could have a material adverse effect on our business, financial condition and results of operations.

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

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. We may also 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.

The manufacture and marketing of drugs as well as research and development activities are subject to extensive regulation for safety, efficacy and quality by numerous government authorities in the United States and abroad. 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 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 could 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;

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•	an occurrence of serious and unanticipated adverse events;


•	identification of serious and unanticipated long-term adverse events 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.

Manufacturing facilities are subject to ongoing periodic inspection by the FDA and corresponding state agencies, including unannounced inspections, and must achieve an acceptable inspection outcome before they can be used in commercial manufacturing of our products. 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.

Although Breakthrough Therapy Designations for IMBRUVICA^TM monotherapy for the treatment of patients with relapsed or refractory MCL, IMBRUVICA^TM monotherapy for the treatment of patients with Waldenström's macroglobulinemia (WM), and IMBRUVICA^TM monotherapy for the treatment of patients with CLL/SLL characterized by deletion of the short arm of chromosome 17 (deletion 17p) were previously granted, and although FDA subsequently granted a marketing approval for IMBRUVICA^TM in the treatment of MCL and in the treatment of CLL, there is no guarantee that the Breakthrough Therapy Designation for the WM indication or the CLL/SLL with deletion 17P indication or any other potential indications for IMBRUVICA^TM will lead to a faster development or regulatory review or approval process or increase the likelihood that IMBRUVICA^TM will receive marketing approval for the WM indication, the CLL/SLL with deletion 17P indication or any other potential indications.

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 IMBRUVICA^TM monotherapy for the treatment of patients with MCL, IMBRUVICA^TM monotherapy for the treatment of patients with WM, and IMBRUVICA^TM monotherapy for the treatment of patients with CLL/SLL characterized by deletion of the short arm of chromosome 17 (deletion 17p) and the FDA’s subsequent grant of marketing approval of IMBRUVICA^TM for the treatment of patients with MCL or for the treatment of patients with CLL, who in each case have received at least one prior therapy, neither guarantees that the Breakthrough Therapy Designation for the WM indication or the CLL/SLL with deletion 17P indication will result in a faster development process, review or approval for such indications nor increases the likelihood that IMBRUVICA^TM will be granted marketing approval for the WM indication or the CLL/SLL with deletion 17P indication. Likewise, any future Breakthrough Therapy Designation for any other potential indication of IMBRUVICA^TM neither guarantees a faster development process, review or approval nor improves the likelihood of the grant of marketing approval by FDA for any such potential indication of IMBRUVICA^TM 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.

If we are unable to successfully develop and test our drug candidates, we may 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 IMBRUVICA^TM for indications other than those approved by the FDA, 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:


•	cause, or may appear as serious adverse events 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.

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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 development of IMBRUVICA^TM for indications other than those approved by the FDA. 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. Because positive results in preclinical studies and early clinical trials may not be replicated in later clinical trials, the results from the completed preclinical studies and 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 may arise. If significant safety issues arise when patients are treated with our marketed product or product candidates, our future sales may be reduced, which would adversely affect our results of operations.

The data supporting the marketing approvals for our products and forming the basis for the safety warnings in our IMBRUVICA^TM product label were obtained in uncontrolled Phase II studies. As our products are used over longer periods of time and by many patients with underlying health problems, taking numerous medications, we expect to continue to find new safety signals and gather new information from controlled Phase III studies, which may require us to provide additional warnings to our label, which could reduce the market acceptance of our product. Further, if serious safety, resistance or drug interaction issues arise with our product, sales could be limited or halted by us or by regulatory authorities and our results of operations would be adversely affected. For further details of safety and efficacy information, please refer to the full U.S. Prescribing Information (USPI).

We may not be successful in developing and obtaining regulatory approval for IMBRUVICA^TM in other indications and there is uncertainty of commercialization of our products under development.

In addition to successfully launching IMBRUVICA^TM for patients with MCL and patients with CLL, who in each case have received at least one prior therapy, to achieve sustained profitability, we may need to successfully develop and obtain regulatory approval of IMBRUVICA^TM in other indications. Likewise, we must successfully research, develop, obtain regulatory approval for, manufacture, introduce, market and distribute the other products we have 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 levels 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 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.

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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 operating losses in the future, until such time, if ever, as the commercialization of our products generate sufficient revenue to cover our expenses.

We have incurred significant operating losses since our inception in 1991 and we expect to continue to incur substantial additional operating losses until such time, if ever, as the sale of IMBRUVICA^TM or the commercialization of our products generates sufficient revenue to cover our expenses. The FDA approved IMBRUVICA^TM for the treatment of patients with MCL and for the treatment of patients with CLL, who in each case have received at least one prior therapy, in the United States. We commercially launched IMBRUVICA^TM on November 13, 2013 for MCL and on February 12, 2014 for CLL. In connection with the commercial launch of IMBRUVICA^TM and the NDA filing, we incurred substantial expenses.

We began generating commercial product revenue during the year ended December 31, 2013, however the commercial product revenue generated to date is not sufficient to cover our operating expenses. Our sustaining profitability depends upon our ability, alone or with others, to successfully commercialize IMBRUVICA^TM for the treatment of patients with MCL and patients with CLL, who in each case have received at least one prior therapy, to successfully complete the development of our product candidates including IMBRUVICA^TM for other indications, and to obtain required regulatory approvals and to successfully manufacture and market our proposed 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 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 IMBRUVICA^TM, 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 IMBRUVICA^TM or 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.

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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 future 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 the active pharmaceutical ingredient of IMBRUVICA^TM 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 use to prevent or attempt to prevent us from commercializing IMBRUVICA^TM or any of 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 IMBRUVICA^TM 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.

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.

We are dependent on our collaboration agreement with Janssen to further develop and commercialize IMBRUVICA^TM 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) IMBRUVICA^TM, our BTK Inhibitor, 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 collaboration and license agreement includes a cost sharing arrangement for associated development activities. Except in certain cases, in general Janssen is responsible for approximately 60% of development costs and we are responsible for the remaining 40% of development costs. The agreement also provides that pre-tax profits or pre-tax losses from the commercialization of any products resulting from the collaboration are shared 50% by us and 50% by Janssen.

The collaboration with Janssen provides us with an annual cap of our share of collaboration costs and pre-tax commercialization 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, 2014, total Excess Amounts of $135,634,000 (which comprises the cumulative amount funded by Janssen to-date of $134,261,000 and interest of $1,373,000) would become payable once we reach a third profitable calendar quarter for the product. Further, Excess Amounts shall be reimbursable only from our share of pre-tax profits (if any) after the third profitable calendar quarter for the product. 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 3 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 through yearly budget approvals, and limited control over the execution 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 IMBRUVICA^TM, 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

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and financial position may be adversely affected if Janssen does not dedicate sufficient time to the development and commercialization of IMBRUVICA^TM, 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 additional milestone or profit share payments, (2) the delay or termination of any future development or commercialization of IMBRUVICA^TM, 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 IMBRUVICA^TM, 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 IMBRUVICA^TM outside the U.S., we may not receive certain corresponding milestone payments or profit payments related to international sales 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 IMBRUVICA^TM, which could adversely impact future development or sales of IMBRUVICA^TM globally.

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 IMBRUVICA^TM on acceptable terms, or at all, and we may be unable to pursue continued development and commercialization of IMBRUVICA^TM on our own.

If our collaboration is unsuccessful or is terminated by Janssen, we might not effectively develop and market IMBRUVICA^TM.

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 IMBRUVICA^TM. There could be a delay in getting our product to market. Such delay could 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 rely heavily on third parties for research, pre-clinical development 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 research, pre-clinical 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

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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 rely upon contract manufacturers to manufacture pharmaceuticals for clinical development or for commercial sale.

We currently rely on third parties for manufacturing and storage activities related to the manufacture of pharmaceuticals for our clinical trials or for commercial sale of IMBRUVICA^TM. 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;


•	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 achieve an acceptable inspection outcome 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. These contractors must achieve an acceptable inspection outcome by the FDA and comparable foreign regulators prior to our use;


•	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;


•	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; and


•	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.

If we are unable to maintain existing or enter into new agreements with suppliers or our suppliers fail to supply us with the active pharmaceutical ingredients, or APIs, for our drugs, we may experience delays in commercializing our drugs.

We currently have supply agreements for PCI-32765, the API used in IMBRUVICA^TM. We cannot guarantee that we will be successful in maintaining these supply agreements or obtaining new supply agreements on reasonable terms or at all or that we will be able to obtain or maintain the necessary regulatory approvals for these suppliers in a timely manner or at all.

We anticipate that we will rely on a single manufacturing and supply chain for IMBRUVICA^TM for the foreseeable future. Any production shortfall on the part of our suppliers that impairs the supply of IMBRUVICA^TM could have a material adverse effect on our business, financial condition and results of operations. An inability to continue to source product from our only manufacturing and supply chain, which could be due to regulatory actions or requirements affecting the supplier, adverse financial or other strategic developments experienced by a supplier, labor disputes or shortages, unexpected demands or quality issues, could adversely affect our ability to satisfy demand for IMBRUVICA^TM, which could adversely affect our product sales and operating results materially, which could significantly harm our business.

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Our manufacturing process may require the use of highly flammable solvents and agents, and may result in hazardous situations in our contract manufacturing facilities.

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 carefully designed safety procedures to prevent 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 may not be able to successfully continue to manage our Sales and Marketing organizations.

The FDA approved IMBRUVICA^TM for the treatment of patients with MCL on November 13, 2013 and for the treatment of patients with CLL on February 12, 2014, who in each case have received at least one prior therapy. Prior to the approval, we hired and trained sales representatives for our U.S. territories. While we believe our Sales and Marketing organizations have the technical expertise and experience that will be required for the marketing of IMBRUVICA^TM in the U.S., our marketing and sales efforts may be unsuccessful and as a result, our future product revenues could suffer and we may incur significant losses or become unable to continue the operation of our business. 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. Although we have a co-promotion and licensing arrangement with our partner Janssen for the marketing of IMBRUVICA^TM in the U.S., this relationship may fail to increase the commercial success of IMBRUVICA^TM. If Janssen terminates its relationship with us, we may decide to enter into a co-promotion or other licensing arrangement with another large pharmaceutical or biotechnology firm in order to commercialize IMBRUVICA^TM.

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.

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 product and for existing and future product candidates. Our success depends on our continued ability to attract, retain and motivate highly qualified management and personnel with sales, marketing, medical affairs, regulatory, manufacturing, pre-clinical and clinical experience. We will need to hire additional personnel as we continue to expand our research and development, partnering activities and commercialization efforts.

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 his or her 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

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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.

Forecasting sales of IMBRUVICA^TM may be difficult and revenue recognition may be deferred. If our revenue projections are inaccurate or revenue is deferred and our business forecasting and planning decisions are not reflected in our actual results, our business may be harmed and our future prospects may be adversely affected.

Our management must make forecasting decisions regarding future revenue in the course of business planning despite the uncertainty of revenue projection. Our actual results of operations may deviate materially from projected results. This may lead to inefficiencies and increased difficulties in operational planning. If our revenues from IMBRUVICA^TM sales are lower than we anticipate or revenue is deferred, we will incur costs in the short term that will result in losses that are unavoidable. A shortfall in our revenue would have a direct impact on our cash flow and on our business generally. In addition, fluctuations in our quarterly results can adversely and significantly affect the market price of our common stock.

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 and our positions that defer or avoid the recognition of revenue from and taxation of intercompany technology transfer transactions, 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.

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 and manufacturing activities, and we expect to continue to do so. We have not entered into any agreements or transactions for currency exchange 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 and manufacturing 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

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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 our existing product or 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 implemented 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 implemented 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 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

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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 costs and 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, 2013, 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.

Because our business and industry are highly regulated and scrutinized, any failure to follow such regulations could result in litigation or government enforcement actions that could have a material adverse effect on our business and results of operations.

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 implemented a corporate compliance program, which adheres to: (1) the requirements set forth by the OIG in OIG’s Compliance Program Guidance for Pharmaceutical Manufacturers, as codified into law in California, (2) the PhRMA Code on Interactions with Healthcare Professionals as codified into law in California, and (3) other applicable healthcare compliance laws and regulations, and is largely based on what we believe are the current pharmaceutical industry 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 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.

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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 two year period beginning April 1, 2012 and ending March 31, 2014, the sales price for one share of our common stock reached a high closing price of $151.61 per share and a low closing price of $25.33 per share. The market price of our common stock may fluctuate significantly due to a variety of factors, including:


•	the commercial success of IMBRUVICA^TM and the revenues we generate;


•	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;


•	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;

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•	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 IMBRUVICA^TM and any of our additional 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 widespread acceptance of IMBRUVICA^TM and any of our additional products even 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 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 may 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

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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 and obtained preferred positioning for 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.

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 when sold to patients and when used in human clinical trials will result in adverse effects. IMBRUVICA^TM is currently marked, and if we complete clinical testing for our additional products and receive regulatory approval to market such additional products, we will mark our additional products, 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 have received approval for commercial sale. Although we are insured against such risks in connection with clinical trials and commercial activities, 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



31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.1	Section 1350 Certifications of Principal Executive Officer 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

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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, 2014	By:	/s/ ROBERT W. DUGGAN
		Robert W. Duggan
		Chairman of the Board and Chief Executive Officer
		(Principal Executive Officer)



Dated: May 7, 2014	By:	/s/ MANMEET S. SONI
		Manmeet S. Soni
		Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

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EXHIBITS INDEX



Exhibit Number	Description
31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer
32.1	Section 1350 Certifications of Principal Executive Officer 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

Weighted Average Grant Date Fair Value

Balance at December 31, 2013

Balance at March 31, 2014