1
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 March 31,
1998
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 (I.R.S. employer
incorporation or organization) identification no.)
901 MARINERS ISLAND BLVD., SUITE 205, SAN MATEO, CALIFORNIA 94404
- ----------------------------------------------------------- ------
(Address of principal executive offices) (Zip code)
(650) 358-3456
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of April 30, 1998, 17,355,584 shares of the registrant's Common
Stock, no par value, were issued and outstanding.
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SCICLONE PHARMACEUTICALS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Operations
Three months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows
Three months ended March 31, 1998 and 1997 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 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1998 1997
------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 3,024,142 $ 3,619,100
Short-term investments 4,132,494 3,866,007
Accounts receivable 1,242,838 1,024,802
Inventory 1,924,822 2,046,218
Prepaid expenses and other current assets 219,473 332,193
------------- -------------
Total current assets 10,543,769 10,888,320
Property and equipment, net 478,883 525,077
Long-term investments 2,722,569 5,415,358
Notes receivable from officers 1,570,933 2,326,851
Other assets 47,800 39,899
------------- -------------
Total assets $ 15,363,954 $ 19,195,505
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 484,882 $ 562,730
Accrued compensation and benefits 557,253 758,955
Accrued clinical trials expense 1,411,596 1,210,164
Accrued professional fees 354,000 413,000
Other accrued expenses 472,534 526,999
------------- -------------
Total current liabilities 3,280,265 3,471,848
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; 17,348,108 and 17,343,358 shares
issued and outstanding 107,046,293 107,033,516
Note receivable from former officer (5,944,000) (5,944,000)
Net unrealized gain(loss) on available-for-sale
securities 14,350 (17,588)
Accumulated deficit (89,032,954) (85,348,271)
------------- -------------
Total shareholders' equity 12,083,689 15,723,657
------------- -------------
Total liabilities and shareholders' equity $ 15,363,954 $ 19,195,505
============= =============
See notes to consolidated financial statements
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SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended
March 31,
---------------------------------
1998 1997
------------ --------------
Product revenue $ 554,399 $ 670,538
Contract revenue 100,000 --
------------ ------------
Total revenue 654,399 670,538
Cost of sales
224,945 261,565
------------ ------------
Gross margin 429,454 408,973
Operating expenses:
Research and development 2,169,574 2,065,719
Marketing 1,248,014 1,029,138
General and administrative 893,219 867,041
------------ ------------
Total operating expenses 4,310,807 3,961,898
------------ ------------
Loss from operations (3,881,353) (3,552,925)
Interest and investment income, net 196,670 512,755
------------ ------------
Net loss $ (3,684,683) $ (3,040,170)
============ ============
Net loss per share (basic & diluted) $ (0.24) $ (0.17)
============ ============
Weighted average shares used in
computing net loss per share 15,463,972 17,536,639
============ ============
See notes to consolidated financial statements
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SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended
March 31,
-----------------------------
1998 1997
----------- -----------
OPERATING ACTIVITIES:
Net loss $(3,684,683) $(3,040,170)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 59,014 38,822
Changes in operating assets and liabilities:
Prepaid expenses and other assets 106,737 357,624
Accounts receivable (218,036) (934,975)
Inventory 121,396 77,786
Accounts payable and other accrued expenses (132,313) (587,104)
Accrued clinical trial expense 201,432 334,997
Accrued professional fees (59,000) (156,000)
Accrued compensation and benefits (201,702) (355,934)
----------- -----------
Net cash used in operating activities (3,807,155) (4,264,954)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (12,820) (40,388)
Sale of marketable securities, net 2,458,240 2,921,907
----------- -----------
Net cash provided by investing activities 2,445,420 2,881,519
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 12,777 1,025,429
Payment on notes receivable from officer 754,000 ----
Repurchase of common stock ---- (826,484)
----------- -----------
Net cash provided by financing activities 766,777 198,945
----------- -----------
Net decrease in cash and cash equivalents (594,958) (1,184,490)
Cash and cash equivalents, beginning of period 3,619,100 4,642,590
----------- -----------
Cash and cash equivalents, end of period $ 3,024,142 $ 3,458,100
=========== ===========
See notes to consolidated financial statements
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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,
1997. 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. As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 requires the presentation of basic earnings (loss) per share and
diluted earnings (loss) per share, if more dilutive, for all periods
presented. In accordance with SFAS 128, basic net loss per share has
been computed using the weighted average number of shares of common
stock outstanding during the period. Diluted net loss per share has not
been presented as the result would be antidilutive given the Company's
history of net losses.
3. As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net loss or shareholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholders' equity to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the
requirements of SFAS 130. During the first quarter of 1998 and 1997,
total comprehensive loss amounted to $(3,670,333) and $(3,404,881),
respectively.
4. As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires that
the Company report financial and descriptive information about its
reportable operating segments. The Company is evaluating the impact, if
any, on SFAS 131 disclosures, but does believe the disclosures are not
material.
5. The following is a summary of available-for sale securities at March 31,
1998:
Available-for-Sale Securities
-------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- --------- --------- ----------
U.S. Government &
Agency obligations $2,211,190 $ 22,094 $ (18,854) $2,214,430
Corporate obligations 4,557,643 17,673 (31,693) 4,543,623
Corporate securities 100,000 6,410 (9,400) 97,010
---------- --------- --------- ----------
$6,868,833 $ 46,177 $ (59,947) $6,855,063
========== ========= ========== ==========
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The amortized cost and estimated fair value of
available-for-sale securities at March 31, 1998 by
contractual maturity are shown below.
Estimated
Fair
Cost Value
---------- ----------
Due in one year or less $4,058,018 $4,035,484
Due after one year through three years 2,710,815 2,722,569
---------- ----------
6,768,833 6,758,053
Corporate securities 100,000 97,010
---------- ----------
$6,868,833 $6,855,063
========== ==========
The following is a summary of inventories at March 31, 1998
Raw materials $1,521,797
Finished goods 403,024
----------
$1,924,822
==========
6. For the three months ended March 31, 1998, one customer in China
accounted for 81% of the Company's product sales. Such customer
represents 86% of the accounts receivable balance at March 31, 1998.
Such collections to date have been slower than anticipated and the
Company is currently monitoring the situation. At March 31, 1998, the
Company had allowances for bad debts of $197,000. If collection of
outstanding accounts receivable do not improve, it may be necessary to
further increase related allowances for bad debts.
7. In March 1998, the Company received $754,000 from one of its executive
officers as a partial payment of a $1,000,000 loan. This payment reduced
the loan to $236,500 including accrued interest.
8. In April 1998, the Company sold 661,157 shares of Series C convertible
preferred stock at $6.05 per share and received $4,000,000 from the
offering (before deducting expenses). The preferred stock is convertible
into common stock on a scheduled basis over the next five years at
prices based on the market price of the common stock during a pricing
period preceding conversion. In conjunction with the offering, the
Company granted to the investor warrants to purchase 100,000 shares of
common stock. These warrants are exercisable during the five year period
ending March 2003 at an exercise price of $5.67 per share.
9. In April 1998, the Company entered into an agreement with Sclavo S.p.A.,
an international pharmaceutical company, to acquire its marketing
approval for ZADAXIN thymosin alpha 1 in Italy as an influenza vaccine
adjuvant. This agreement also included a marketing application for use
of ZADAXIN to treat non-small cell lung cancer, as well as all of
Sclavo's development and marketing rights to ZADAXIN in Italy, Spain and
Portugal. Under the agreement, which is subject to certain standard
closing conditions, the purchase price includes $296,000 in cash, the
issue of 375,000 shares of the Company's common stock, and two-year
warrants to purchase 375,000 shares of common stock at an exercise price
of $4.125 per share.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following material contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act. Such forward-looking statements
include those which management has attempted to identify elsewhere
with an asterisk (*). Such forward-looking statements are subject to
risks and uncertainties, including those identified in Factors That
May Affect Future Operating Results in the Company's Annual Report
on Securities and Exchange Commission Form 10-K for the year ended
December 31, 1997. These risks and uncertainties include (i) the
Company's current reliance on a single product, ZADAXIN, for its
revenues, (ii) the absence of regulatory approval for ZADAXIN in
major pharmaceutical markets, (iii) the expensive, time consuming
and uncertain regulatory approval process, (iv) risks associated
with the manufacture and supply of ZADAXIN, (v) competition from
competing therapies, (vi) market acceptance of the Company's
products, (vii) uncertainties regarding the outcome of the Company's
efforts to commercialize additional products and (viii) the need for
additional funds and a strategic partner for the commencement of
additional trials, 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
that acquires, develops and commercializes specialist-oriented drugs
for treating chronic and life-threatening diseases, including
hepatitis B, hepatitis C, cancer, immune system disorders and cystic
fibrosis. Currently, the Company has two drugs in clinical
development, ZADAXIN (thymosin alpha 1) for hepatitis B, hepatitis
C, cancer and immune system disorders, and CPX for cystic fibrosis.
The Company also has other drug candidates in preclinical
development. To date, the Company's principal focus has been the
development and commercialization of ZADAXIN and the development of
CPX.
From commencement of operations through March 31, 1998,
the Company incurred a cumulative net loss of approximately $89.0
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
increasing ZADAXIN sales in approved markets, securing regulatory
approvals for ZADAXIN in additional countries and successfully
launching ZADAXIN, if approved, in such countries. In addition,
other factors may also impact the Company's ability to achieve a
profitable level of operations such as spending associated with
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, market acceptance of
ZADAXIN, the timing and costs associated with preclinical and
clinical development of the Company's products, 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 the launch, sale or distribution of ZADAXIN,
preclinical and clinical development of the Company's products, the
regulatory approval process or 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.
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RESULTS OF OPERATIONS
Total revenue was approximately $654,000 and $671,000 for
the three-month periods ended March 31, 1998 and 1997. For the three
months ended March 31, 1998, $554,000 of total revenue was derived
from ZADAXIN product sales and $100,000 from a research grant from
the U.S. Food and Drug Administration. For the three months ended
March 31, 1997, all of the $671,000 total revenue was related to
ZADAXIN product sales. Currently, ZADAXIN has been approved for
marketing in Argentina, Italy, Kuwait, the People's Republic of
China, Peru, the Philippines and Singapore. For the three months
ended March 31, 1998, one customer in China accounted for 81% of the
Company's product sales. The Company's accounts receivable
collections in China are typically 180 days or longer. Such customer
represents 86% of the accounts receivable balance at March 31, 1998.
Such collections to date have been slower than anticipated and the
Company is currently monitoring the situation. At March 31, 1998,
the Company had allowances for bad debts of $197,000. If collection
of outstanding accounts receivable do not improve, it may be
necessary to further increase related allowances for bad debts. 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 revenue to increase in 1998
and beyond, upon the commencement of the commercial launch of
ZADAXIN in additional markets once regulatory approvals are
secured.* The level of such product revenue increase is dependent
upon increased ZADAXIN market penetration in the Company's existing
approved markets, additional ZADAXIN marketing approvals and the
successful launch of ZADAXIN in new markets. Although the Company
remains optimistic regarding the prospects of ZADAXIN, there can be
no assurance that the Company will ever achieve significant levels
of product revenue or that the Company will receive additional
ZADAXIN market approvals.
Cost of sales was approximately $225,000 and $262,000 for
the three-month periods ended March 31, 1998 and 1997, respectively.
The decrease is attributable to decreased product sales. The Company
expects cost of sales to vary from quarter to quarter, dependent
upon the level of product revenue, the absorption of fixed
product-related costs, and any charges associated with excess or
expiring finished product.
Research and development expenses were approximately
$2,170,000 and $2,066,000 for the three-month periods ended March
31, 1998 and 1997, respectively. The increase is primarily
attributable to license fees associated with the proposed
acquisition of Alpha 1 Biomedicals Inc.'s worldwide rights to
thymosin alpha 1 and increased consulting fees offset by decreased
clinical expenses and payroll costs. The Company recently completed
dosing in its CPX Phase 1 clinical study in the United States and
plans to start a Phase 2 clinical trial later this year.* In
addition, the Company is pursuing a corporate partnering arrangement
with a major pharmaceutical company for a pivotal phase 3
development of the combination of ZADAXIN plus interferon for
hepatitis C in the U.S. and Europe.* The initiation and continuation
of these programs by the Company had and will continue to have a
significant effect on the Company's research and development
expenses in the future and will require the Company to seek
additional capital resources. In general, the Company expects
product 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,
entering into one or more corporate partnering arrangements,
acquiring product rights, and expanding regulatory activities.
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Marketing expenses were approximately $1,248,000 and
$1,029,000 for the three-month periods ended March 31, 1998 and
1997, respectively. The increase relates to increased payroll costs
and travel and entertainment expenses associated with the expansion
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.*
General and administrative expenses were approximately
$893,000 and $867,000 for the three-month periods ended March 31,
1998 and 1997, respectively. The increase is attributable to
increased general office expenses and fees for professional
services, offset by decreased investor relations fees and payroll
costs. 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 and resources to
support increased expenditures on clinical trials and testing, and
regulatory, pre-commercialization and marketing activities.
Net interest and investment income was approximately
$197,000 and $513,000 for the three-month periods ended March 31,
1998 and 1997, respectively. The decrease primarily resulted from
decreased interest and investment income due to lower average
invested cash balances.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had approximately
$9,879,000 in cash, cash equivalents and liquid short and long-term
investments.
Net cash used by the Company in operating activities
amounted to approximately $3,807,000 for the three-month period
ended March 31, 1998. Net cash used in operating activities in the
1998 period is greater than the Company's net loss for such period
due to increases in accounts receivable and payments to third
parties for goods and services and to employees for compensation and
benefits. These uses of cash were offset by non-cash charges
associated with depreciation and amortization, decreases in
inventory and prepayments of certain future expenses and increases
in amounts owed to third parties for clinical trials. Net cash used
by the Company in operating activities amounted to approximately
$4,265,000 for the three-month period ended March 31, 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
non-cash charges associated with depreciation and amortization and
increases in amounts owed to third parties for clinical trials.
Net cash provided by investing activities amounted to
approximately $2,445,000 for the three-month period ended March 31,
1998 related to the net sale of approximately $2,458,000 of
marketable securities offset by the purchase of $13,000 in equipment
and furniture. Net cash provided by investing activities amounted to
approximately $2,882,000 for the three-month period ended March 31,
1997 related to the net sale of approximately $2,922,000 of
marketable securities offset by the purchase of $40,000 in equipment
and furniture.
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Net cash provided by financing activities for the
three-month period ending March 31, 1998 amounted to approximately
$767,000, consisting of a partial repayment of $754,000 on a note
receivable from an officer and $13,000 in proceeds received from the
issuance of common stock under the Company's employee stock purchase
plan. Net cash provided by financing activities for the three-month
period ending March 31, 1997 primarily consisted of approximately
$1,025,000 in proceeds received from the issuance of common stock
from the exercise of outstanding warrants and under the Company's
stock option plan, offset by repurchases of the Company's common
stock under the Company's approved stock repurchase plan of
approximately $826,000.
Management believes its existing capital resources and
interest on funds available are adequate to maintain its current and
planned operations at least through 1998.* In April 1998, the
Company concluded an offering of convertible preferred stock with
proceeds of $4,000,000 (before deducting expenses) and is actively
pursuing additional financings including a private placement of
common stock and an equity line. The Company believes it will
conclude one or more of such additional financings in the next three
to six months although no assurance can be given that such financing
will occur in the time frame expected by the Company, on terms
favorable to the Company, or at all.* The Company is considering
corporate partnering and other opportunities to increase its capital
resources and if one or more of such other opportunities occurred,
the Company would consider accelerating drug development activities,
including clinical trials. 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 preclinical and clinical trials and testing, the timing of
regulatory approvals, developments in relationships with existing or
future collaborative partners and the status of competitive
products. The Company continues to pursue corporate partnering and
public and private financing alternatives. If the Company cannot
eventually generate sufficient funds from operations, it will need
to raise additional financing in the near future. There can be no
assurance that such financing will be available on acceptable terms
and on a timely basis, if at all.
IMPACT OF THE YEAR 2000
As the year 2000 approaches, an issue impacting all
companies has emerged regarding how existing application software
programs and operating systems can accommodate this date value. In
brief, many existing application software products in the
marketplace were designed to accommodate only a two digit date
position which represents the year (e.g., "95" is stored on the
system and represents the year 1995). As a result, the year 1999
(i.e., "99") could be the maximum date value systems will be able to
accurately process. Management is in the process of working with its
software vendors to assure that the Company is prepared for the year
2000. Management does not anticipate that the Company will incur
significant operating expenses or be required to invest heavily in
computer system improvements to be year 2000 compliant.
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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Dependence on ZADAXIN and CPX. The Company's principal
drug development efforts are currently focused primarily on ZADAXIN
and CPX. Clinical trials of ZADAXIN sponsored by the Company and/or
other parties are currently in progress or planned and favorable
results from such trials will be necessary to gain regulatory
approval in major pharmaceutical markets. Sales of ZADAXIN commenced
in 1997 but are not material at this time. While ZADAXIN has been
approved for commercial sale for treatment of hepatitis B in the
People's Republic of China, Kuwait, Peru, the Philippines and
Singapore, no assurance can be given that ZADAXIN approvals will be
obtained in additional countries or for the treatment of additional
indications, such as hepatitis C or cancer, in a timely fashion or
at all. The Company's launch of ZADAXIN in the People's Republic of
China, the Philippines and Singapore is the first commercial
introduction of ZADAXIN by the Company, and no assurance can be
given that commercialization of ZADAXIN will prove successful. The
Company has not yet launched ZADAXIN in Argentina, Italy, Kuwait or
Peru and no assurance can be given that future launch of ZADAXIN
will prove successful in these countries or in any additional
countries. Future sales of ZADAXIN will depend on market acceptance
and successful distribution. In particular, although the People's
Republic of China has the highest hepatitis B prevalence rate in the
world, the low average income and poorly developed distribution
infrastructure present ongoing challenges to successful
commercialization of ZADAXIN in that market. Because the Company
currently relies on ZADAXIN as its sole source of revenue, the
failure to demonstrate the drug's efficacy in future clinical
trials, obtain additional marketing approvals or commercialize the
drug successfully would have a material adverse effect on the
Company.
The Company may experience delays and encounter
difficulties in clinical trials of CPX. In addition, there can be no
assurance that any clinical trial will provide statistically
significant evidence of the efficacy of CPX in treating cystic
fibrosis ("CF"). A failure to demonstrate the safety and efficacy of
CPX in a CF clinical trial, obtain regulatory approval of CPX for CF
or successfully commercialize CPX would have a material adverse
effect on the Company.
No History of Significant Revenues; Continuing Operating
Losses. The Company has only recently generated revenues from the
commercialization of its lead product, ZADAXIN, and there is
substantial uncertainty regarding the timing and amount of any
future revenues and whether such future revenues will be material.
The Company cannot predict when or if marketing approvals for CPX
will be obtained or additional marketing approvals for ZADAXIN will
be obtained. Even if such approvals are obtained, there can be no
assurance that ZADAXIN and CPX will be commercialized successfully.
The Company has experienced significant operating losses since its
inception and has a substantial accumulated deficit. The Company
expects its operating expenses to increase over the next several
years as it expands its development, clinical testing and marketing
capabilities. The Company's ability to achieve a profitable level of
operations is dependent in large part on successful expansion of the
market for ZADAXIN in Asia, Latin America and the Middle East,
obtaining additional regulatory approvals for ZADAXIN and/or future
products, entering into a corporate partnering arrangement for
pivotal phase 3 development of the combination of ZADAXIN plus
interferon for hepatitis C in the U.S. and Europe, entering into
other agreements for product development and commercialization,
where appropriate, and continuing to expand from development into
successful marketing. There can be no assurance that the Company
will ever achieve a profitable level of operations.
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Future Capital Needs; Uncertainty of Additional Financing.
Since inception, the Company has financed its operations primarily
through sales of equity securities. The Company will need to obtain
additional financing through sales of equity securities to support
its long-term product development and commercialization programs.
The Company believes its existing capital resources and interest on
funds available are adequate to maintain its current and planned
operations at least through 1998.* The Company is considering
corporate partnering and other opportunities to increase its capital
resources. However, the Company's future capital requirements will
depend on many factors, including the level of ZADAXIN product
sales, the availability of complementary products, technologies and
businesses, the initiation of preclinical and clinical trials and
testing, the timing and cost of regulatory approvals, patent costs,
competing technological and market developments, the nature of
existing and future collaborative relationships, and the Company's
ability to establish development, sales, manufacturing and marketing
arrangements. The Company continues to pursue corporate partnering
and public and private financing alternatives. If additional funds
are raised by the Company through the issuance of equity securities
or securities convertible into or exercisable for equity securities,
the percentage ownership of the then current shareholders of the
Company will be reduced. The Company may issue a series of Preferred
Stock with rights, preferences and privileges senior to those of the
Company's Common Stock. There can be no assurance that such
financing will be available on acceptable terms or a timely basis,
if at all. The unavailability or timing of financing could prevent
or delay the Company's long-term product development and
commercialization programs and may require curtailment of operations
of the Company.
Dependence on Third Parties. The Company's strategy
contemplates that it will enter into various arrangements with other
entities. To date, the Company has acquired rights to ZADAXIN, CPX
and certain other drugs but is only actively pursuing clinical
development of ZADAXIN and CPX. Failure to license or otherwise
acquire rights to additional drugs would result in a shortage of
products for development. In addition, the Company has licensed
exclusive rights to develop and market ZADAXIN in Japan to
Schering-Plough K.K. ("SPKK"), the Japanese subsidiary of
Schering-Plough Corporation. SPKK has a substantial commitment to
alpha interferon, which is an approved therapy for hepatitis B and
hepatitis C in Japan. There can be no assurance that the
relationship will prove successful or that the Company will be able
to negotiate additional arrangements in the future. The amount and
timing of resources that collaborators devote to their activities
with the Company will not be within the control of the Company and
may be affected by financial difficulties or other factors affecting
these third parties. There can be no assurance that such parties
will perform their obligations as expected. Moreover, the Company's
ability to obtain regulatory approval in one country may be delayed
or adversely affected by the timing of regulatory activities and
approvals in one or more other countries, particularly if the
Company does not participate in the regulatory approval process in
such other countries.
Foreign Sales and Operations. The Company's financial
condition in the near term will be highly dependent on ZADAXIN sales
in foreign jurisdictions, where sales and operations are subject to
inherent risks, including difficulties and delays in obtaining
pricing approvals and reimbursement, unexpected changes in
regulatory requirements, tariffs and other barriers, political
instability, difficulties in staffing and managing foreign
operations, longer payment cycles, greater difficulty in accounts
receivable collection, currency fluctuations and potential adverse
tax consequences. Certain foreign countries regulate pricing of
pharmaceuticals and such regulation may result in prices
significantly below those
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that would prevail in a free market. The majority of the Company's
current sales are to customers in the People's Republic of China
where the Company's accounts receivable collections are typically
180 days or greater. Such collections to date have been slower than
anticipated and the Company is currently monitoring the situation.
If collection of outstanding accounts receivable does not improve,
it may become necessary to further increase the related allowances
for bad debts or slow the rate of sales to this market.
Patents and Proprietary Rights. The U.S. and most European
composition of matter patents for thymosin alpha 1 have expired. The
Company will in the future have only limited composition of matter
patents for thymosin alpha 1 or other products and this could
adversely affect the Company's proprietary rights. However, the
Company owns or has exclusive licenses for use and/or process
patents or patent applications in the U.S., Europe, Japan and other
jurisdictions for thymosin alpha 1, and for CPX in the U.S. and will
seek to protect such products from competition through such patent
protection and through other means. The Company's success is
significantly dependent on its ability to obtain patent protection
for its products and technologies and to preserve its trade secrets
and operate without infringing on the proprietary rights of third
parties. No assurance can be given that the Company's pending patent
applications will result in the issuance of patents or that any
patents will provide competitive advantages or will not be
invalidated or circumvented by its competitors. Moreover, no
assurance can be given that patents are not issued to, or patent
applications have not been filed by, other companies which would
have an adverse effect on the Company's ability to use, manufacture
or market its products or maintain its competitive position with
respect to its products. Numerous patents and patent applications
relating to thymosin alpha 1 are held under exclusive license and
the breach by the Company of the terms of such license could result
in the loss of the Company's rights to such patents and patent
applications. Other companies obtaining patents claiming products or
processes useful to the Company may bring infringement actions
against the Company and such litigation is typically costly and
time-consuming. As a result, the Company may be required to obtain
licenses from others or not be able to use, manufacture or market
its products. Such licenses may not be available on commercially
reasonable terms, if at all.
The patent positions of biotechnology firms generally are
highly uncertain and involve complex legal and factual questions. No
consistent policy has emerged regarding the validity and scope of
claims in biotechnology patents, and courts have issued varying
interpretations in the recent past, and legal standards concerning
validity, scope and interpretations of claims in biotechnology
patents may continue to evolve. Even issued patents may later be
modified or revoked by the U.S. Patent and Trademark Office, the
European Patent Office or the courts in proceedings instituted by
third parties. Moreover, the issuance of a patent in one country
does not assure the issuance of a patent with similar claims in
another country and claim interpretation and infringement laws vary
among countries, so the extent of any patent protection is uncertain
and may vary in different countries.
Pharmaceuticals are not patentable in certain countries in
SciClone's ZADAXIN territory, or have only recently become
patentable, and enforcement of intellectual property rights in many
countries in such territory has been limited or non-existent. Future
enforcement of patents and proprietary rights in many countries in
SciClone's ZADAXIN territory can be expected to be problematic or
unpredictable. There can be no assurance that any patents issued or
licensed to the Company will provide it with competitive advantages
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or will not be challenged by others. No assurance can be given that
holders of patents licensed to the Company will file, prosecute,
extend or maintain their patents in countries where the Company has
rights. Furthermore, there can be no assurance that others will not
independently develop similar products or will not design around
patents issued or licensed to the Company.
Government Regulation and Product Approvals. The research,
preclinical and clinical development, manufacturing, marketing and
sales of pharmaceuticals, including ZADAXIN, CPX and the Company's
other drug candidates, are subject to extensive regulation by
governmental authorities. Products developed by the Company cannot
be marketed commercially in any jurisdiction in which they have not
been approved. The process of obtaining regulatory approvals is
lengthy and requires the expenditure of substantial resources. In
some countries where the Company contemplates marketing ZADAXIN, the
regulatory approval process for drugs not previously approved in
countries that have established clinical trial review procedures is
uncertain and this uncertainty may result in delays in granting
regulatory approvals. In addition, in certain countries such as
Japan, the process for obtaining regulatory approval is time
consuming and costly because all clinical trials and most
preclinical studies must be conducted there. The Company is
currently sponsoring clinical trials and pursuing regulatory
approvals of ZADAXIN in a number of countries and of CPX in the
U.S., but there can be no assurance that the Company will be able to
complete such trials, that such trials, if completed, will fulfill
regulatory approval criteria or that the Company will ultimately
obtain approvals in such countries. Adverse results in the Company's
development programs also could result in the placement of
restrictions on the use of ZADAXIN and CPX or revocation of the
approval. The marketing approval for ZADAXIN in Singapore requires a
patient surveillance program to continue study of the drug's safety
and efficacy. Adverse results in such program could result in the
placement of restrictions on the use of ZADAXIN or revocation of the
approval in Singapore. Failure to comply with the applicable U.S. or
foreign regulatory requirements can, among other things, result in
Warning Letters, fines, suspensions of regulatory approvals, product
recalls or seizures, operating restrictions, injunctions and
criminal prosecutions. Further, additional government regulation may
be established or imposed which could prevent or delay regulatory
approval of ZADAXIN, CPX or any future products of the Company.
Manufacturing. The Company has entered into contract
manufacturing and supply agreements to source ZADAXIN and CPX. The
Company has experienced delays of supply of thymosin alpha 1 bulk
drug in the past and could do so again in the future. To be
successful, the Company's products must be manufactured in
commercial quantities in compliance with regulatory requirements and
at an acceptable cost. While the Company believes it has and will be
able in the future to establish manufacturing relationships with
experienced suppliers capable of meeting the Company's needs, there
can be no assurance that the Company will establish long term
manufacturing relationships with suppliers or that these suppliers
will prove satisfactory. The Company currently has vialing and
packaging supply agreements in effect and has a sufficient supply of
finished thymosin alpha 1 for the near term and is currently
negotiating a new vialing and packaging supply agreement. No
assurances can be given that such new agreement will be reached.
Production interruptions, if they occur, could significantly delay
clinical development of potential products, reduce third party or
clinical researcher interest and support of proposed clinical
trials. Such interruptions could also delay commercialization of the
Company's products and impair their competitive position, which
would have a material adverse effect on the business and financial
condition of the Company.
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Marketing and Sales. The Company has established
distribution arrangements with local pharmaceutical distribution
companies covering countries in Asia, Latin America and the Middle
East. However, no assurance can be given that any such distribution
arrangements will remain in place or prove successful.
Technological Change and Competition. Rapid technological
development may result in the Company's products becoming obsolete
before they are marketed or before the Company recovers a
significant portion of the related development and commercialization
expenses. Competition in the pharmaceutical field is intense and the
Company expects that competition will increase. The Company's
competitors include major pharmaceutical companies, biotechnology
firms and universities and other research institutions, both in the
U.S. and abroad, that are actively engaged in research and
development of products in the therapeutic areas being pursued by
the Company. Many of these companies and institutions have
substantially greater financial, technical, manufacturing, marketing
and human resource capabilities than the Company and extensive
experience in undertaking clinical testing and obtaining regulatory
approvals necessary to market drugs. Principal competitive factors
in the pharmaceutical field include efficacy, safety, price and
therapeutic regimen. Where comparable products are marketed by other
companies price is also a competitive factor.
Uncertainty of Third Party Reimbursement; Resources of
Patient Populations. The Company's ability to successfully
commercialize its products may depend in part on the extent to which
reimbursement for the cost of such products will be available from
government health administration authorities, private health
insurers and other organizations. Significant uncertainty exists as
to the reimbursement status of new therapeutic products and there
can be no assurance that third party reimbursement will be available
for therapeutic products the Company might develop. In many of the
foreign countries in which the Company intends to operate,
reimbursement of ZADAXIN under government or private health
insurance programs will not be available. In the U.S., health care
reform is an area of increasing national attention and a priority of
many governmental officials. Certain reform proposals, if adopted,
could impose limitations on the prices the Company will be able to
charge in the U.S. for its products or the amount of reimbursement
for the Company's products from governmental agencies or third party
payors. In many countries where the Company has marketing rights for
ZADAXIN, government resources and per capita income levels may be so
low that the Company's products will be prohibitively expensive for
a large percentage of the population. In such countries, there can
be no assurance that the Company will be successful in marketing its
products on economically favorable terms, if at all.
Dependence on Qualified Personnel and Key Individuals.
Because of the specialized scientific nature of the Company's
business, the Company is highly dependent upon its ability to
continue to attract and retain qualified management, scientific and
technical personnel. There is intense competition for qualified
personnel in the areas of the Company's activities, and there can be
no assurance that the Company will be able to continue to attract
and retain the qualified personnel necessary for the development of
its business. In addition, many key responsibilities within the
Company have been assigned to a relatively small number of
individuals. Loss of the services of any of these individuals unless
they were promptly replaced could be significantly detrimental to
the Company's development. The Company does not maintain key person
life insurance on the lives of any of its key personnel.
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Product Liability; Absence of Insurance. The Company's
business will expose it to potential product liability risks which
are inherent in the testing, manufacturing, marketing and sale of
pharmaceutical products, and there can be no assurance that product
liability claims will not be asserted against the Company. Product
liability insurance for the pharmaceutical industry generally is
expensive to the extent that it is available at all. The Company has
product liability insurance coverage for clinical trials and
commercial sales. However, there can be no assurance that a product
liability claim would not adversely affect the business or financial
condition of the Company.
Blank Check Preferred Stock. The Company recently issued
shares of Series C Preferred Stock (the "Series C Shares") in a
private placement with proceeds of $4,000,000 (before deducting
offering expenses). The Company's Board of Directors has the
authority to issue additional series of preferred stock and to
determine the price, rights, preferences, privileges and
restrictions, including voting rights, without any further vote or
action by the Company's shareholders. The rights of the holders of
the Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any Preferred Stock that may be
issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company.
Series C Preferred Stock. Under certain conditions, each
Series C Share may convert into substantially more than one share of
the Company's Common Stock. If such events were to occur, the
conversion of the Series C Shares would have a dilutive effect on
the common shareholders. In connection with the issuance of the
Series C Shares, the Company will recognize a deemed dividend in the
amount of $3,143,000 in the second quarter ended June 30, 1998. This
amount will increase the net loss and net loss per share applicable
to common shareholders and was calculated as required by the SEC.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
3(i).1 Restated Articles of Incorporation
(incorporated by reference from the
Company's Registration Statement on
Form S-1 (No. 33-45446), declared
effective by the Commission on March
17, 1992).
3(i).2 Certificate of Amendment of Restated
Articles of Incorporation (incorporated
by reference from the Company's
Registration Statement on Form S-8 (No.
33-66832) filed with the Commission on
August 3, 1993).
3(ii).1 Bylaws (incorporated by reference from
the Company's Registration Statement on
Form S-1 (No. 33-45446), declared
effective by the Commission on March
17, 1992).
3(ii).2 Certificate of Amendment of Bylaws
(incorporated by reference from the
Company's Registration Statement on
Form S-8 (No. 33-66832) filed with the
Commission on August 3, 1993).
4.1 Rights Agreement, dated as of July 25,
1997, between Sciclone and ChaseMellon
Shareholder Services, LLC.
(incorporated by reference to the
Company's Current Report on Form 8-K
filed on October 14, 1997).
10.23 Employment Agreement dated March 24, 1997
between Registrant and Alfred R. Rudolph
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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: May 14, 1998 DONALD R. SELLERS
------------------------------
Donald R. Sellers
Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1998 DIANE LEE
--------------------------------
Diane Lee
Director, Corporate Finance and
Administration
(Principal Financial & Accounting Officer)