<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
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 0-15847
SEQUUS PHARMACEUTICALS, INC.
(Formerly Liposome Technology, Inc.)
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3031834
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
960 Hamilton Court, Menlo Park, CA 94025
----------------------------------------
(Address of principle executive offices)
(415) 323-9011
----------------------------------------------------
(Registrant's telephone number, including area code)
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
--- ---
At November 08, 1995 the number of outstanding shares of the Company's common
stock, par value $.0001, was 25,625,911.
<PAGE> 2
SEQUUS PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C>
ITEM 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheet
September 30, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . . . . . 1
Condensed Statement of Operations for the
Three Months and Nine Months Ended September 30, 1995 and 1994 . . . . . . . . . . 2
Condensed Statement of Cash Flows for the
Nine Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . 5
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 . . . . . . . . . . . . . . . . 19
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 19
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
i
<PAGE> 3
SEQUUS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEET
(in thousands except par value)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,543 $ 5,448
Short-term marketable investments 8,118 6,309
Trade accounts and interest receivable 219 285
Inventory 938 558
Prepaid expenses 631 922
----------- ---------
Total Current Assets 14,449 13,522
Equipment and improvements, net 3,380 3,808
Long-term marketable investments -- 500
Other assets 264 368
----------- ---------
Total Assets $ 18,093 $ 18,198
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 684 $ 1,586
Accrued clinical costs 2,485 3,954
Accrued compensation 1,316 797
Other accrued liabilities 437 923
----------- ---------
Total Current Liabilities 4,922 7,260
Stockholders' Equity:
Preferred stock, par value $.01 5 --
Common stock, par value $.0001 2 2
Additional paid-in capital 136,886 110,801
Accumulated deficit (123,722) (99,865)
----------- ---------
Total Stockholders' Equity 13,171 10,938
----------- ---------
Total Liabilities and Stockholders' Equity $ 18,093 $ 18,198
=========== =========
</TABLE>
See accompanying notes to condensed financial statements.
1
<PAGE> 4
SEQUUS PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net Sales $ 33 $ 1,455 $ 1,073 $ 2,401
Royalties and fees 53 23 91 63
-------- -------- -------- --------
Total Revenues 86 1,478 1,164 2,464
Expenses:
Cost of goods sold 4 440 279 662
Research and development 5,173 6,237 15,902 19,130
Selling, general and
administrative 3,133 1,687 9,326 5,500
-------- -------- -------- --------
Total Expenses 8,310 8,364 25,507 25,292
Net interest and other income 271 231 471 815
-------- -------- -------- --------
Net Loss $ (7,953) $ (6,655) $(23,872) $(22,013)
======== ======== ======== ========
Net loss per common share $ (0.37) $ (0.35) $ (1.17) $ (1.16)
======== ======== ======== ========
Common and common equivalent
shares used in calculation of loss per
share 21,545 19,008 20,435 18,930
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE> 5
SEQUUS PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(23,872) $(22,013)
Adjustment to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 1,466 1,378
Decrease (increase) in assets:
Trade accounts and interest receivable 66 (597)
Inventories (380) (22)
Prepaid expenses 291 573
Other assets 6 --
Increase (decrease) in liabilities:
Accounts payable (902) (160)
Accrued clinical costs (1,469) 1,034
Accrued compensation 519 (201)
Other accrued liabilities (486) 496
-------- --------
Net cash used by operating activities (24,763) (19,512)
-------- --------
Cash flows from investing activities:
Available for sale securities:
Purchases (17,067) (12,933)
Sales -- 25,560
Maturities 15,765 10,398
Capital expenditures (932) (1,126)
-------- --------
Net cash (used) provided by investing activities (2,234) 21,899
-------- --------
Cash flows from financing activities:
Sale of common stock 15,052 348
Sale of preferred stock 11,038 --
Principal payments under capital lease obligations -- (18)
-------- --------
Net cash provided by financing activities 26,092 330
-------- --------
Net (decrease) increase in cash and cash equivalents
(carried forward) $ (905) $ 2,717
-------- --------
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 6
(Continued)
SEQUUS PHARMACEUTICALS, INC.
CONDENSED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1995 1994
------- -------
<S> <C> <C>
Net (decrease) increase in cash and cash equivalents
(brought forward) $ (905) $ 2,717
Cash and cash equivalents at beginning of the period 5,448 3,073
------- -------
Cash and cash equivalents at end of the period $ 4,543 $ 5,790
======= =======
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 7
SEQUUS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1995
(unaudited)
1. BASIS OF PRESENTATION
SEQUUS Pharmaceuticals, Inc. (formerly Liposome Technology, Inc.) is
engaged in the development of proprietary liposome and lipid-based
products to treat life-threatening illnesses. SEQUUS' strategic
emphasis is on injectable pharmaceutical products designed to improve
the efficacy and reduce the toxicity of selected existing and new drugs
used to treat cancer and infectious diseases.
In the opinion of management, the accompanying unaudited condensed
financial statements of SEQUUS contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the
financial position as of September 30, 1995, and the results of
operations for the three months and nine months ended September 30,
1995 and 1994 and cash flows for the nine months ended September 30,
1995 and 1994.
Although the nature of the business is not seasonal, the results of
operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
2. CASH AND CASH EQUIVALENTS AND INVESTMENTS
The Company invests its excess cash principally in government
securities and high-grade investment paper. The Company maintains its
cash, cash equivalents and investments in several different instruments
with various banks and brokerage houses. The diversification of risk is
consistent with Company policy to maintain liquidity and ensure the
safety of principal.
Management determines the appropriate classification of debt securities
at the time of purchase and reevaluates such designation as of each
balance sheet date. At September 30, 1995, all investments are
classified as available-for-sale securities and are carried at fair
value, with the unrealized gains and losses reported as a component of
accumulated deficit. The amortized cost of debt securities in this
category is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest
income. Realized gains and losses and declines in value judged to be
other than temporary on available-for-sale securities are included in
net interest and other income. The cost of securities sold is based on
the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest
income.
The following is a summary of available-for-sale securities as of
September 30, 1995:
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED ESTIMATED
----------------
COST GAINS LOSSES FAIR VALUE
------ ----- ------- ----------
(in thousands)
<S> <C> <C> <C> <C>
United States government securities . . . . $7,118 $ -- $ -- $7,118
Foreign debt securities . . . . . . . . . . 1,000 -- -- 1,000
------ ----- ----- ------
$8,118 $ -- $ -- $8,118
====== ===== ===== ======
</TABLE>
The gross realized gains and losses on sales of available-for-sale
securities have been immaterial. As of September 30, 1995 the average
portfolio duration was approximately 46 days and contractual maturity
of the investments did not exceed 90 days.
5
<PAGE> 8
SEQUUS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1995
(unaudited)
3. INVENTORIES
Inventories are stated at the lower of cost (principally first-in,
first-out) or market. The inventory detail at September 30, 1995 and
December 31, 1994 is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31,
1995 1994
-------- --------
(in thousands)
<S> <C> <C>
Raw materials . . . $ 398 $ 268
Work-in-process . . 238 201
Finished goods . . 302 89
-------- --------
$ 938 $ 558
======== ========
</TABLE>
4. EQUIPMENT AND IMPROVEMENTS:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------- --------
(in thousands)
<S> <C> <C>
Office and laboratory equipment ..... $ 7,227 $ 6,308
Leasehold improvements .............. 3,966 3,953
-------- --------
11,193 10,261
Accumulated depreciation and ........ (7,813) (6,453)
-------- --------
amortization ...................... $ 3,380 $ 3,808
-------- --------
</TABLE>
5. STOCKHOLDERS' EQUITY
On March 31, 1995, the Company raised $10.9 million (net proceeds $10.1
million) of equity capital with the sale of 436,000 shares of Series A
Convertible Reset Preferred Stock ("Convertible Reset Preferred Stock")
together with warrants to purchase 734,000 shares of Common Stock. Each
share of Convertible Reset Preferred Stock is convertible into Common
Stock at an initial conversion price of $7.425 per share of Common
Stock, representing a 10% premium to the closing price of the Common
Stock on March 24, 1995, the date the offering was priced. The
Convertible Reset Preferred Stock will automatically convert into
Common Stock at the option of the Company, in whole or in part, in the
event that the Common Stock has closed for 20 out of 30 consecutive
trading days at a price in excess of approximately $13.00 per share.
This condition for automatic conversion was met as of September 12,
1995, and the Company may elect to convert the Convertible Reset
Preferred Stock at any time. In the event that the Convertible Reset
Preferred Stock remains outstanding on March 25, 1996, the conversion
price will be reset to the lesser of (i) the initial conversion price
and (ii) the lowest 30-day consecutive average closing market price of
the Common Stock in the preceding 12-month period, subject to a floor
of $3.713 per share. In the event of any liquidation, dissolution or
winding up of the Company, the holders of the outstanding shares of
Convertible Reset Preferred Stock are entitled to receive, prior and in
preference to any distribution of any assets or surplus funds of the
Company to the holders of Common Stock, an amount equal to $25.00 per
outstanding share of Convertible Reset Preferred Stock. The warrants
have a three-year life and are exercisable at a fixed rate of $7.425
per share of Common Stock.
6
<PAGE> 9
SEQUUS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1995
(unaudited)
On April 13, 1995, the Company raised an additional $1.1 million (net
proceeds of $900,000) of equity capital with the sale of 44,000 shares
of Convertible Reset Preferred Stock together with warrants to purchase
74,320 shares of Common Stock. The additional shares of Convertible
Reset Preferred Stock were issued under the same terms as those
described above.
On May 25, 1995, the Company raised $15 million (net proceeds $14.2
million) through a private placement of Units. Each Unit consisted of
one share of Common Stock and a warrant to purchase one-half share of
Common Stock at an exercise price per share of $7.4328. The warrants
are only exercisable if the Common Stock portion of the Unit is held
for one year by the initial Unit purchaser. The price per Unit was
$6.7571. Under the terms of this financing, the investors also receive
the first right to negotiate with the Company to participate in the
commercial development of the Company's anticancer product, DOXIL, in
Brunei, China, Hong Kong, Indonesia, Malaysia, Singapore, Taiwan and
Thailand.
In June 1995, the Company's Board of Directors authorized an additional
2,150,000 shares of Common Stock be reserved for the Company's 1987
Employee Stock Option Plan, 1990 Director Stock Option Plan and the
1987 Consultant Stock Option Plan and an additional 100,000 shares of
Common Stock for the Company's Employee Stock Purchase Plan, each
subject to stockholder approval. On September 12, 1995, stockholders
approved the reservation of these additional shares. Also on September
12, 1995, the Company's stockholders approved an increase in the number
of authorized shares of Common Stock from 35,000,000 to 45,000,000.
6. SUBSEQUENT EVENT
On October 30, 1995, the Company raised an amount estimated to be
approximately $39.8 million (net of offering costs) through a public
offering of 3.9 million shares of Common Stock.
7
<PAGE> 10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leader in the development and commercialization of liposome and
lipid-based biopharmaceutical products primarily to treat cancer and certain
fungal infections. The Company has incurred losses in each year since its
inception and had accumulated approximately $123.7 million in net losses through
September 30, 1995. Although the Company has commenced marketing its first
product, AMPHOTEC(TM)1, in the United Kingdom ("U.K.") and has received
marketing approval in three additional European countries, the Company expects
operating losses to continue for a number of years because of expenditures
associated with research, preclinical testing and clinical trials, marketing
expenses and other expenses relating to seeking regulatory approvals and
commercialization of its products, if approved. The Company also anticipates
that clinical activity and research and development spending will increase in
1995 and 1996 as expenditures for clinical trials of DOXIL(R)2 (doxorubicin HCl
liposome injection) in solid tumors are increased.
AMPHOTEC has been approved in the U.K. since August 1993, in Ireland since
October 1994, in Finland since June 1995, and in Russia since July 1995 for
treating systematic fungal infections in patients for whom conventional
amphotericin B is contraindicated due to toxicity or renal failure or for whom
previous antifungal therapy was unsuccessful. The Company and Zeneca have
submitted Marketing Authorization Applications ("MAAs") for AMPHOTEC in 11 other
European Union ("EU") countries and similar applications in other countries. The
EU submissions were made in accordance with the Committee on Proprietary and
Medicinal Products ("CPMP") multistate procedures. On September 13, 1995, the
CPMP reviewed the Company's application for AMPHOTEC marketing approval in the
EU countries. Germany, France, Spain, Greece and Luxembourg did not accept the
MAAs. Subsequently, the Company and Zeneca have withdrawn the application in
Germany. Based primarily on the CPMP review, SEQUUS believes national approval
will be forthcoming in Austria, Denmark, Italy, The Netherlands, Portugal and
Sweden, although the CPMP is an advisory committee only, its vote is not binding
on member countries, and there can be no assurance that approvals will be
forthcoming on a timely basis, or at all. In addition, the CPMP review indicates
that Belgium can approve AMPHOTEC for marketing upon the receipt of additional
clinical information, although there can be no assurance that the Company will
be able to provide additional data or, if provided, that approval will be
forthcoming on a timely basis, or at all. If approvals are received, SEQUUS and
Zeneca intend to negotiate pricing in each of these countries, which the Company
believes will take as long as six to 12 months or longer following market
approval. NeXstar Pharmaceuticals, Inc. ("NeXstar"), a competitor of the
Company, has regulatory approval in approximately 18 countries, primarily in
Europe, to sell a liposomal amphotericin B product which targets indications
similar to those targeted by AMPHOTEC. The Liposome Company ("TLC") recently
introduced its liposomal amphotericin B product as the third entrant in the U.K.
market at a price substantially below the price of the other lipid-based
antifungals. This could have an adverse effect on AMPHOTEC's market penetration.
Zeneca has engaged in some price competition, and if increased price competition
results, it would have a material adverse effect on the Company's business,
financial condition and results of operations.
In August 1993, the Company signed a distribution agreement with Zeneca under
which Zeneca will market and sell AMPHOTEC in most European countries. In March
1994, SEQUUS and Zeneca announced the expansion of their August 1993 agreement
to cover all countries not previously covered with the exception of the United
States, Canada, Japan and selected small markets. SEQUUS announced Zeneca's
commercial launch of AMPHOTEC in the U.K. in May 1994. SEQUUS currently is
dependent on Zeneca for the distribution of AMPHOTEC, and unless and until the
Company receives any approvals for and begins to sell DOXIL, the Company's
future revenues are largely dependent upon Zeneca's success in selling AMPHOTEC
in approved markets and Zeneca's forecasts of future sales, including such
factors
- ---------------------------------
(1) Also known as ABCD and AMPHOCIL
(2) Also known as DOX-SL and S-Dox
8
<PAGE> 11
as additional approvals for AMPHOTEC, if any, and inventory requirements. The
level of the Company's future sales of AMPHOTEC to Zeneca will depend upon the
rate at which the product penetrates the existing approved markets of the U.K.,
Ireland, Finland and Russia, as well as the timing of additional product
approvals in other countries, if any. Sales of AMPHOTEC to date have been below
expectations, and Zeneca and the Company have initiated discussions regarding
modifications to their agreement. The Company expects to ship no additional
product to Zeneca for the remainder of 1995, and may not ship product to Zeneca
during the first half of 1996. In addition, the Company may elect to use certain
Zeneca inventory for its clinical trials in return for partial credits on future
product sales to Zeneca. Additional terms under discussion include the
scheduling of regulatory milestone payments, possibly modifying territories in
which Zeneca has distribution rights and implementing a mechanism to give Zeneca
greater pricing flexibility. It also is possible that other terms of the
agreement between the parties will be amended as appropriate. Accordingly, there
can be no assurance that Zeneca will elect to maintain distribution rights to
AMPHOTEC in any or all markets or that the terms of such rights will remain the
same. In addition, the delay in regulatory approvals of AMPHOTEC in the EU
countries will affect the timing, and any failure to obtain regulatory approval
would affect the receipt, of additional milestone payments from Zeneca. There
can be no assurance that these or other factors, including the amount and timing
of resources devoted to AMPHOTEC sales by Zeneca, will not lead to substantial
fluctuations in the Company's revenues from period to period. Any delays in the
receipt, or denial of, marketing approvals or material changes to the terms of
the agreement with Zeneca would have a material adverse effect on the Company's
business, financial condition and results of operations.
In September 1995, SEQUUS received an approvable letter from the U. S. Food and
Drug Administration ("FDA") for DOXIL as a treatment for AIDS-related Kaposi's
sarcoma ("KS") patients in whom prior systemic chemotherapy has failed either
due to disease progression or unacceptable toxicity ("refractory KS"). The
Company expects its marketing and sales expenses to increase significantly as it
prepares for and, if FDA approval is received, proceeds with the
commercialization of DOXIL in the United States. In the United States, SEQUUS
intends to market and sell its products directly, or possibly co-promote them
with strategic partners, and the Company has recruited a marketing and sales
group of 22 individuals experienced in the sale of pharmaceutical and
biopharmaceutical products. In addition, the Company currently uses Ben Venue, a
contract manufacturer, for the commercial-scale manufacturing of its products.
If certain regulatory approvals are obtained, the Company expects to incur
manufacturing scale-up costs in support of expanded production at Ben Venue.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
During the three months ended September 30, 1995, net sales were $33,000
compared to approximately $1.5 million recorded in the third quarter of the
prior year of which approximately $1.4 million was attributed to AMPHOTEC
pipeline-filling (inventory) by Zeneca. There were no sales to Zeneca in third
the quarter 1995 and the level of future sales to Zeneca depends on the rate of
market penetration where AMPHOTEC is approved and additional approvals by other
European countries in which applications have been filed. For the remainder of
1995, the Company anticipates no additional sales to Zeneca.
Generally, most of the Company's operating expenses are incurred for research
and development ("R&D"), including preclinical testing and clinical trials
required for new pharmaceutical products. The principal items of R&D expense are
personnel costs, costs of clinical trials, clinical production and supplies. In
the third quarter of 1995, R&D expenses declined by approximately $1.1 million
compared to the same period in 1994 when the Company was conducting extensive
clinical activities related to regulatory filings for DOXIL for the treatment of
refractory KS. The Company anticipates expenditures for clinical activities will
increase in the future as clinical trials for the treatment of solid tumors are
expanded.
Selling, general and administrative expenses (SG&A) increased by approximately
$1.4 million over the third quarter of the prior year, principally reflecting
preparation for the anticipated launch of DOXIL in the United States. If DOXIL
receives FDA approval, the Company expects its marketing expenses to increase
significantly as it proceeds with the commercialization of DOXIL in the United
States.
9
<PAGE> 12
The Company's net loss for the quarter ended September 30, 1995 increased to
$7,953,000 from $6,655,000 in the third quarter of 1994. The loss per share was
$0.37 compared to $0.35 in the same period of the prior year.
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
During the nine months ended September 30, 1995, revenues were approximately
$1.2 million, a decrease of approximately $1.3 million from the same period of
the prior year. Of this decline, approximately $1.1 million was attributed to
lower product sales to Zeneca.
R & D costs were lower in the first nine months of 1995 than in 1994 by $3.2
million. This is a reflection of higher spending in 1994 on clinical activities
in preparation for regulatory filings for approval of DOXIL for the treatment of
refractory KS. The Company anticipates that clinical activity and R&D spending
will increase later in 1995 as clinical trials for the treatment of solid tumors
are expanded.
SG&A costs increased $3.8 million in the first nine months of 1995 compared to
1994 principally reflecting preparation for the anticipated launch of DOXIL in
the United States and accrued expenses in connection with termination of the
employment of certain officers, offset by decreased legal activities due to the
settlement of patent related litigation.
The Company's net loss for the nine month period ended September 30, 1995 of
$23.9 million was an increase of $1.9 million over the first nine months of
1994. The loss per share was $1.17 compared to $1.16 in the prior year.
INTEREST AND OTHER INCOME
Net interest and other income increased $40,000 compared to the third quarter of
1994 and decreased $344,000 in the nine month period ended September 30, 1995.
These changes are a reflection of the average cash balance during the period as
well as changing interest rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and marketable investments at September
30, 1995 were approximately $12.7 million compared to $12.3 million at December
31, 1994.
The Company's strategy is to fund from its own cash resources the preclinical
and clinical development of two of its proprietary products, AMPHOTEC and DOXIL,
and the continued research and development of additional STEALTH(R) liposome
products. This strategy will require significant operating and capital
expenditures including the construction of a pilot plant facility which is
currently in the planning phase.
During the nine months ended September 30, 1995, the Company raised an aggregate
of $27.0 million (net proceeds of $25.2 million) from two equity financings. On
March 30, 1995 and April 13, 1995, the Company raised an aggregate of $12.0
million (net proceeds of $11.0 million) from a private placement of 480,000
shares of a new issue of Series A Convertible Reset Preferred Stock and warrants
to purchase 808,320 shares of Common Stock. On May 25, 1995, the Company raised
$15.0 million (net proceeds of $14.2 million) in a private placement of Units
composed of one share of Common Stock and a warrant to purchase one-half share
of Common Stock; the warrant is only exercisable if the initial Unit purchaser
retains the associated Common Stock for one year. See Note 5 of the Notes to the
Condensed Financial Statements for a description of the terms of these
financings. The Company believes that at planned spending rates its existing
cash balances, interest income earned thereon, revenues from operations and the
net proceeds of the recently completed public offering will be adequate to fund
its planned activities at least through the end of 1996, although it may seek
additional financing sooner. There can be no assurance that adequate financing
will be available on satisfactory terms, if at all.
On October 30, 1995 the Company realized approximately $39,825,000 (net of
offering costs) from a public offering of 3.9 million shares of common stock.
10
<PAGE> 13
RISK FACTORS
UNCERTAINTY OF MARKET ACCEPTANCE
Even if regulatory approvals are obtained, uncertainty exists as to whether the
Company's products will be accepted by the market. The only product marketed by
the Company to date is AMPHOTEC, which has been marketed only in the U.K. and
which has generated only limited revenues. A number of factors may limit the
market acceptance of AMPHOTEC, DOXIL and any other products developed by the
Company, including the timing of regulatory approval and market entry relative
to competitive products, the availability of alternate therapies, the price of
the Company's products relative to alternative therapies, the availability of
third-party reimbursement and the extent of marketing efforts by third-party
distributors or agents retained by the Company. No therapeutic product based on
liposome or lipid-based technology is presently commercially available in the
United States. As a result, unanticipated side effects or unfavorable publicity
concerning any product incorporating liposome or lipid-based technologies could
have an adverse effect on the Company's ability to obtain physician, patient or
third-party payor acceptance and to sell the Company's products. There can be no
assurance of the Company's ability, or the length of time required, to achieve
commercialization of the Company's products or that physicians, patients or
third-party payors will accept liposome products or any of the Company's
products as readily as traditional forms of medication or at all.
UNCERTAINTY OF PRODUCT DEVELOPMENT
The development of new pharmaceutical products is subject to a number of
significant risks. Potential products that appear to be promising at various
stages of development may not receive regulatory approval, reach the market or
achieve widespread use for a number of reasons. For example, DOXIL is being
clinically tested in various types of solid tumors. Although the Company
believes that preliminary results suggest activity in some but not all of these
tumors, these results are not conclusive nor are they predictive of future
results. Moreover, even when a drug does demonstrate activity, this does not
mean that it will prove sufficiently effective to be better than existing
therapies. The reasons for a product not being successful include the
possibilities that the potential products will be found insufficiently effective
or unduly toxic during preclinical testing or clinical trials, fail to receive
necessary regulatory approvals, be difficult to manufacture on a large scale, be
uneconomical to market or not achieve market acceptance, be inferior or
significantly later to market than competing products or be precluded from
commercialization by proprietary rights of third parties.
There are a number of challenges the Company must address successfully to
develop commercial products in each of its development programs. The Company's
potential products will require significant additional research and development
efforts, including process development and significant additional clinical
testing, prior to any commercial use. There can be no assurance that the Company
will successfully address any of these technological challenges, or others that
may arise in the course of development. In addition, the Company may not have
sufficient resources to commercialize new products successfully.
Successful product development requires, among other things, the design and
completion of clinical trials. The rate of completion of the Company's clinical
trials is dependent upon, among other factors, the rate of patient enrollment.
Patient enrollment is a function of many factors, including the size of the
patient population, the nature of the protocol, the Company's ability to manage
the clinical trial, the proximity of patients to clinical sites and the
eligibility criteria for the study. Several factors, such as delays in planned
patient enrollment may result in increased costs and delays, or termination of
clinical trials prior to completion, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
COMPETITION
The drugs being developed by the Company compete with existing and new drugs
being created by pharmaceutical, biopharmaceutical and biotechnology companies.
Many of these companies, as well as university-related entities, both in the
United States and abroad are developing products based on improved drug delivery
technologies as well as novel therapeutics for the treatment of cancer,
infectious
11
<PAGE> 14
diseases and other indications targeted by the Company. Some of these
companies are active in the development of liposome and lipid-based research and
product development and many have financial and technical resources and
production and marketing capabilities substantially greater than those of the
Company. In addition, most such companies have significantly greater experience
than the Company in preclinical and clinical development activities and in
obtaining regulatory approval to manufacture and market biopharmaceutical
products.
The Company's two principal competitors in liposomal drug delivery are NeXstar
and TLC. NeXstar has regulatory approval for its liposomal amphotericin B
product in approximately 18 countries, primarily in Europe, and its product,
therefore, at present has a marketing advantage over AMPHOTEC, which has
approvals in four European countries and received those approvals after its
competitor. NeXstar reported sales of approximately $26.2 million in the six
months ended June 30, 1995, as compared to approximately $1.0 million by the
Company. In both cases, sales represent primarily revenues received for
amphotericin B products. TLC has submitted a NDA to the FDA and Market
Authorization Applications ("MAAs") in several European countries for a
liposomal amphotericin B product and has received approval for this product in
the U.K. TLC recently introduced its liposomal amphotericin B product as the
third entrant in the U.K. market at a price substantially below the price of
NeXstar's and SEQUUS' lipid-based antifungals. This could have an adverse effect
on AMPHOTEC's market penetration. Zeneca, the Company's distributor of AMPHOTEC,
has engaged in some price competition, and if increased price competition
results, it would have a material adverse effect on the Company's business,
financial condition and results of operations.
NeXstar has received an approvable letter from the FDA with respect to its
liposome-based daunorubicin product for use in first line therapy of KS.
Approval as a first line treatment may give it a competitive advantage over
DOXIL which has received an approvable letter for treatment of refractory KS.
Neither product has received approval to be marketed in the United States. To
the extent either company receives approval first, that company may enjoy a
significant competitive advantage. If physicians prescribe DOXIL for first line
therapy, DOXIL's limited approval may restrict reimbursement by certain
third-party payors.
SEQUUS believes that competition in all pharmaceutical products and in all forms
of drug delivery will continue to be intense. There can be no assurance that
other pharmaceutical companies will not develop more effective therapeutics or
drug delivery technologies than those of the Company or will not market and sell
their products more effectively than the Company.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
The Company's business may be materially adversely affected by the continuing
efforts of worldwide governmental and third-party payors to contain or reduce
the costs of health care in general and drugs in particular. For example, in
most foreign markets, including markets the Company is seeking to enter, pricing
of prescription pharmaceuticals is subject to government pricing control. In
these markets, once marketing approval is received, pricing negotiation could
take as long as another six to 12 months or longer. In the United States, there
has been, and the Company expects that there will continue to be, a number of
federal and state proposals to implement similar government pricing control. In
addition, an increasing emphasis on managed care and consolidation of hospital
purchasing in the United States has and will continue to put pressure on
pharmaceutical pricing. Such initiatives and proposals, if adopted, could
decrease the price that the Company receives for any products it may develop and
sell in the future and thereby have a material adverse effect on the Company's
business, financial condition and results of operations. Further, to the extent
that such proposals or initiatives have a material adverse effect on
pharmaceutical companies that are collaborators or prospective collaborators for
certain of the Company's potential products, the Company's ability to
commercialize its potential products may be materially adversely affected. In
addition, price competition may result from competing product sales, attempts to
gain market share or introductory pricing schemes, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's ability to commercialize biopharmaceutical products may depend in
part on the extent to which reimbursement for such products and related
treatments will be available from government health administration authorities,
private health insurers and other third-party payors. Significant uncertainty
exists as to the reimbursement status of newly approved health care products,
and third-party payors are
12
<PAGE> 15
increasingly challenging the prices charged for medical products and services.
There can be no assurance that any third- party insurance coverage will be
available to patients for any products developed by the Company. Government and
other third-party payors are increasingly attempting to contain health care
costs by limiting both coverage and the level of reimbursement for new
therapeutic products, and by refusing, in some cases, to provide coverage for
off-label uses of approved products, i.e., uses for indications as to which the
FDA has not granted marketing approval. Moreover, reimbursement may be denied
even for FDA- approved indications. If adequate coverage and reimbursement
levels are not provided by the government and third-party payors for the
Company's products, the Company's business, financial condition and results of
operations would be materially adversely affected.
NO ASSURANCE OF REGULATORY APPROVALS
The production and marketing of the Company's products are subject to rigorous
manufacturing requirements, preclinical testing and clinical trials and approval
by the FDA, by comparable agencies in other countries and by state regulatory
authorities prior to marketing. The process of conducting clinical trials and
obtaining regulatory approval for a product typically takes a number of years
and involves substantial expenditures. In addition, product approvals may be
withdrawn or limited for noncompliance with regulatory standards or the
occurrence of unforeseen problems following initial marketing. The Company has
not received regulatory approval in the United States for the commercial sale of
any of its principal products. The Company may encounter significant delays or
excessive costs in its efforts to secure and maintain necessary approvals or
licenses. Future federal, state, local or foreign legislative or administrative
acts could also prevent or delay regulatory approval of the Company's or its
licensees' products. There can be no assurance that the Company will be able to
obtain or maintain the necessary approvals for manufacturing or marketing the
Company's products for current or expanded indications or that the data it
obtains in clinical trials will be sufficient to establish the safety and
efficacy of its products. Even if the Company obtains regulatory approval for
any particular product, there can be no assurance that it will be economically
feasible for the Company to commercialize such product. In addition,
identification of certain side effects after a drug is on the market or the
occurrence of manufacturing problems could cause subsequent withdrawal of
approval, reformulation of the drug, additional preclinical testing or clinical
trials, and changes in labeling of the product. Failure to obtain or maintain
requisite governmental approvals, failure to obtain approvals of the clinically
intended uses or the identification of side effects could delay or preclude the
Company from further developing particular products or from marketing its
products, or could limit the commercial use of its products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
DOXIL Regulatory Status
In September 1995, SEQUUS received a FDA approvable letter for DOXIL as a
treatment for refractory KS in accordance with the FDA's procedures for
Accelerated Approval of New Drugs for Serious or Life-Threatening Illnesses. The
FDA may approve the marketing of DOXIL upon the satisfactory responses by the
Company and its supplier of doxorubicin to items regarding labeling and
chemistry, manufacturing and control. SEQUUS recently submitted a response to
the items raised by the FDA in the approvable letter and will work with its
supplier to assist the supplier in responding to certain chemistry items. The
Company cannot control the responses of its supplier to the FDA or the timing of
such responses, and there can be no assurance that such responses will be
adequate to meet the FDA's requirements or as to how long it will take to
satisfy such requirements. Accelerated approval regulations require that an
applicant study an investigational drug following product launch to verify and
describe the drug's clinical benefit. In the letter, the FDA acknowledged
SEQUUS' commitment to a post-marketing clinical trial designed to meet
accelerated approval requirements. There can be no assurance that final approval
will be granted on a timely basis, if at all, and under FDA accelerated approval
regulations, the FDA may withdraw approval following product launch if the
Company fails to show due diligence in conducting a post- marketing clinical
trial or if this clinical trial fails to demonstrate clinical benefit to the
FDA's satisfaction. There can be no assurance that the Company will be able to
conduct a satisfactory post-marketing clinical trial.
13
<PAGE> 16
The Company has submitted MAAs for DOXIL in 15 EU countries seeking approval to
use DOXIL in the first line treatment of KS. There can be no assurance that the
CPMP, which is composed of representatives from the respective regulatory bodies
in the EU countries, will determine that the Company's clinical data have
provided evidence of safety and efficacy in humans adequate to support approval
or that any of the MAAs will be approved on a timely basis, if at all.
AMPHOTEC Regulatory Status
SEQUUS has received marketing approval for AMPHOTEC in the U.K., the Republic of
Ireland ("Ireland"), Finland and Russia for treating systemic fungal infections
in patients for whom conventional amphotericin B is contraindicated due to
toxicity or renal failure or for whom previous antifungal therapy was
unsuccessful. The Company and Zeneca have submitted MAAs for AMPHOTEC in 11
other EU countries and similar applications in other countries. The EU
submissions were made in accordance with CPMP multistate procedures. On
September 13, 1995, the CPMP reviewed the Company's application for product
marketing approval. Germany, France, Spain, Greece and Luxembourg did not accept
the MAAs. Subsequently, the Company and Zeneca have withdrawn the application in
Germany. Based primarily on the CPMP review, SEQUUS believes national approvals
will be forthcoming in Austria, Denmark, Italy, The Netherlands, Portugal and
Sweden, although the CPMP is an advisory committee only, its vote is not binding
on member countries, and there can be no assurance that approvals will be
forthcoming on a timely basis, or at all. In addition, the CPMP review indicates
that Belgium can approve AMPHOTEC for marketing upon the receipt of additional
clinical information, although there can be no assurance that the Company will
be able to provide additional data or, if provided, that approval will be
forthcoming on a timely basis, or at all. If approvals are received, SEQUUS and
Zeneca intend to negotiate pricing in each of these countries, which the Company
believes will take as long as six to 12 months or longer following marketing
approval.
The Company continues to prepare a NDA for AMPHOTEC based upon certain data from
open label clinical trials. There can be no assurance that the Company's NDA for
AMPHOTEC will be accepted for filing by the FDA, that the FDA will determine
that the Company's NDA provides sufficient evidence of safety and efficacy in
humans to support FDA approval or that the NDA will be approved on a timely
basis, or at all.
DEPENDENCE ON THIRD-PARTY DISTRIBUTOR AND AGENTS; LIMITED MARKETING AND SALES
EXPERIENCE
In 1994, all of the Company's product revenues came from sales either to a
third-party distributor (Zeneca) or through third-party agents. Ninety-one
percent (91%) of the Company's product revenues in fiscal 1994 and 74% of
product revenues for the nine-month period ended September 30, 1995 came from
sales of AMPHOTEC to Zeneca. As a consequence of this current dependence on
Zeneca for the distribution of AMPHOTEC, and unless and until the Company
receives any approvals for and begins to sell DOXIL, the Company's future
revenues are largely dependent on Zeneca's success in selling AMPHOTEC in
approved markets and Zeneca's forecasts of future sales, including such factors
as timing of additional approvals for AMPHOTEC, if any, and inventory
requirements. The level of the Company's future sales of AMPHOTEC to Zeneca will
depend upon the rate at which the product penetrates the existing approved
markets of the U.K., Ireland, Finland and Russia, as well as the timing of
additional approvals in other countries, if any. Sales of AMPHOTEC to date have
been below expectations, and Zeneca and the Company have initiated discussions
regarding modifications to their agreement. The Company expects to ship no
additional product to Zeneca for the remainder of 1995, and may not ship product
to Zeneca during the first half of 1996. In addition, the Company may elect to
use certain Zeneca inventory for its clinical trials in return for partial
credits on future product sales to Zeneca. Additional terms under discussion
include the scheduling of regulatory milestone payments, possibly modifying the
territories in which Zeneca has distribution rights and implementing a mechanism
to give Zeneca greater pricing flexibility. It also is possible that other terms
of the agreement between the parties will be amended as appropriate.
Accordingly, there can be no assurance that Zeneca will elect to maintain
distribution rights to AMPHOTEC in any or all markets or that the terms of such
rights will remain the same. In addition, the delay in regulatory approvals of
AMPHOTEC in the EU countries will affect the timing, and any failure to obtain
regulatory approval would affect the receipt, of additional milestone payments
from Zeneca. There can be no assurance that these or other factors, including
the amount and timing of resources devoted to
14
<PAGE> 17
AMPHOTEC sales by Zeneca, will not lead to substantial fluctuations in the
Company's revenues from period to period. Any delays in the receipt, or denial,
of marketing approvals or material changes to the terms of the agreement with
Zeneca would have a material adverse effect on the Company's business, financial
condition and results of operations.
If FDA approvals are obtained in the United States, the Company expects to
market and sell its products directly, or possibly co- promote them with
strategic partners. In this regard, the Company has hired a sales force
experienced in the sale of pharmaceutical and biotechnology products of 22
individuals in anticipation of FDA approval to market DOXIL to physicians,
hospitals and clinics, including managed care providers. The Company intends to
increase the size of this staff if warranted. Developing such a marketing and
sales organization will require significant additional expenditures, management
resources and time. The Company has no experience marketing and selling its
products. In addition, the loss of certain key sales personnel would delay and
adversely affect the sales effort and would have a material adverse effect on
the Company's business, financial condition and results of operations. There can
be no assurance that the Company will be able to implement its marketing plan
successfully. If the Company enters into any marketing partnerships in the
United States, such as those currently under consideration, this would
significantly reduce the Company's margins on these products. There can be no
assurance that the Company will be able to establish such a marketing and sales
organization successfully or manage its marketing organization successfully.
PRODUCT LIABILITY
Testing, manufacturing, marketing and use of the Company's products will entail
substantial risk of product liability. The Company currently maintains product
liability insurance in an amount of $5.0 million per occurrence and $5.0 million
in the aggregate. A single product liability claim could exceed the $5.0 million
coverage limit, and there is a possibility of multiple claims. There can be no
assurance that the amount of insurance the Company has obtained against the risk
of product liability will be adequate, that the amount of such insurance can be
renewed or that the amount and scope of any coverage obtained will be adequate
to protect the Company in the event of a successful product liability claim. The
Company's business could be materially adversely affected by one or more
successful product liability claims.
In addition, if the Company receives approval to sell its products commercially
in the United States, the Company will have significantly greater risk in
connection with product liability claims due to the greater frequency of
lawsuits and higher claims paid in courts in the United States as opposed to
most other countries. The Company is required by governmental regulations to
test its products even after they have been sold and used by patients. As a
result of such tests, the Company may be required to, or may determine that it
should, recall products when most of such products have already been sold. Such
later testing and product recalls may increase the Company's potential exposure
to product liability claims.
DEPENDENCE ON THIRD-PARTY MANUFACTURER; MANUFACTURING RISKS
The Company's present internal manufacturing capabilities are limited to
producing products for preclinical development. The Company is dependent on Ben
Venue Laboratories, Inc. ("Ben Venue"), a United States-based contract
manufacturer, to manufacture commercial- scale quantities of AMPHOTEC and DOXIL
pursuant to supply agreements. Under these agreements the Company has agreed to
indemnify Ben Venue against certain liabilities. As of September 1995, the
Company and Ben Venue have manufactured 13 commercial-scale batches of DOXIL,
including the three registration batches which are required as part of the FDA's
NDA approval process. There can be no assurance that Ben Venue will continue to
meet FDA or product specification standards or that the Company's manufacturing
goals can be met in a consistent and timely manner. There is only a limited
number of other manufacturers with the capability of manufacturing AMPHOTEC and
DOXIL, and any alternative manufacturer would require regulatory qualification
to manufacture the product which would likely take several months. The Company
has not qualified alternative manufacturers for its products. In the event of
any interruption of supply from the contract manufacturer due to regulatory or
other causes, there can be no assurance that the Company could make alternative
manufacturing arrangements on a timely basis, if at all. Such an interruption
would have a material adverse effect on the Company's business, financial
condition and results of operations.
15
<PAGE> 18
The Company relies on certain suppliers of key raw materials to provide an
adequate supply of such materials for production of finished products. Certain
materials are purchased from single sources. In particular, amphotericin B and
doxorubicin are currently each supplied to the Company by single sources, and
the number of alternative sources is severely limited. For example, the Company
has a five-year, sole-source supply agreement with Meiji Seika Pharma
International Ltd. ("Meiji Seika") to supply the Company with doxorubicin for
DOXIL. There can be no assurance that the doxorubicin supplied under the
agreement will meet FDA requirements applicable to DOXIL, which could delay or
prevent future sales of DOXIL, if any, by the Company. Although the Company has
supply agreements in place with the suppliers of its key raw materials, the
number of alternative qualified suppliers of key raw materials required for the
manufacture of AMPHOTEC and DOXIL is limited. The disqualification or loss of a
sole source supplier could have a material adverse effect on the Company because
of a delay or inability in obtaining and qualifying an alternate supplier and
the costs associated with such delay and in finding and qualifying an alternate
supplier. Regulatory requirements applicable to pharmaceutical products tend to
make the substitution of suppliers costly and time consuming. The unavailability
of adequate commercial quantities, the loss of a supplier's regulatory approval,
the inability to develop alternative sources, a reduction or interruption in
supply or a significant increase in the price of materials could have a material
adverse effect on the Company's ability to manufacture and market its products
and its results of operations.
PATENTS AND TRADE SECRETS
There has been increasing litigation in the biomedical, biotechnology and
pharmaceutical industries with respect to the manufacture, use and sale of new
therapeutic products that are the subject of conflicting patent rights. A
substantial number of patents relating to liposomes have been issued to, or are
controlled by, other public and private entities, including academic
institutions. In addition, others, including competitors of SEQUUS, may have
filed applications for, or may have been issued patents or may obtain additional
patents and proprietary rights relating to products or processes competitive
with those of SEQUUS. The patent positions of pharmaceutical, biopharmaceutical,
biotechnology and drug delivery companies, including SEQUUS, are uncertain and
involve complex legal and factual issues. Additionally, the coverage claimed in
a patent application can be significantly reduced before the patent is issued.
As a consequence, the Company does not know whether any of its patent
applications will result in the issuance of patents or whether any of the
Company's patents will provide significant proprietary protection or will be
circumvented or invalidated. Since patent applications in the United States are
maintained in secrecy until patents issue, and since publication of discoveries
in the scientific or patent literature often lag behind actual discoveries, the
Company cannot be certain that it was the first inventor of inventions covered
by its pending patent applications or that it was the first to file patent
applications for such inventions. Moreover, the Company may have to participate
in interference proceedings to determine priority of invention, which could
result in substantial cost to the Company, even if the eventual outcome is
favorable to the Company. There can be no assurance that any patents owned or
controlled by the Company will protect SEQUUS against infringement litigation or
afford commercially significant protection of the Company's technology. Almost
none of the Company's patents has been tested in court to determine their
validity and scope. Moreover, the patent laws of foreign countries differ from
those of the United States and the degree of protection, if any, afforded by
foreign patents may, therefore, be different.
In November 1991, the Company received a letter from TLC bringing to SEQUUS'
attention TLC's United States Patent No. 5,059,591 (the "'591 Patent")
containing claims directed to amphotericin B/sterol compositions and their
method of use. Subsequently, SEQUUS' patent counsel delivered an opinion to the
Company that, among other things, AMPHOTEC does not infringe any valid claim of
the '591 Patent. However, no assurance can be given that TLC will not make a
claim against SEQUUS with respect to the '591 Patent, which could have a
material adverse effect on the Company's ability to commercialize AMPHOTEC.
The Company has a practice of monitoring patents and other developments in the
liposome field. To the extent that the Company becomes aware of patents of other
parties which the Company's processes or products might infringe, it is the
Company's practice to seek review of such patents by the Company's patent
counsel. With respect to the Company's DOXIL product, the Company is aware of
TLC's United States Patent No. 5,077,056 relating to the loading of therapeutic
drugs into liposomes. The Company's patent counsel has rendered an opinion that
its DOXIL product would not infringe any valid claim of this patent. The Company
is also aware of TLC's United States Patent No. 5,008,050 relating to reducing
16
<PAGE> 19
liposome size by extrusion, and NeXstar's United States Patent No. 5,435,989
relating to targeting of liposomes to solid tumors. The Company's patent counsel
has rendered an opinion that its DOXIL product would not infringe any valid
claim of either of these patents. In addition, the Company is aware of certain
patents covering lyophilization of liposomes. Neither of the Company's principal
products involves the lyophilization of liposomes.
Generally, the Company refers patents to its patent counsel for review. Even if
the Company's patent counsel renders advice that the Company's products do not
infringe any valid claim under such patents, there can be no assurance that any
third party will not commence litigation to enforce such patents or that the
Company will not incur substantial expense, or that it will prevail, in any
patent litigation.
The Company has been required to defend itself in patent litigation in the past
and the uncertainties inherent in any other lawsuit that may be commenced in the
future with respect to any alleged patent infringement by the Company make the
outcome of any such litigation difficult to predict. The Company may decide to
pay a royalty or make other concessions to settle a patent dispute. In the event
of litigation, there can be no assurance that the Company will be successful. A
judgment adverse to the Company in any such litigation could materially
adversely affect the Company's business, financial condition and results of
operations, and the expense of such litigation may be substantial, whether or
not the Company is successful in such litigation.
The Company relies on unpatented trade secrets and proprietary know-how to
protect certain aspects of its production and lipid purification technologies
and other proprietary information. Although SEQUUS has entered into
confidentiality agreements with its employees, consultants, representatives and
other business associates, there can be no assurance that trade secrets and
know-how will remain undisclosed or that similar trade secrets or know-how will
not be independently developed by others.
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING
The Company has incurred losses in each year since its inception and has
accumulated approximately $123.7 million in net losses through September 30,
1995. The Company to date has generated limited revenues. There can be no
assurance that revenues from product sales will be significant or sufficient to
fund operations. Owing to expenditures associated with self-funded research,
preclinical and clinical programs, marketing expenses and other activities
related to seeking regulatory approval and achieving commercialization of its
products, the Company expects operating losses to continue for at least several
years. Additional financing is likely to be required to fund the Company's
continuing operations and product and business development activities in the
form of debt or equity securities or bank financing. There can be no assurance
that such financing will be available on acceptable terms, if at all. The
unavailability of such financing could delay or prevent the development,
testing, regulatory approval, manufacturing or marketing of some or all of the
Company's products and could have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT TRANSITION
The Company's success depends largely upon its ability to attract and retain
qualified scientific, engineering, manufacturing, sales and marketing and
management personnel. The Company faces competition for such personnel from
other companies, academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful in
hiring or retaining such personnel.
In the summer of 1995, the Board of Directors appointed I. Craig Henderson, M.D.
as Chairman of the Board and Chief Executive Officer and L. Scott Minick as
President, Chief Operating Officer and a director of the Company. In addition,
Nick V. Arvanitidis, Ph.D., a founder of the Company who served as Chairman and
Chief Executive Officer, retired from the Company and from the Board of
Directors; Peter V. Leigh resigned his position as Vice President and Chief
Financial Officer; and Richard E. Mamelok, M.D. resigned his position as Vice
President and Medical Director. The new management team will face significant
challenges in transitioning the Company from research and development to
manufacturing and marketing if the Company's products obtain regulatory
approval. There can be no assurance that the management team can successfully
manage the transition of the Company's business.
17
<PAGE> 20
HAZARDOUS MATERIALS
As with many biopharmaceutical companies, the Company's research and development
involves the controlled use of hazardous materials and chemical compounds. There
can be no assurance that the Company's safety procedures for handling and
disposing of such materials will comply with the standards prescribed by
federal, state and local regulations or that it will not be subject to the risk
of accidental contamination or injury from these materials. In the event of such
an accident, the Company could be held liable for any damages that result and
any such liability could materially adversely affect the Company's business,
financial condition and results of operations.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock, like the stock prices of many publicly
traded biopharmaceutical companies, has been and may continue to be highly
volatile. A variety of events, both concerning and unrelated to the Company and
the biopharmaceutical industry, such as the level of sales of the Company's
products, problems with clinical development of the Company's potential
products, announcements of technological innovations, regulatory developments or
new commercial products by the Company or its competitors, government
regulation, delays or other developments relating to regulatory approvals,
developments or disputes relating to patent or proprietary rights, product
liability claims, as well as period-to-period fluctuations in the Company's
financial results, may have a significant negative impact on the market price of
the Common Stock. Although the Common Stock trades on the Nasdaq National
Market, the trading volume has fluctuated and at times has been quite low. Any
large sale of securities of the Company could have a significant adverse effect
on the market price of the Common Stock.
18
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 4.
Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------
The Company held its Annual Meeting of Stockholders on September 12, 1995.
At the meeting, the stockholders considered the items described below:
Each of the nominees for election as a director was elected as follows:
Number of Votes Cast
--------------------
Name For Against Abstain
---- --- ------- -------
I. Craig Henderson, M.D. 17,952,802 -- 453,590
L. Scott Minick 17,950,886 -- 455,506
Robert G. Faris 17,943,527 -- 462,865
Richard C.E. Morgan 17,953,027 -- 453,365
E. Donnall Thomas, M.D. 17,952,127 -- 454,265
The stockholders voted to approve an amendment to the Company's Certificate
of Incorporation to increase the number of shares of Common Stock authorized
from 35,000,000 to 45,000,000. The amendment was approved by a vote of
17,439,779 shares for, 771,772 shares against and 69,460 shares abstaining.
The stockholders voted to approve amendments to the Company's 1987
Employee Stock Option Plan to increase the number of shares reserved for
issuance from 3,350,000 to 5,000,000 and to impose an annual limit on the
number of shares with respect to which awards may be made to any one
participant. The amendments were approved by a vote of 8,376,691 shares for,
3,927,976 shares against and 78,037 shares abstaining.
The stockholders voted to approve an amendment to the Company's 1990
Director Stock Option Plan to increase the number of shares reserved for
issuance from 350,000 to 600,000. The amendment was approved by a vote of
9,371,025 shares for, 3,234,832 shares against and 89,897 shares abstaining.
The stockholders voted to approve an amendment to the Company's Employee
Stock Purchase Plan to increase the number of shares reserved for issuance
from 150,000,000 to 250,000. The amendment was approved by a vote of 11,886,143
shares for, 740,282 shares against and 69,329 shares abstaining.
ITEM 6.
Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K. During the three months ended September 30, 1995,
no reports on Form 8-K were filed. On October 13, 1995, the Company
filed a Report on Form 8-K in connection with the public offering of
3.9 million shares of Common Stock.
19
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEQUUS PHARMACEUTICALS, INC.
-----------------------------
(Registrant))
Date: November 13, 1995 By: /s/ Donald J. Stewart
-----------------------------
Donald J. Stewart
Vice President, Finance
(Principal Accounting Officer)
20
<PAGE> 23
EXHIBIT INDEX
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 4,543
<SECURITIES> 8,118
<RECEIVABLES> 219
<ALLOWANCES> 0
<INVENTORY> 938
<CURRENT-ASSETS> 14,449
<PP&E> 3,380
<DEPRECIATION> 0
<TOTAL-ASSETS> 18,093
<CURRENT-LIABILITIES> 4,922
<BONDS> 0
<COMMON> 5
0
2
<OTHER-SE> 13,164
<TOTAL-LIABILITY-AND-EQUITY> 18,093
<SALES> 1,073
<TOTAL-REVENUES> 1,164
<CGS> 279
<TOTAL-COSTS> 25,507
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,872)
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> 0
</TABLE>
