FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________________to ______________________
Commission file number: 0-19825
SCICLONE PHARMACEUTICALS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
California 94-3116852
---------- ----------
(State or other jurisdiction of incorporation or organization) (I.R.S. employer
identification no.)
901 Mariners Island Blvd., Suite 315, San Mateo, California 94404
----------------------------------------------------------- -----
(Address of principal executive offices) (Zip code)
(415) 358-3456
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days
Yes_______X_________ No________________
As of July 31, 1997, 17,031,486 shares of the registrant's Common
Stock, no par value, were issued and outstanding.
SCICLONE PHARMACEUTICALS, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations
Three and six months ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows
Six months ended June 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1997 1996
------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 3,515,313 $ 4,642,590
Short-term investments 3,458,829 5,205,529
Accounts receivable 1,193,915 245,078
Inventory 2,456,265 2,608,877
Prepaid expenses and other current assets 1,482,565 1,783,778
------------- -------------
Total current assets 12,106,887 14,485,852
Property and equipment, net 445,385 299,405
Long-term investments 17,503,352 25,257,589
Notes receivable from officers 2,338,351 2,648,292
Other assets 36,764 36,549
------------- -------------
Total assets $ 32,430,739 $ 42,727,687
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 259,235 $ 639,392
Accrued compensation and benefits 517,422 817,774
Accrued clinical trials expense 1,750,116 964,331
Accrued professional fees 1,528,000 1,989,000
Other accrued expenses 308,212 851,562
------------- -------------
Total current liabilities 4,362,985 5,262,059
------------- -------------
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized; no shares issued and outstanding -- --
Common stock, no par value; 75,000,000 shares
authorized; 17,023,164 and 17,532,195 shares
issued and outstanding 105,771,124 108,988,019
Net unrealized loss on available-for-sale (137,323) (171,125)
securities
Accumulated deficit (77,566,047) (71,351,266)
------------- -------------
Total shareholders' equity 28,067,754 37,465,628
------------- -------------
Total liabilities and shareholders' equity $ 32,430,739 $ 42,727,687
============= =============
<FN>
See notes to consolidated financial statements
</FN>
3
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Product sales $ 623,080 $ 122,037 $ 1,293,618 $ 248,345
Cost of product sales 262,913 203,660 524,478 403,460
------------ ------------ ------------ ------------
Gross profit 360,167 (81,623) 769,140 (155,115)
Operating expenses:
Research and development 2,019,880 2,542,473 4,085,599 5,077,074
Marketing 950,314 1,030,296 1,979,452 2,101,113
General and administrative 898,256 787,636 1,765,297 1,563,334
------------ ------------ ------------ ------------
Total operating expenses 3,868,450 4,360,405 7,830,348 8,741,521
------------ ------------ ------------ ------------
Loss from operations (3,508,283) (4,442,028) (7,061,208) (8,896,636)
Interest and investment income, net 333,672 711,571 846,427 1,427,677
------------ ------------ ------------ ------------
Net loss $ (3,174,611) $ (3,730,457) $ (6,214,781) $ (7,468,959)
============ ============ ============ ============
Net loss per share $ (0.18) $ (0.21) $ (0.36) $ (0.43)
============ ============ ============ ============
Weighted average shares used in
computing per share amounts 17,174,520 17,441,228 17,354,579 17,246,676
============ ============ ============ ============
<FN>
See notes to consolidated financial statements
</FN>
4
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six months ended
June 30,
1997 1996
----------- -----------
Operating activities:
Net loss $(6,214,781) $(7,468,959)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization
76,450 288,434
Changes in operating assets and liabilities:
Accounts receivable (948,837) 22,610
Inventory 152,612 (124,971)
Prepaid expenses and other assets 610,939 59,736
Accounts payable and other accrued expenses (923,507) 238,491
Accrued clinical trial expense 785,785 (612,930)
Accrued professional fees (461,000) 996,500
Accrued compensation and benefits (300,352) (263,754)
----------- -----------
Net cash used in operating activities (7,222,691) (6,864,843)
----------- -----------
Investing activities:
Purchase of property and equipment (222,430) (83,132)
Sale of marketable securities, net 9,534,739 6,273,400
----------- -----------
Net cash provided by investing activities 9,312,309 6,190,268
----------- -----------
Financing activities:
Proceeds from issuance of common stock, net 1,050,354 2,778,721
Repurchase of common stock (4,267,249) --
----------- -----------
Net cash (used in) provided by financing activities (3,216,895) 2,778,721
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,127,277) 2,104,146
Cash and cash equivalents, beginning of period 4,642,590 3,986,307
=========== ===========
Cash and cash equivalents, end of period $ 3,515,313 $ 6,090,453
=========== ===========
<FN>
See notes to consolidated financial statements
</FN>
5
SCICLONE PHARMACEUTICALS, INC.
Notes to Consolidated Financial Statements
1. The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles
consistent with those applied in, and should be read in conjunction
with, the audited financial statements for the year ended December 31,
1996. The interim financial information reflects all normal recurring
adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the interim periods presented. The
interim results are not necessarily indicative of results for
subsequent interim periods or for the full year.
2. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, " Earnings Per Share," which is required to be
adopted on December 31, 1997. Under the requirements for calculating
net loss per share, the antidilutive effect of stock options and
warrants will be excluded. The impact of Statement 128 on the
calculation of earnings per share for the quarters ended June 30, 1997
and June 30, 1996 is not expected to be material, as the Company
already computes net loss per share in this manner. Net loss per share
has been computed using the weighted average number of common shares
outstanding during each period presented. Common equivalent shares for
outstanding options and warrants were not included in the weighted
average shares outstanding because the effect of including such shares
is antidilutive.
3. The following is a summary of available-for sale securities at June 30,
1997:
Available-for-Sale Securities
-----------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Government &
Agency obligations $15,033,593 $ 11,798 $ (123,584) $14,921,807
Corporate obligations 5,865,911 905 (12,980) 5,853,836
Corporate securities 200,000 11,538 (25,000) 186,538
----------- --------- ---------- -----------
$21,099,504 $ 24,241 $ (161,564) $20,962,181
=========== ========= =========== ===========
The amortized cost and estimated fair value of debt and marketable
securities at June 30, 1997 by contractual maturity are shown below.
Estimated
Fair
Cost Value
----------- -----------
Due in one year or less $ 3,275,992 $ 3,272,291
Due after one year through three years 12,168,870 12,097,321
Due after three years 5,454,642 5,406,031
----------- -----------
20,899,504 20,775,643
Corporate securities 200,000 186,538
----------- -----------
$21,099,504 $20,962,181
=========== ===========
4. The following is a summary of inventories at June 30, 1997:
Raw materials $1,545,339
Finished goods 910,926
----------
$2,456,265
==========
6
5. In 1995, the Company's Board of Directors authorized the repurchase of
up to 1.0 million shares of the Company's common stock. During the six
months ended June 30, 1997, the Company completed its repurchase
program and repurchased 684,500 shares of its common stock for an
aggregate cost of $4,267,249. There was no impact on the Company's
results of operations.
6. For the six months ended June 30, 1997, one customer in China accounted
for 81% of the Company's product sales.
7. On July 24, 1997, the Company loaned Thomas E. Moore, Chairman and one
of the founders of the Company, $5.95 million secured by approximately
1.9 million shares of SciClone common stock owned by Mr. Moore. The
loan carries interest at 7% and is repayable in two years. During the
period Mr. Moore's loan is outstanding, the Company may convert the
loan plus accrued interest into Mr. Moore's SciClone common stock by
repurchasing his SciClone common stock at a fixed discount rate. The
Company, at its sole discretion, may exercise its repurchase option at
the time of a Company financing. To date, the Company has not
repurchased any of Mr. Moore's SciClone common stock. In connection
with this transaction, Mr. Moore resigned from the Company.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following material contains certain forward-looking statements
including statements regarding the application of ZADAXIN(R) thymosin alpha 1 in
disease areas beyond hepatitis B, the potential for regulatory approvals of
ZADAXIN and the launching of ZADAXIN in additional markets, the commencement of
clinical trials, and the Company's expectations regarding increases in revenues
from ZADAXIN and increases in marketing and research and development expense
levels. These statements are subject to certain risks and uncertainties. These
risks and uncertainties include the Company's current reliance on a single
product, ZADAXIN , for its revenues, the absence of regulatory approval for
ZADAXIN in significant markets, the expensive, time consuming and uncertain
regulatory approval process, risks associated with the manufacture and supply of
ZADAXIN, competition from competing therapies, and uncertainties regarding the
outcome of the Company's efforts to commercialize additional products, as well
as other risks and uncertainties described herein and in the Company's other
reports filed with the Securities and Exchange Commission.
The Company is an international biopharmaceutical company involved in
the acquisition, development and commercialization of pharmaceuticals worldwide.
The Company focuses on specialist oriented products that address significantly
unmet chronic or life-threatening diseases. The Company concentrates on
infectious diseases, cancer, immune system disorders, and cystic fibrosis.
Currently, the Company has acquired two drugs for development and
commercialization: ZADAXIN for hepatitis B and C, cancer and immune system
disorders; and CPX for cystic fibrosis. To date, the Company's principal focus
has been the development and commercialization of ZADAXIN.
From commencement of operations through June 30, 1997, the Company
incurred a cumulative net loss of approximately $77.6 million. The Company
expects its operating expenses to increase over the next several years as it
expands its research and development, clinical testing and marketing
capabilities. The Company's ability to achieve profitable operations is
primarily dependent on securing regulatory approvals for ZADAXIN in additional
countries, successfully launching ZADAXIN if approved in such countries and
meeting increased demand for ZADAXIN, if it arises. In addition, other factors
may also impact the Company's ability to achieve a profitable level of
operations such as spending associated with the successful development of CPX,
acquiring rights to additional drugs, and entering into and extending agreements
for product development and commercialization, where appropriate. There can be
no assurance that the Company will be able to attain these objectives or that
the Company will ever achieve a profitable level of operations.
The Company's operating results may fluctuate from period to period as
a result of, among other things, the timing and costs associated with clinical
trials and the regulatory approval process, and the acquisition of additional
product rights. The Company participates in a highly dynamic industry, which
often results in significant volatility of the Company's common stock price.
Setbacks in clinical trials, in the regulatory approval process or in
relationships with collaborative partners, and any shortfalls in revenue or
earnings from levels expected by securities analysts, among other developments,
have in the past had and could in the future have an immediate and significant
adverse effect on the trading price of the Company's common stock in any given
period.
8
Results of Operations
Product sales reached approximately $623,000 and $1,294,000 for the
three and six month periods ended June 30, 1997, respectively, as compared to
approximately $122,000 and $248,000 for the corresponding periods in 1996.
Currently, the Company has received approval to market ZADAXIN in China, the
Philippines and Singapore and commercially launched ZADAXIN during the first
quarter of 1997. For the six months ended June 30, 1997, one customer in China
accounted for 81% of the Company's product sales. In addition, the Company has
filed for approval to market ZADAXIN in several countries and anticipates
additional filings in other countries. As a result, the Company expects product
sales to increase in 1997 and beyond, as a result of the commercial launch of
ZADAXIN in its existing approved markets and upon the commencement of the
commercial launch of ZADAXIN in additional markets once regulatory approvals are
secured. The level of such product sales increase is dependent upon additional
ZADAXIN marketing approvals and successfully launching ZADAXIN. Although the
Company remains optimistic regarding the prospects of ZADAXIN, there can be no
assurance that the Company will achieve significant levels of product sales.
Cost of product sales was approximately $263,000 and $524,000 for the
three and six month periods ended June 30, 1997, respectively, as compared to
approximately $204,000 and $403,000 for the corresponding periods in 1996. The
increase is attributable to increased product sales. The Company expects cost of
product sales to vary from quarter to quarter, dependent upon the level of
product sales, the absorption of fixed product-related costs, and any charges
associated with excess or expiring finished product.
Research and development expenses were approximately $2,020,000 and
$4,086,000 for the three and six month periods ended June 30, 1997,
respectively, as compared to approximately $2,542,000 and $5,077,000 for the
corresponding periods in 1996. The decrease is primarily attributable to
decreased professional fees and payroll costs offset by increased clinical trial
expenses. Clinical expenses in the 1997 period were impacted by additional
clinical trial expenses for the clinical development of CPX, a synthetic
compound licensed in April 1996 from the National Institutes of Health as a
potential treatment for cystic fibrosis. In April 1997, CPX entered a Phase I
clinical trial in the United States. In addition, the Company is organizing its
U.S. and European ZADAXIN clinical trial strategy. The initiation of these
trials will have a significant effect on the Company's research and development
expenses in the future. In general, the Company expects research and development
expenses to increase over the next several years and to vary quarter to quarter
as the Company pursues its strategy of initiating additional clinical trials and
testing, acquiring product rights, and expanding regulatory activities.
Marketing expenses were approximately $950,000 and $1,979,000 for the
three and six month periods ended June 30, 1997, respectively, as compared to
$1,030,000 and $2,101,000 for the corresponding periods in the prior year. The
decrease is primarily attributable to decreased professional services and travel
expenses partially offset by increased publications and promotional material
expenses associated with the launch of ZADAXIN in its approved markets. The
Company expects marketing expenses to increase significantly in the next several
quarters and years as it anticipates expanding its commercialization and
marketing efforts and pursuing other strategic relationships.
9
General and administrative expenses were approximately $898,000 and
$1,765,000 for the three and six month periods ended June 30, 1997,
respectively, as compared to approximately $788,000 and $1,563,000 for the
corresponding periods in the prior year. The increase is primarily attributable
to increased general office expenses associated with increased rent and office
relocation expenses. In the near term, the Company expects general and
administrative expenses to vary quarter to quarter as the Company augments its
general and administrative activities to support increased expenditures on
clinical trials and testing, and regulatory, pre-commercialization and marketing
activities.
Net interest and investment income was approximately $334,000 and
$846,000 for the three and six month periods ended June 30, 1997, respectively,
as compared to approximately $712,000 and $1,428,000 in the same periods in
1996. The changes in the three and six month periods primarily resulted from
decreased interest and investment income due to lower average invested cash
balances.
Liquidity and Capital Resources
At June 30, 1997, the Company had approximately $24,477,000 in cash,
cash equivalents and short and long term investments. On July 24, 1997, the
Company loaned Thomas E. Moore, Chairman and one of the founders of the Company,
$5.95 million secured by approximately 1.9 million shares of SciClone common
stock owned by Mr. Moore. The loan carries interest at 7% and is repayable in
two years. During the period Mr. Moore's loan is outstanding, the Company may
convert the loan plus accrued interest into Mr. Moore's SciClone common stock by
repurchasing his SciClone common stock at a fixed discount rate. The Company, at
its sole discretion, may exercise its repurchase option at the time of a Company
financing. To date, the Company has not repurchased any of Mr. Moore's SciClone
common stock. In connection with this transaction, Mr. Moore resigned from the
Company.
Net cash used by the Company in operating activities amounted to
approximately $7,223,000 for the six month period ended June 30, 1997. Net cash
used in operating activities in the 1997 period is greater than the Company's
net loss for such period primarily due to increases in accounts receivable
associated with sales from the Company's launch of ZADAXIN in its approved
markets and increases in payments to third parties for goods and services and to
employees for compensation and benefits. These uses of cash were offset by
noncash charges associated with depreciation and amortization, decreases in and
prepayments of certain future period expenses, and increases in amounts owed to
third parties for clinical trials. Net cash used by the Company in operating
activities amounted to approximately $6,865,000 for the six month period ended
June 30, 1996. Net cash used in operating activities in the 1996 period is less
than the Company's net loss for such period primarily due to noncash charges
associated with depreciation and amortization, decreases in and prepayments of
certain future period expenses and increases in amounts owed for accounts
payable and accrued professional fees. These were offset by cash used for
inventory purchases and decreases in amounts owed to third parties for goods and
services related to clinical trial expenses and compensation and benefits.
Net cash provided by investing activities for the six month period
ended June 30, 1997 related to the net sale of approximately $9,535,000 of
marketable securities offset by the purchase of $222,000 in equipment and
furniture. Net cash provided by investing activities for the comparable 1996
period primarily resulted from the net sale of $6,273,000 of marketable
securities offset by the purchase of $83,000 in equipment and furniture.
10
Net cash provided by financing activities for the six month period
ending June 30, 1997 primarily consisted of approximately $1,050,000 in proceeds
received from the issuance of common stock from the exercise of outstanding
warrants and from the issuance of common stock under the Company's stock option
plan and employee stock purchase plan, offset by repurchases of the Company's
common stock under the Company's approved stock repurchase plan of approximately
$4,267,000. Net cash provided by financing activities for the six month period
ending June 30, 1996 primarily consisted of approximately $2,779,000 in proceeds
received for the issuance of common stock under the Company's stock option plan.
Management believes its existing capital resources and interest on
funds available are adequate to maintain its current and planned operations
through 1998. However, the Company's capital requirements may change depending
upon numerous factors, including the level of ZADAXIN product sales, the
availability of complementary products, technologies and businesses, the
initiation of clinical trials and testing, the timing of regulatory approvals,
developments in relationships with collaborative partners and the status of
competitive products. If the Company cannot eventually generate sufficient funds
from operations, it will need to raise additional financing. There can be no
assurance that such financing will be available on acceptable terms, or at all.
11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on May 16, 1997 to
elect five (5) directors, to approve an amendment to the Company's 1995 Equity
Incentive Plan, and to ratify the appointment of the independent auditors of the
Company.
At the Annual Meeting, all of the nominees were elected as follows:
Votes
-----
For Withheld
--- --------
Thomas E. Moore 10,697,661 704,642
Donald R. Sellers 10,698,961 703,342
John D. Baxter, M.D. 10,698,161 704,142
Edwin C. Cadman, M.D. 10,522,761 879,542
Jere E. Goyan, Ph.D. 10,521,561 880,742
The shareholders also approved an amendment to the Company's 1995
Equity Incentive Plan to increase by 750,000 the maximum number of shares of
common stock that may be issued under such plan with voting as follows:
9,948,560 for; 1,372,588 against; and 82,055 abstaining.
The shareholders also ratified the selection of Ernst & Young LLP as
independent auditors for the Company for the fiscal year ending December 31,
1997 with voting as follows: 11,375,827 for; 23,755 against; and 22,171
abstaining.
Subsequent to Annual Meeting of Shareholders, two changes occurred to
the Board of Directors. On July 2, 1997, the Company appointed Rolf H. Henel to
its Board of Directors. Effective July 24, 1997, Thomas E. Moore, Chairman of
the Board of Directors and director of the Company, resigned to pursue other
interests.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None
12
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SCICLONE PHARMACEUTICALS, INC.
(Registrant)
Date: August 13, 1997 Donald R. Sellers
-------------------------------------------------------
Donald R. Sellers
Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1997 Mark A. Culhane
-------------------------------------------------------
Mark A. Culhane
Vice President, Finance and Administration
and Chief Financial Officer
(Principal Financial & Accounting Officer)
13