<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3031834
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
960 Hamilton Court, Menlo Park, CA 94025
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 323-9011
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on the Nasdaq
National Market on January 31, 1996, was $487,060,000. Solely for the purposes
of this calculation, each officer and director of the registrant is deemed to be
an affiliate.
The number of shares of Common Stock outstanding as of January 31, 1996, was
26,845,494.
DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K Part
-------- --------------
Portions of registrant's definitive
Proxy Statement to be filed with the
Securities and Exchange Commission on or
prior to April 29, 1996 and to be used
in connection with the Annual Meeting of
Stockholders. III
<PAGE> 2
PART I
ITEM 1. BUSINESS
OVERVIEW
SEQUUS Pharmaceuticals, Inc. ("SEQUUS" or the "Company") is a leader in
the development, manufacture, marketing and sale of liposome and lipid-based
biopharmaceutical products primarily to treat cancer and certain fungal
infections. In November 1995, SEQUUS received marketing clearance from the U.S.
Food and Drug Administration ("FDA") for its proprietary anticancer drug
DOXIL(R) (doxorubicin HCl liposome injection) product for the treatment of
Kaposi's sarcoma ("KS") in AIDS patients whose KS has progressed on prior
chemotherapy or in patients who are intolerant to such therapy. In December
1995, the Company launched DOXIL in the United States, using its own marketing
and sales force. SEQUUS recently received a unanimous opinion from the European
Committee on Proprietary and Medicinal Products ("CPMP") recommending marketing
authorization of DOXIL under the tradename CAELYX (TM), in the 15 member states
of the European Union ("EU"), for both first-line and second-line treatment of
AIDS-KS in patients with low CD4 counts and extensive mucocutaneous or visceral
disease. The Company is currently conducting clinical trials for the use of
DOXIL to treat certain solid tumors, including ovarian cancer, breast cancer,
liver cancer, and prostate cancer.
AMPHOTEC(TM) (amphotericin B colloidal dispersion injection), the
Company's first approved product, is being marketed in Denmark, Finland, Ireland
Russia, Singapore and the United Kingdom ("U.K.") and has also received
marketing clearance in Brazil and the Czech Republic for treating systemic
fungal infections in patients for whom conventional therapy (amphotericin B) is
contraindicated due to toxicity or renal failure or for whom previous antifungal
therapy was unsuccessful. The drug is being marketed in Europe under the
tradename AMPHOCIL(TM). In November 1995, SEQUUS filed a New Drug Application
("NDA") with the FDA for AMPHOTEC, which was accepted for filing by the FDA in
January 1996. The NDA seeks marketing authorization for AMPHOTEC in the
treatment of invasive aspergillosis in patients where renal impairment or
unacceptable toxicity precludes the use of conventional therapy in effective
doses and in patients where prior systemic antifungal therapy has failed.
The Company is further focusing on the development of additional
oncology and other pharmaceutical products utilizing its proprietary drug
delivery technology, STEALTH liposomes.
THE COMPANY'S FUTURE OPERATIONS, FINANCIAL PERFORMANCE, BUSINESS AND
SHARE PRICE MAY BE AFFECTED BY THE FACTORS DESCRIBED UNDER "RISK FACTORS" ON
PAGES 19 TO 26.
TECHNOLOGY
Liposomes are microscopic spheres composed of lipid membranes surrounding
internal aqueous compartments. When liposomes were first characterized as
potential drug carriers in the mid-1960s, scientists believed that these lipid
vesicles showed promise for improving intravenous drug delivery, theorizing that
liposomes would reduce drug toxicity by delivering entrapped drug to diseased
sites in the
------------------------
STEALTH(R) is a registered trademark of SEQUUS and is used throughout
this Form 10-K to describe the Company's proprietary long-circulating liposomes.
SEQUUS has filed for the registration of the AMPHOTEC(TM) tradename used through
this document to describe the Company's AMPHOTEC (amphotericin B colloidal
dispersion injection) product. AMPHOTEC is marketed under the trade name
AMPHOCIL(TM) outside of the U.S. and is also known as ABCD. DOXIL(R) is a
registered trademark of SEQUUS and is used throughout this document to describe
the Company's DOXIL (doxorubicin HCl liposome injection) product. DOX-SL is also
called CAELYX(TM), DOX-SL(TM), and S-Dox. This document also includes trademarks
of companies other than SEQUUS.
<PAGE> 3
body and avoiding healthy tissue. As development of potential liposome products
progressed, two serious limitations emerged. First, in many cases these
conventional liposomes were attacked by proteins in the blood, causing rupture
or premature release of entrapped drug into the bloodstream. Second, liposomes
that survived rupture were quickly removed from circulation, primarily by the
liver.
While working on the development of liposome-based drug formulations
that might benefit from the reduced toxicity potentially afforded by
conventional liposomes, the Company also recognized that the key to improved
liposome performance was to solve the two problems that limited the utility of
liposomes for intravenous drug delivery -- premature drug release and rapid
entrapment in the reticuloendothelial system ("RES") immune surveillance cells.
As a result, SEQUUS developed a unique patented liposome capable of avoiding
breakdown in the bloodstream and clearance by the body's filtering system. This
was achieved by attaching polyetheleneglycol ("PEG") to the surface of the
liposomes to form the Company's proprietary long-circulating STEALTH liposomes.
Clinical data demonstrate that the chemotherapeutic drug, doxorubicin,
encapsulated in STEALTH liposomes has a circulating half-life of approximately
50 hours compared to a half-life of 15 minutes for doxorubicin and four hours
for daunorubicin encapsulated in conventional liposomes. This increased
half-life enables STEALTH liposomes to concentrate and release the drug in areas
of the body where new blood vessels are being formed or where blood vessels have
been damaged and are leaky, such as tumors and sites of inflammation and injury,
thereby providing a potential to enhance drug efficacy through targeted delivery
of drug to the site of disease. At the same time, STEALTH liposomes preserve the
safety advantages of conventional liposomes by significantly reducing peak drug
concentration levels in the blood and certain tissues, thereby reducing the
serious side effects, such as heart damage, of some unencapsulated therapeutic
agents.
An additional significant benefit of STEALTH technology is that drugs
can be attached to the PEG on the surface of the liposomes. The Company believes
that this should enable it to develop additional drug delivery products using
its STEALTH technology.
The Company uses additional liposome and lipid-based technology in the
development of its proprietary products. For example, AMPHOTEC is a novel
lipid-based colloidal dispersion of amphotericin B, which forms a stable
suspension of the active drug. The Company believes the stability of the
formulation allows a reduction in manufacturing costs, longer shelf-life and
easier preparation of the product prior to administration relative to other
lipid-based products.
BUSINESS STRATEGY
The Company's strategy is to build an integrated biopharmaceutical
company that develops, manufactures, markets and sells innovative drug
formulations of existing and new therapeutics based primarily on proprietary
STEALTH liposome technology. The Company intends to focus its near-term efforts
on: (i) the commercialization of DOXIL and, following the receipt of FDA
marketing clearance, of AMPHOTEC in the U.S. and selected international markets;
(ii) the development of additional markets for DOXIL and AMPHOTEC by
establishing clinical efficacy in a range of additional indications; (iii) the
development of new products in the SEQUUS pipeline that utilize STEALTH
liposomes; and (iv) the expansion of the STEALTH platform, either alone or
through strategic alliances, to create additional proprietary products and drug
delivery technologies. In addition, SEQUUS is emphasizing the establishment of a
strong marketing and sales capability in the United States and the creation of
marketing or co-promotion alliances as appropriate.
SEQUUS currently employs a sales force of 25 professionals to market
DOXIL, which the Company expects to expand if warranted. This group is
experienced in the sale of pharmaceutical products to physicians, hospitals and
clinics, including managed care providers, and in facilitating reimbursement
with third-party payors. Outside of the United States, the
2
<PAGE> 4
Company's strategy is to market its products in conjunction with corporate
partners. In addition to marketing its own proprietary products, SEQUUS may
in-license rights to other products applicable to its target markets.
SEQUUS currently uses a contract manufacturer for the commercial-scale
production of its products, thus deferring the need to invest in manufacturing
infrastructure in the near term while retaining future flexibility.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The current status of the Company's principal products, potential products
under development and research projects is discussed below.
DOXIL FOR TREATING REFRACTORY KS
Patients with AIDS have an increased incidence of developing certain
cancers. The most common cancer in this group of patients is KS, a tumor that
occurs only rarely in the general population. The most characteristic features
of KS are disfiguring soft nodules or tumors (usually reddish purple or brown).
Such tumors frequently occur on the surface of the skin, including the face,
feet or legs, and can cause painful swelling or limit mobility. Less frequently,
KS involves vital organs such as the lung where it may cause shortness of
breath, and the gastrointestinal tract where it may cause internal bleeding.
Interferon is currently the only FDA-approved treatment for KS, but it
is effective only for patients who have less advanced forms of AIDS. Interferon
is associated with side effects such as fever and flu-like symptoms. When KS
patients are no longer responsive to interferon, they are commonly treated with
the same chemotherapy agents that are used for other types of cancers. The ones
used most commonly for KS include generic doxorubicin, bleomycin, and
vincristine in combination ("ABV") or bleomycin and vincristine in combination
("BV"). The combination of all three drugs generally results in side effects
such as neutropenia (decrease in white blood cells), nausea, vomiting, hair
loss, rash, numbness and tingling of the hands and feet and increased
susceptibility to bleeding because of a reduction in platelets. Patients with
AIDS are often more sensitive to the side effects of chemotherapy than non-HIV
patients, and this is often manifested as an increased incidence of infection or
bleeding when chemotherapy is given. For this reason, the doses of these drugs
must frequently be reduced in order to limit side effects. There is no
established therapy for refractory KS.
The Company has conducted clinical trials of DOXIL, a STEALTH liposome
formulation of generic doxorubicin. To support the Company's NDA filed with the
FDA in September 1994, the Company submitted data from 77 refractory KS patients
from an open label Phase II clinical trial. A subset of these, the evaluable
patients, demonstrated a tumor response rate ranging from 27% to 48%, depending
on the method of assessment. The Company also included safety data on 705
patients in the NDA which showed that DOXIL was generally well tolerated with
manageable side effects. See "-- Results of KS Clinical Trials."
In November 1995, SEQUUS received marketing clearance from the FDA for
the use of DOXIL in treating AIDS-KS patients whose KS has progressed on prior
chemotherapy or in patients who are intolerant to such therapy. In December
1995, the Company launched DOXIL in the United States, using its own marketing
and sales force. The marketing clearance was provided in accordance with the
FDA's procedures for Accelerated Approval of New Drugs for Serious or Life
Threatening Illnesses. Accelerated approval regulations require that an
applicant study an investigational drug following product launch to verify and
describe the drug's clinical benefit. The FDA has acknowledged the Company's
commitment to
3
<PAGE> 5
a post-marketing clinical trial designed to meet accelerated approval
requirements. Under FDA accelerated approval regulations, the FDA may withdraw
approval following product launch if the Company fails to show due diligence in
conducting post-marketing studies or if these studies fail to demonstrate
clinical benefit to the FDA's satisfaction.
In February 1996, the Company received a unanimous opinion from the
European CPMP recommending marketing authorization of DOXIL under the tradename
CAELYX, in the 15 member states of the EU, for both first-line and second-line
treatment of AIDS-KS in patients with low CD4 counts and extensive mucocutaneous
(skin and mucus membrane) or visceral disease. The U.K. is acting as the
sponsoring country (rapporteur) for DOXIL. Prior to product launch, the
Brussels-based European Commission will formally issue the license to market the
SEQUUS product. In addition, the Company will enter into pricing discussions
with the appropriate agencies in those European countries where pricing approval
is required. Following the receipt of the license, DOXIL will be cleared for
marketing throughout the EU, i.e., Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain,
Sweden, and the United Kingdom.
DOXIL FOR TREATING SOLID TUMORS
Most solid tumors are treated by surgery, radiation, chemotherapy or a
combination of these therapies. When used appropriately, chemotherapy can
relieve suffering and sometimes prolong life. However, only a very small
percentage of patients with cancer are cured by the use of chemotherapy alone.
This is especially true for common solid tumors, such as cancer of the lung,
breast, ovary and colon. The drugs used are associated with considerable
toxicity. The side effects include increased susceptibility to infection due to
a reduction in white blood cells, nausea, vomiting, hair loss, rash, numbness
and tingling of the hands and feet and increased susceptibility to bleeding due
to a reduction in platelets. In almost all cases where chemotherapy is
effective, a combination of drugs is used. Generally, the drugs chosen to be
used in combination chemotherapy are those that have different side effects. For
example, the combination might include two drugs that are known to cause tumor
shrinkage, one of which causes a depression of the white blood cell count but
has little effect on the nervous system while the other may have a lesser effect
on the white blood cell count but causes numbness and tingling. Because these
drugs have different side effects, each can be used at a higher dose than if two
drugs were used that had the same side effect. Because of the limited benefits
of chemotherapy for most solid tumors and the toxicities of the treatments used,
physicians are constantly searching for drugs that are more effective, less
toxic, or, ideally, both more effective and less toxic.
The Company is conducting clinical trials on the use of DOXIL for a
number of solid tumors described below. The clinical results reported below are
preliminary and may not be indicative of results that may be obtained in an
expanded patient population.
- Ovarian cancer. Ovarian cancer is the fifth most common tumor in
women in the United States according to the American Cancer Society,
which estimated a 1995 annual incidence of 26,600 in the United
States . Surgical removal of he ovary is typically performed in
early stages of the disease, sometimes in conjunction with
chemotherapy. Chemotherapy is typically used in advanced stages of
the disease, often without surgery. Chemotherapy has been shown to
reduce symptoms and prolong the survival of patients with this
cancer. The most effective drugs, and those now used most often in
first line treatment, are cisplatin or carboplatin and Taxol,
usually in combination. Doxorubicin is also used against ovarian
cancer, but is not considered as effective. The Company recently
completed patient enrollment in a Phase II trial of DOXIL as
single-agent therapy in 35 patients with advanced ovarian cancer who
had failed one or more prior courses of chemotherapy, including
platinum- and taxane-based regimens. Patients were treated with
doses of 50 mg/M2 every three weeks. The Company recently initiated
a second Phase II trial in patients with advanced ovarian cancer;
DOXIL is being administered in combination with another anticancer
drug in this trial.
4
<PAGE> 6
- Breast cancer. Breast cancer is the most common tumor in women in
the United States according to the American Cancer Society, which
estimates that in 1995 the annual incidence in the United States was
approximately 182,000. Standard therapy may involve a mastectomy
(removal of the mammary gland), a lumpectomy (removal of the tumor)
and radiation therapy and chemotherapy, or some combination of
these. Among solid tumors, breast cancer is generally considered one
of the most responsive to chemotherapy. There are currently seven
drugs approved by the FDA to treat breast cancer: (in order of
relative efficacy) cyclophosphamide, doxorubicin, Taxol, thiotepa,
methotrexate, 5-fluorouracil and vinblastine. The most common
combinations of drugs are cyclophosphamide, methotrexate, and
5-fluorouracil and cyclophosphamide and doxorubicin. Taxol is the
most recently approved drug. Currently it is approved only as a
second line treatment for patients who have failed doxorubicin
therapy. The Company is currently conducting two Phase II clinical
trials in patients with newly diagnosed metastatic disease, or
recurrent, or refractory disease following failure of chemotherapy.
One trial is being conducted in Europe; multiple-dose cohorts are
being used with doses of DOXIL ranging between 45-60 mg/M2 at
intervals of every three to four weeks. The second trial was
recently initiated in the U.S., with fixed doses of DOXIL in
combination with cyclophosphamide.
- Liver cancer. Although relatively uncommon in the United States,
primary liver cancer results in the largest number of cancer deaths
in parts of Asia and Africa. Currently, doxorubicin is the only
recommended chemotherapeutic regime for the treatment of primary
liver cancer. Surgery is indicated in only a small proportion of
patients. The Company is sponsoring a Phase I/II dose escalation
clinical trial. Doses range from 10 to 80 mg/m2 every three to four
weeks; the trial is prospectively designed to study four cohorts
with varying degrees of liver dysfunction.
- Prostate cancer. This is the most common cancer among men in the
United States. The American Cancer Society estimates that in 1995,
the annual incidence in the United States was approximately 244,000.
The most commonly used therapies are surgery, radiation or a
combination of both. Chemotherapy is used relatively infrequently
due to its toxicity and the generally elderly patient population.
Although prostate cancer is responsive to a variety of
chemotherapies, it has not been shown that these will substantially
prolong survival. The most effective agents include cisplatin,
doxorubicin, estramustine phosphate, and 5-fluorouracil. At present
there are no standard or widely accepted combinations. The Company
has initiated two Phase II trials treating a certain type of
prostate cancer with DOXIL.
- Small cell lung cancer. Among the various types of cancer of the
lung, this sub-type has the worst prognosis but, at the same time,
is most sensitive to chemotherapy. Based on American Cancer Society
data, the Company estimates that the annual incidence of small cell
carcinoma was approximately 42,500 in the United States in 1995, and
that almost all of these patients would be treated with
chemotherapy. Combinations of drugs will both decrease patient
symptoms and prolong survival. The most common drugs used for this
disease are cisplatin, etoposide, doxorubicin, cyclophosphamide and
mitomycin C. Most combinations used today include cisplatin and
etoposide. However, a combination of cyclophosphamide, doxorubicin
and cisplatin is also widely used. The Company has initiated a Phase
II trial of DOXIL in patients with small cell lung cancer who have
failed prior chemotherapy.
- Other solid tumors. Small numbers of additional patients with
different types of solid tumors have also been treated with DOXIL.
Antitumor responses were observed in renal cancer, mesothelioma and
head and neck cancer. No responses to DOXIL were observed in
patients with non-small cell lung cancer. The Company believes that
the numbers of patients involved in these studies are too small for
any conclusions to be drawn.
5
<PAGE> 7
DOXIL has been studied in more than 250 patients with many types of
solid tumors, including those listed above. The side effect from doxorubicin
that limits how much of the drug may be given, and thus limits the amount of
drug that can reach the tumor, is suppression of the patient's white blood cell
count. For this reason, it is standard medical practice to reduce the dose of
doxorubicin whenever a patient demonstrates very low white blood cell counts
during treatment. In addition, since most of the drugs used to treat cancer have
a similar effect on the white blood cell count, the dose of each drug must be
reduced when several drugs are used together. Preliminary clinical trial results
indicate that there is relatively less depression of the white blood cell counts
from treatment with DOXIL compared to doxorubicin. Instead, the side effects
that limits how much DOXIL can be given are mucositis (mouth sores) and
palmar-plantar erythema (reddening of the skin; sometimes swelling and pain in
the hands, feet, and other pressure points; and, infrequently, loss of
superficial skin). The Company believes that this difference in the principal
toxicity from using DOXIL compared to doxorubicin reflects the change in
distribution of DOXIL with relatively less going to the bone marrow where white
blood cells are made and more going to other areas of the body. Because of the
long circulation time of DOXIL, variations in palmar-plantar erythema seen in
individual patients are controlled by increasing the time-period between doses
rather than by reducing dose. DOXIL is also associated with less hair loss,
nausea and vomiting than might be expected with a conventional dose-schedule of
doxorubicin.
SEQUUS plans to initiate Phase II clinical trials of combination
DOXIL/Taxol therapy in patients afflicted with metastatic breast cancer. The
Company also plans to initiate Phase II clinical trials with DOXIL for the
treatment of certain tumors refractory to doxorubicin.
RESULTS OF KS CLINICAL TRIALS
The pivotal trial used by SEQUUS in its NDA included 383 patients
treated with DOXIL alone at a dose of 20 mg/M2 once every three weeks. A cohort
of 77 patients with advanced KS was retrospectively identified as having disease
progression while receiving conventional chemotherapy or as being intolerant to
this conventional therapy. Forty-nine of the 77 patients had received prior
doxorubicin therapy. For most cancers there are widely accepted methods of
assessing response to therapy. This is not true for KS because it was so rarely
seen before the AIDS epidemic. In response to differing opinions regarding the
best way to assess KS response to treatment, SEQUS used two methods in compiling
its NDA. SEQUUS used both methods in compiling its NDA: the "investigator
assessment" based on the treating physician's assessment of changes in the
lesions on the patient's entire body and the "indicator lesion" assessment based
on changes in the characteristics of up to five representative lesions. As
reviewed by the FDA, 34 patients were evaluable using the investigator
assessment of response. Of these, 27% achieved a partial response (primarily due
to flattening of at least 50% of previously raised lesions), 29% had stable
disease, and 44% had disease progression. Based on the FDA review using the
indicator lesion assessment, 42 patients were evaluable. Of these, 48% achieved
a partial response (primarily based on flattening of at least 50% of previously
raised lesions), 26% had a stable disease, and 26% had disease progression.
Similar results were also observed in those patients who received doxorubicin as
part of their prior systemic chemotherapy. In these patients, six of 20
evaluable patients achieved a partial response using the investigator
assessment, and 12 of 23 evaluable patients achieved a partial response using
the indicator lesion method of assessment. Generally, a "partial" response is a
reduction in the size of a lesion or tumor by at least 50%, and a "complete"
response is a reduction in the size of a lesion or tumor so that there is no
measurable tumor remaining.
Many of the patients in this study had received prior doxorubicin
treatment and had become refractory to doxorubicin. The response rate to DOXIL
among these patients was as least as good as that for patients who had not
previously received doxorubicin. This observation occurred in patients whose KS
lesions had grown while receiving doxorubicin immediately before beginning
treatment with DOXIL. The Company plans to pursue this observation in other
tumor types.
6
<PAGE> 8
The side effects observed in the patients treated with DOXIL were
somewhat difficult to evaluate because these patients were usually receiving
other drugs and had many symptoms from their underlying AIDS. The major side
effect of DOXIL was a decrease in white blood cell count in 60% of the patients.
Investigators scored this leukopenia as "severe" for 26% of the patients. Only
1.5% of the patients discontinued treatment due to the effect of DOXIL on the
white blood cells. However, only 5% of the patients had sepsis; of this 5%, the
investigators felt that the infection was related to treatment with DOXIL in
only 0.7% of the patients. There was also an acute reaction in some patients
consisting of flushing, facial swelling, chills, headache, hair loss, nausea,
vomiting and sometimes a fall in blood pressure. Approximately 3.4% of the
patients experienced palmar plantar erythema, and approximately 4.3% of the
patients experienced cardiac events that were thought to be possibly or probably
related to DOXIL. None of the patients who experienced palmar plantar erythema
withdrew from the study due to this adverse event.
In a study to determine the cardiotoxicity of DOXIL, five patients with
KS who had received cumulative doses of DOXIL underwent heart biopsies. The
Company believes these biopsies demonstrated little or no doxorubicin-induced
cardiac damage. This is in contrast to the higher degree of damage historically
demonstrated with similar cumulative doses of doxorubicin alone.
Subsequent to the submission of the NDA, SEQUUS completed two Phase III
trials of DOXIL as first line therapy in AIDS-KS patients. In one of these
trials, patients were randomized to receive either DOXIL or ABV (Adriamycin,
Bleomycin and Vincristine, or "ABV"), and in the other the patients received
either DOXIL or BV (Bleomycin and Vincristine, or "BV"). In a poster presented
at the December 1995 American Society of Hematology meeting, data from the
DOXIL-ABV trial were shown. A total of 258 patients were enrolled in the trial;
of these, 239 patients (131 DOXIL and 108 ABV) received more than two cycles of
therapy and were considered assessable for efficacy. Of the evaluable patients,
data indicated that the response to DOXIL treatment was significantly better
than the response to ABV with complete or partial responses achieved in 46.2% of
DOXIL patients and only 25.6% of ABV patients. A total of 68% of DOXIL patients
and 34% of ABV patients were able to complete the six cycles of therapy called
for by the study protocol. Differential attrition was attributable to both
improved tolerance and efficacy of DOXIL as compared to multi-agent therapy. The
preliminary results of the DOXIL versus BV trial suggest a favorable response
rate and less toxicity among patients receiving DOXIL alone compared to the BV
combination. There can be no assurance that these preliminary results will be
supported by additional analysis.
AMPHOTEC
Systemic fungal infections are serious illnesses with high mortality
rates, which occur primarily in patients whose immune systems have been
compromised. In addition to its prevalence in AIDS patients, the incidence of
such infections is increasing with the more aggressive use of chemotherapeutics
for cancer and immune-suppressive drugs for organ transplants. Currently,
amphotericin B is the standard treatment for patients with severe fungal
infections that do not respond to other drugs. Amphotericin B is a well
established drug whose use is widespread. Unlike newer compounds, such as
Diflucan, which inhibit growth of fungal infections, amphotericin B works to
kill the fungus. As a result, amphotericin B is considered to be the most
powerful anti-fungal drug available and is used when other compounds fail.
However, amphotericin B has a number of serious side effects, the most
significant of which is renal toxicity. In many cases, treatment with
amphotericin B must be discontinued because of renal impairment.
The Company developed AMPHOTEC, a lipid-based colloidal dispersion of
amphotericin B, to provide effective therapy while reducing the dose-limiting
toxicities typically associated with conventional amphotericin B. AMPHOTEC is
produced in a lyophilized dosage form with a shelf-life at room temperature of
over two years. SEQUUS has formulated AMPHOTEC so that the product readily
reconstitutes with water for injection and is stable after reconstitution.
7
<PAGE> 9
Based upon clinical studies, the Company believes that AMPHOTEC is a
safe and effective agent for use in treating a variety of life-threatening
fungal infections that are increasingly common in immune-compromised patients --
those who have undergone organ or bone marrow transplants, are being treated
with chemotherapeutic compounds that suppress the immune system or have leukemia
or AIDS. The most common fungal infections include candidiasis, aspergillosis,
histoplasmosis and cryptococcal meningitis. Aspergillosis is generally believed
to be the most difficult to treat.
AMPHOTEC is believed to have efficacy comparable to amphotericin B, but
with reduced incidence of renal failure in comparison to standard amphotericin.
Based upon five open label Phase II clinical trials, 149 of 260 patients were
reported to have had a therapeutic response, including 39 of 80 responses with
aspergillosis and 75 of 107 patients with candida infections. Accordingly, three
major market segments have been identified. These include patients with severe
fungal disease for whom amphotericin B has failed, patients with aspergillosis
and possibly other severe fungal infections who have not yet been treated and
patients with fever of unknown origin ("FUO").
Severe fungal infections. Patients who have severe fungal infections and
who have failed amphotericin B, usually because of dose limitations related to
renal toxicity, are the best candidates for AMPHOTEC. In essence, these patients
have limited options as they will either die from the fungal infection or suffer
possibly fatal kidney failure.
Aspergillosis. Patients diagnosed with aspergillosis but who have not
yet been treated with amphotericin B constitute the second group of potential
patients for AMPHOTEC. Some percentage of this group will be candidates for
AMPHOTEC based on a prior history of kidney problems or a risk profile that
suggests that amphotericin B is contraindicated. Subject to regulatory approval
and reimbursement, these patients may be given AMPHOTEC because the physician
does not want to expose them to the risk of renal impairment or because the cost
of managing the potential side effects of amphotericin B may be excessive. In
cases where aspergillosis is neither diagnosed nor strongly suspected, other
less toxic agents may be administered instead of amphotericin B.
FUO. Patients who have FUO potentially represent the largest number of
candidates for AMPHOTEC, but market penetration is expected to be lower than for
those actually diagnosed with severe fungal infections. FUO patients may have a
fungal infection, but their fever may also be caused by other factors, including
bacterial infections which would respond to standard antibiotic therapy.
Moreover, if the cause of the fever is a fungal infection, it is most likely
candidiasis which can be treated with amphotericin B, but which also responds to
other treatments with fewer side effects. Current medical practice is to treat
these patients with antibiotics first and then evaluate other agents if the
fever does not respond to the antibiotic therapy.
AMPHOTEC is currently being marketed in Denmark, Finland, Ireland,
Russia, Singapore and the U.K. and has also received marketing clearance in
Brazil and the Czech Republic 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. Under
an August 1993 agreement with Zeneca, Zeneca has marketing and distribution
rights to the drug worldwide, except for the United States, Canada and Japan.
Zeneca has been marketing AMPHOTEC in the U.K. since May 1994 but has
experienced limited sales. See "-- Strategic Alliances."
The Company and Zeneca have submitted MAAs for AMPHOTEC in 10 other EU
countries and similar applications in other countries. The EU submissions were
made in accordance with the 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. Based
primarily on the CPMP review, SEQUUS believes national approvals will be
forthcoming in Austria, Italy, The Netherlands, Portugal and Sweden. However,
there can be no assurance that approvals will be
8
<PAGE> 10
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 following marketing approval. The
Company and Zeneca will continue to work with certain of the non-approving
countries to meet their requirements for approval, if possible. There can be no
assurance that marketing approval will be received for AMPHOTEC in any of these
countries. See "-- Government Regulation."
Based on the results of five open label AMPHOTEC clinical trials
conducted in patients with disseminated fungal disease, SEQUUS submitted in
November 1995 an NDA for AMPHOTEC, which was accepted for filing in January
1996. The NDA seeks marketing authorization for AMPHOTEC for the treatment of
invasive aspergillosis in patients in whom renal impairment or unacceptable
toxicity precludes the use of conventional therapy (amphotericin B deoxycholate)
in effective doses and in patients in whom prior systemic antifungal therapy has
failed. There can be no assurance that the FDA will determine that the Company's
NDA provides sufficient evidence of safety and efficacy in humans adequate to
support FDA approval or that the NDA will be approved in a timely manner, if at
all.
SEQUUS is conducting a Phase III double-blind, randomized study
comparing AMPHOTEC with amphotericin B in treating patients with first-line
aspergillus infections and a Phase II double blind study for the treatment of
patients with FUO who have not responded to antibiotic therapy. There can be no
assurance that the Company will complete either of these clinical trials, that
the results of such trials, if completed, will demonstrate the safety and
efficacy of AMPHOTEC in treating aspergillosis or any other fungal disease, or
that a NDA amendment, if filed by the Company, will be accepted or approved by
the FDA.
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 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 product 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
9
<PAGE> 11
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.
RESEARCH AND DEVELOPMENT
The primary focus of the Company's ongoing product development and
research efforts is to capitalize on the STEALTH liposome technology. This
includes identifying additional therapeutic drugs that can be formulated using
the existing technology and creating advanced applications by attaching
therapeutics to the outside of the STEALTH liposome to expand its possible
applications. The Company is conducting exploratory programs with other
companies and, in some cases, is dependent upon these companies for their
technologies.
The following is a brief summary of the Company's additional research
and development projects:
Encapsulation of Other Drugs in STEALTH Liposomes. SEQUUS has developed
STEALTH liposome formulations of other anticancer drugs such as vincristine and
cisplatin. The Company has undertaken preclinical development of its cisplatin
formulation, which it calls SPI-77. While effective in the treatment of many
solid tumors, cisplatin is characterized by considerable toxicity. Therefore, a
STEALTH liposome formulation has the potential to be less toxic than free
cisplatin while achieving the efficacy advantages of tumor targeting. If
successful, SPI-77 would complement DOXIL in the Company's product line because
cisplatin is often used to treat tumors that are not responsive to doxorubicin.
Preclinical studies have demonstrated that, relative to free cisplatin, SPI-77
has a prolonged circulation time, enhanced antitumor activity and less chronic
renal and bone marrow toxicity.
DOXIL, Monoclonal Antibody Combination Therapy (Co-therapy). The Company
believes that monoclonal antibodies to growth factor receptors may slow the
growth of human cancers. Clinical studies also suggest that monoclonal
antibodies in combination with chemotherapy drugs, such as doxorubicin and
cisplatin, appear to be more effective than the chemotherapy agent or the
monoclonal antibody alone. The Company believes that the results of preclinical
studies conducted by SEQUUS in collaboration with a biotechnology company
suggest that the therapeutic effect of monoclonal antibodies combined with DOXIL
is greater than the combination of monoclonal antibodies and free doxorubicin.
SEQUUS is conducting feasibility studies to evaluate combining DOXIL with
monoclonal antibodies to treat a broad array of solid tumors. This project has
been named SPI-49. If preclinical tests are successful, the Company may proceed
with clinical development in collaboration with the biotechnology companies
providing the monoclonal antibodies.
Small Molecules. Recent advances in molecular biology have led to the
development of small molecules that function as effective drugs with much less
toxicity. However, these small molecules are generally cleared very rapidly
from the body and thus must be administered as a continuous infusion. Several
of these small molecules can be attached to the PEG on the surface of the
long-circulating STEALTH liposomes. This slows the clearance of the small
molecules. This may increase the number that are delivered to the disease
target. SEQUUS has begun to study the application of this technology to two
small molecules. One of these molecules, a small peptide called YIGSR, is an
angiogenesis inhibitor which blocks a cancer's ability to form new blood
vessels. The Company believes this drug might inhibit the local growth and
spread of many different types of cancer. The other small molecule, part of a
natural carbohydrate called sialyl Lewisx, blocks the passage of white blood
cells into sites of inflammation and lessens the damage caused to organs when
blood flow is temporarily stopped, such as during a heart attack or stroke. The
Company has conducted preclinical studies using these molecules in conjunction
with STEALTH liposomes for these indications.
10
<PAGE> 12
Radiosensitizers. SEQUUS is also conducting several preclinical programs
focused on placing established radiosensitizers in STEALTH liposomes, which the
Company calls SPI-40. Radiosensitizers are agents that amplify the effect of
radiation therapy on tumor cells. The Company believes that STEALTH liposomes
would enhance the utility of radiosensitizers by increasing their concentration
at the site of the tumor and decreasing their concentration in other tissues.
Gene Therapy. SEQUUS is conducting basic research projects in
collaboration with academic institutions and other companies to develop a
liposome delivery system for gene therapy, called SPI-01. Although less specific
than gene therapy delivery systems that utilize retroviruses, the Company
believes that liposome-based delivery of genetic material may provide a safer
and more effective method of administering gene therapy.
The Company's research and development expenses for 1993, 1994 and 1995
were $21.1 million, $25.4 million and $22.7 million, respectively.
MARKETING AND SALES
SEQUUS currently employs a sales force of 25 professionals to market
DOXIL. This group is experienced in the sale of pharmaceutical products to
physicians, hospitals and clinics, including managed care providers, and in
facilitating reimbursement with third-party payors. SEQUUS seeks to create a
strong marketing and sales capability in the United States and to create
marketing or co-promotion alliances as appropriate. The Company intends to
expand this sales force if warranted. The Company intends to invest significant
resources and management time in developing its sales and marketing
organization.
The sales force has substantial experience in selling oncology products.
However, the Company has limited experience in marketing and selling its
products. In addition, the loss of certain key sales personnel would delay and
adversely impact 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, this would significantly reduce the Company's margins on these
products. There can be no assurance that the Company will be able to continue to
manage its marketing organization successfully.
Outside of the United States, the Company's strategy is to establish
marketing and distribution agreements with pharmaceutical companies, agents or
distributors. Pursuant to this strategy in August 1993, the Company signed a
distribution agreement with Zeneca under which Zeneca obtained marketing rights
to 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. The Company is also engaged in discussions with
several pharmaceutical and biotechnology companies regarding marketing and sales
alliances for DOXIL, although there can be no assurance that such discussions
will lead to an agreement on terms satisfactory to the Company, or at all. Under
the terms of a financing completed in May 1995, the Company granted the
investors the first right to negotiate with the Company to participate in the
commercial development of DOXIL in certain Asian countries excluding Japan. This
right has lapsed. If Zeneca or any other distributor were to abruptly terminate
its agreement with the Company or be unsuccessful in meeting its sales
objectives, the Company's business, financial condition and results of
operations could be materially adversely affected. Sales of AMPHOTEC to date
have been below expectations, and Zeneca and the Company have initiated
discussions regarding changes to their agreement. See "Strategic Alliances" and
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Overview".
11
<PAGE> 13
MANUFACTURING AND PRODUCTION
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") to manufacture commercial-scale
quantities of AMPHOTEC and DOXIL pursuant to supply agreements. SEQUUS has
developed production technologies for AMPHOTEC and DOXIL which it employs at Ben
Venue, a United States-based contract manufacturer of injectable drug products,
pursuant to supply agreements for commercial-scale manufacturing. As of February
29, 1996, SEQUUS and Ben Venue have manufactured 18 commercial-scale batches of
DOXIL, including the three registration batches which were required as part of
the FDA's NDA approval process. In February 1995, the Company announced that the
FDA had satisfactorily completed its pre-approval inspection of Ben Venue's
facility, processes and procedures for DOXIL. There can be no assurance,
however, that Ben Venue and the Company will continue to meet FDA or product
specification standards for the manufacture of DOXIL, that Ben Venue and the
Company will meet FDA standards for the manufacture of AMPHOTEC or that the
Company's manufacturing goals can be met in a consistent and timely manner.
There is only a limited number of contract 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. See "--
Government Regulation."
SEQUUS devotes considerable resources to developing manufacturing
technologies and process controls for its products to achieve and maintain
regulatory approval, suitable shelf-life, stability and ease of use. Such
activities include scaling up production methods, developing quality control
systems, establishing batch-to-batch reproducibility, testing sterilization
methods, establishing reliable sources of raw materials and synthesizing new
proprietary raw materials. Generally, the equipment used in the Company's
processing technologies is commercially available in industrial sizes and is
currently used in pharmaceutical industry operations.
In the future, SEQUUS may elect to manufacture some or all of its
products internally in lieu of using third-party contract manufacturers.
However, the Company does not currently have a commercial-scale manufacturing
facility and, as a result, an election by the Company to pursue in-house
manufacturing would require the commitment of significant capital and other
resources. The Company currently has no plans to develop a commercial
manufacturing facility in-house. The Company has produced and will continue to
endeavor to produce certain of its products in quantities sufficient for
clinical trials in compliance with the FDA's Good Manufacturing Practices
("GMPs"). However, SEQUUS expects to continue to use contract manufacturers for
final processing and packaging of the clinical supplies that SEQUUS itself
produces.
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 HCl are currently each supplied to the Company by single
sources, and the number of alternative sources is severely limited.
On February 15, 1994, the Company entered into a five-year, sole-source
supply agreement with A.L. Laboratories, Inc. ("A.L. Labs") to supply the
Company with amphotericin B for AMPHOTEC. Under the agreement the Company is
required to purchase its forecasted three months requirements. The
12
<PAGE> 14
agreement may be automatically renewed for one-year periods unless either party
provides the other party with six months notice prior to the expiration of the
current term. The Company agreed to indemnify A.L. Labs for certain liabilities.
On September 27, 1994, the Company entered into a five-year,
principal-source supply agreement with Meiji Seika Pharma International Ltd.
("Meiji Seika") to supply the Company with doxorubicin for DOXIL. Under the
agreement the Company is required to purchase its forecasted three months
requirements in yen. The agreement may be automatically renewed for one-year
periods unless either party provides the other party with six months notice
prior to the expiration of the current term. The Company agreed to indemnify
Meiji Seika for certain liabilities.
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 and lost revenues associated with
such delays 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 on its results of operations.
STRATEGIC ALLIANCES
Zeneca Limited
In August 1993, the Company signed a distribution agreement with Zeneca
under which Zeneca will market and sell AMPHOTEC in most European countries.
Under the terms of the agreement, the Company received and recognized in the
third quarter of 1993 a signing fee and a milestone payment in the amount of
$5.3 million which was earned by the Company's receipt of a product license
authorizing the sale of AMPHOTEC in the U.K. The Company manufactures and sells
AMPHOTEC to Zeneca at a price which, subject to a minimum, reflects the price(s)
achieved by Zeneca in the market. The agreement provides for additional
milestone payments upon receipt of product licenses in certain other European
countries and upon the achievement of certain cumulative sales totals.
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.
Subsequently, SEQUUS announced Zeneca's commercial launch of AMPHOTEC in the
U.K. in May 1994. For the fiscal year ended December 31, 1995, 41% of the
Company's product sales represent sales of AMPHOTEC to Zeneca as compared to
91% for 1994. A significant portion of these sales reflect pipeline-filling
(inventory) orders. The Company had one shipment of AMPHOTEC to Zeneca in 1995,
which occured in the first quarter of 1995. One shipment of product was made in
the first quarter of 1996 and the Company anticipates only limited sales to
Zeneca for the foreseeable future. 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 Brazil, Denmark, Ireland, Finland, Russia,
Singapore and the U.K. as well as the timing of additional approvals in other
EU 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.
13
<PAGE> 15
Ben Venue Laboratories, Inc
Effective January 1993, the Company entered into a manufacturing and
supply agreement with Ben Venue pursuant to which Ben Venue will be the
principal manufacturer and supplier of DOXIL and AMPHOTEC. Ben Venue is required
to supply SEQUUS with quantities of DOXIL and AMPHOTEC sufficient to meet the
Company's forecasted requirements for research and for commercial production.
The Company has agreed to indemnify Ben Venue against certain liabilities.
PATENTS AND TRADE SECRETS
SEQUUS currently owns or controls 55 United States patents, which expire
at various times between 1998 and 2013, including seven claiming various aspects
of the Company's long-circulating STEALTH liposomes, which expire at various
times between 2006 and 2013. SEQUUS has filed numerous patent applications on
inventions claiming specific liposome compositions and methods of use, liposome
processing methods, drug/lipid compositions, and surface-modified liposomes and
methods. SEQUUS has also filed corresponding foreign patent applications with
respect to certain of its key technologies and owns or controls foreign
counterpart applications and issued patents in various countries with respect to
its most important United States patents and pending applications. SEQUUS
intends to file additional patent applications, when appropriate, relating to
improvements in its technologies and other specific inventions and products that
it develops.
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 prior litigation in the Patents County Court in the U.K., a suit
brought by NeXstar Pharmaceuticals, Inc. ("NeXstar") alleging that the Company's
DOXIL product infringes NeXstar's EPO Patent No. 0,179,444 was settled by the
parties dropping their respective claims against one another. The U.K. Patent
Court dismissed all claims in the case with prejudice.
In November 1991, SEQUUS received a letter from The Liposome Company
("TLC") bringing to SEQUUS' attention TLC's United States Patent Number
5,059,591 for "Reduced Toxicity" (the "'591 Patent") containing claims directed
to amphotericin B/sterol compositions and their method of use.
14
<PAGE> 16
Subsequently, SEQUUS' patent counsel delivered an opinion 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
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.
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.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other
countries is a significant consideration in all aspects of the clinical
development, production and marketing of SEQUUS' products and in its on-going
research and development activities. In order to clinically test, produce and
sell products for human therapeutic use, mandatory procedures and safety
standards established by the FDA and comparable agencies in foreign countries
must be followed. SEQUUS prepares and files regulatory documents required to
begin clinical trials, recruits and monitors clinical investigators, analyzes
and synthesizes clinical trial data and prepares and files documents requesting
approval to sell pharmaceutical products.
The standard process required by the FDA before a pharmaceutical agent
may be marketed in the United States includes: (i) laboratory and preclinical
tests, (ii) submission to the FDA of an application for use of an
investigational new drug, which must become effective before clinical trials may
commence,
15
<PAGE> 17
(iii) adequate and well-controlled clinical trials to establish the safety and
efficacy of the drug in its intended application, (iv) submission to the FDA of
a NDA with respect to a drug or a product license application ("PLA") with
respect to a biologic, and (v) FDA approval of the NDA or PLA prior to any
commercial sale or shipment of the drug or biologic. In addition to obtaining
FDA approval for each product, each domestic drug manufacturing establishment
must be registered or licensed by the FDA. Domestic and foreign manufacturing
establishments are subject to inspections by the FDA and by other federal, state
and local agencies and must comply with GMPs as appropriate for production. If a
product is approved under the FDA procedures for Accelerated Approval of New
Drugs for Serious or Life-Threatening Illnesses, such approval is subject to the
additional requirement that, following product launch, a company continue to
study the drug to verify and describe its clinical benefit. Under these FDA
Accelerated Approval Procedures, the FDA may withdraw approval if the company
fails to show due diligence in conducting post-marketing clinical trials or if
these clinical trials fail to demonstrate clinical benefit to the FDA's
satisfaction.
Clinical trials are typically conducted in three sequential phases,
which phases may overlap. In Phase I, the initial introduction of a drug to
humans, the drug is tested for safety (adverse effects), dosage tolerance,
absorption, distribution, metabolism and excretion. Phase II involves studies in
a limited patient population to determine the efficacy of the drug for specific
targeted indications, dosage tolerance and optimal dosage, and possible adverse
effects and safety risks. When a product is found to show clinical effectiveness
and to have an acceptable safety profile in Phase II evaluations, Phase III
trials are undertaken to evaluate further its clinical efficacy and to test
further for safety within an expanded patient population at geographically
dispersed clinical study sites.
Upon accepting a company's NDA, the FDA generally convenes an advisory
committee to review clinical trial results and make a non-binding recommendation
concerning the drug's approval. After considering the advisory committee
recommendation and other information, the FDA may or may not issue an approvable
letter. This letter sets out the specific terms and conditions that the company
must satisfy in order to receive final FDA approval to market.
Sales of pharmaceutical products outside of the United States are
subject to regulatory requirements that vary widely from country to country and
that often include approval of the price at which a product may be sold. In the
EU countries, a company may seek product marketing authorization in other member
countries with the sponsorship of the country which first granted marketing
approval under CPMP procedures. Since the CPMP is an advisory committee, its
vote is not binding on member countries.
Whether undertaken by SEQUUS or an agent or collaborator of SEQUUS, the
regulatory approval process for a new product is likely to take several years
and will involve the expenditure of substantial resources. There can be no
assurance that any such approvals will be granted on a timely basis, if at all.
In addition, the FDA may require post-marketing testing and surveillance
programs to monitor a drug's efficacy and side effects. Results of the
post-marketing programs may prevent or limit the further marketing of a product.
All SEQUUS manufacturing facilities and contract manufacturing
facilities used by SEQUUS will be subject to periodic inspections by the FDA and
comparable state agencies. If violations of applicable regulations are noted
during these inspections, SEQUUS may be restrained from continued marketing of
the product manufactured until such violations are corrected, if possible.
SEQUUS is also subject to regulation under numerous federal, state and local
laws regarding, among other things, occupational safety, laboratory practices,
the use and handling of radioisotopes and hazardous chemicals, prevention of
illness and injury, environmental protection and hazardous substance control.
16
<PAGE> 18
As with many biotechnology 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.
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 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 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.
COMPETITION
Generally, competition in the pharmaceutical field is based on such
factors as product performance, safety, acceptance by doctors, patient
compliance, available reimbursement, patent protection, ease of use, price and
marketing efforts. The Company believes that earlier entry into a market is an
advantage for a new drug, but it also believes that clinical benefits and
pharmacoeconomics are important to a product's success.
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 and novel therapeutics for the treatment of cancer,
infectious diseases and other indications targeted by the Company. Some of these
companies are active in liposome
17
<PAGE> 19
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, many of these 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, both of which have received regulatory approval for products
competitive with the Company's primary products. 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 patients and has also received
approval for the same indication in four European countries. DOXIL has been
approved and is being marketed in the U.S. as a second-line treatment for
AIDS-KS and has been recommended for approval in the 15 E.U. countries for both
first-line and second-line therapy of AIDS-KS (see "Risk Factors - DOXIL
Regulatory Status"). A NeXstar liposomal amphotericin B product has been on the
market in Europe since 1989 and has achieved substantial market share as
compared to the limited market penetration achieved to date by the Company's
lipid-based amphotericin B product, AMPHOTEC. In late 1995, TLC launched its
lipid-based amphotericin B product in the U.S. The Company's NDA for AMPHOTEC is
under review by the FDA. TLC also received approval for its amphotericin B
product in several European countries and has additional MAAs pending.
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.
EMPLOYEES
As of December 31, 1995 SEQUUS had 192 full-time employees, of whom 21
hold Ph.D. or M.D. degrees. 127 employees are engaged in research, development,
clinical and regulatory affairs and pilot manufacturing, 38 employees are
engaged in sales and marketing and 27 work primarily in finance, human resources
and administration. The Company from time to time also hires temporary employees
and consultants in all areas of the Company's operations.
In order to continue development and commercialization of products in
clinical trials as well as to continue research and development of other
products and programs, it will be necessary for SEQUUS to continue to increase
the number of its employees. In particular, in order to commercialize its
products, it will be necessary for the Company to hire additional employees with
experience in the clinical development of pharmaceutical products. 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.
None of the Company's employees is represented by a union, and SEQUUS
considers its relations with its employees to be good.
18
<PAGE> 20
RISK FACTORS
The Company's future operations, financial performance, business and
share price may be affected by the following 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 Company has
only limited experience in marketing its products and has not achieved
substantial market penetration of any product to date. 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. Until quite
recently, no therapeutic product based on liposome or lipid-based technology was
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. See "Business -- Products and Products Under Development."
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
19
<PAGE> 21
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. See
"Business -- Products and Products Under Development" and "-- Government
Regulation."
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 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, many of these 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, both of which have received regulatory approval for products
competitive with the Company's products. 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 patients and has also received approval for the
same indication in four European countries. DOXIL has been approved and is being
marketed in the U.S. as a second-line treatment for AIDS-KS and has been
recommended for approval in the 15 E.U. countries for both first-line and
second-line therapy of AIDS-KS (see "Risk Factors - DOXIL Regulatory Status"). A
NeXstar liposomal amphotericin B product has been on the market in Europe since
1989 and has achieved substantial market share as compared to the limited market
penetration achieved to date by the Company's lipid-based amphotericin B
product, AMPHOTEC. In late 1995, TLC launched its lipid-based amphotericin B
product in the U.S. The Company's NDA for AMPHOTEC is under review by the FDA.
TLC also received approval for its amphotericin B product in several European
countries and has additional MAAs pending.
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. See "Business
- -- Competition."
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
20
<PAGE> 22
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 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. See "Business -- Government Regulation."
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
received regulatory approval in the United States for the commercial sale of
only one of its 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 November 1995, SEQUUS received marketing clearance from the FDA for
use of DOXIL in the treatment of AIDS-KS patients whose KS has progressed on
prior chemotherapy or in patients who are intolerant to such therapy. In
December 1995, the Company launched DOXIL in the U.S., using its own marketing
and sales force. The marketing clearance was provided in accordance with the
FDA's procedures for Accelerated Approval of New Drugs for Serious or
Life-Threatening Illnesses. Accelerated
21
<PAGE> 23
approval regulations require that an applicant study an investigational drug
following product launch to verify and describe the drug's clinical benefit. The
FDA has acknowledged the Company's commitment to a post-marketing clinical trial
designed to meet accelerated approval requirements. 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.
In February 1996, the Company received a unanimous opinion from the
European CPMP recommending marketing authorization for DOXIL under the tradename
CAELYX, in the 15 member states of the EU, for both first-line and second-line
treatment of AIDS-KS in patients with low CD4 counts and extensive mucocutaneous
or visceral disease. Prior to product launch, the Brussels-based European
Commission will formally issue the license to market the SEQUUS product. In
addition, the Company will enter into pricing discussions with the appropriate
agencies in those countries where pricing approval is required. There can be no
assurance that the European Commission will issue the license in a timely manner
or that the Company will be able to negotiate a satisfactory price for DOXIL in
the EU countries.
AMPHOTEC Regulatory Status
SEQUUS has received marketing approval for AMPHOTEC in Brazil, Denmark,
the Czech Republic, Finland, Ireland, Russia, Singapore and the U.K. 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 10 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, Italy, The Netherlands,
Portugal and Sweden. However, 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.
In November 1995, the Company submitted to the FDA an NDA for AMPHOTEC
based upon certain data from open label clinical trials, which was accepted for
filing in January 1996. There can be no assurance 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. See "Business -- Government Regulation."
Dependence on Third-Party Distributor and Agents; Limited Marketing and Sales
Experience
In 1995, a substantial portion of the Company's product revenues came
from sales either to a third-party distributor (Zeneca) or through third-party
agents. For the fiscal year ended December 31, 1995, 41% of the Company's
product sales represent sales of AMPHOTEC to Zeneca as compared to 91% for 1994.
A significant portion of these sales reflect pipeline-filling (inventory)
orders. The Company did not ship any AMPHOTEC to Zeneca in 1995 after the first
quarter.. One shipment of product was made in the first quarter of 1996 and the
Company anticipates only limited sales to Zeneca for the foreseeable future. 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 Brazil,
the Czech Republic, Denmark, Ireland,
22
<PAGE> 24
Finland, Russia, Singapore and the U.K., 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 market and sell its products directly, or
possibly co-promote them with strategic partners, in the U.S.. In this regard,
SEQUUS currently employs a sales and marketing team of 24 professionals to
market DOXIL, which the Company expects to expand if marketing clearance is
obtained for AMPHOTEC. This group is experienced in the sale of pharmaceutical
and biotechnology products to physicians, hospitals and clinics, including
managed care providers, and in facilitating reimbursement with third-party
payors. 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. See "Business -- Marketing and Sales" and "--
Strategic Alliances" and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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, with respect to the sale of DOXIL in the U.S., the Company
believes it has significantly greater risk in connection with product liability
claims due to the greater frequency of lawsuits and higher claims paid in courts
in the U.S. 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, 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 February 1996, the Company and Ben Venue have
manufactured 18 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
23
<PAGE> 25
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.
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 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. See
"Business -- Strategic Alliances" and " -- Manufacturing and Production."
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.
24
<PAGE> 26
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
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. See "Business -- Patents and Trade
Secrets."
History of Operating Losses; Need for Additional Financing
The Company has incurred losses in each year since its inception and has
accumulated approximately $133.4 million in net losses through December 31,
1995, including a loss of $33.6 million in 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 to
continue to incur operating losses. 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
25
<PAGE> 27
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. See Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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. Three of the key executive officers of the
Company has joined the management team in the last seven months. 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. See "Supplemental Item - Executive Officers and Directors of
Registrant."
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. See "Business
- -- Government Regulation."
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. See Item 5 "Market for
Registrant's Common Equity and Related Stockholder Matters"
ITEM 2. PROPERTIES
As of December 31, 1995, the Company leased approximately 70,000 square
feet of laboratory, office and warehouse space in Menlo Park, California under
leases that expire in 1996. The Company currently is negotiating new leases on
existing properties as well as additional square footage required to accommodate
sales and marketing, clinical and regulatory, and administrative personnel. Rent
expense for 1995 was approximately $852,000. The Company anticipates a material
increase in such expense for 1996 due to the increased square footage under
lease.
26
<PAGE> 28
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1995.
27
<PAGE> 29
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS AND DIRECTORS OF REGISTRANT
Information with respect to the executive officers and directors of the
Company as of February 29, 1996 is set forth below:
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---------------------------------- --- --------------------------------------------------
<S> <C> <C>
I. Craig Henderson, M.D........... 54 Chairman of the Board and Chief Executive Officer
L. Scott Minick................... 44 President, Chief Operating Officer and Director
Edward Schnipper, M.D............. 47 Senior Vice President and Medical Director
Carl F. Grove..................... 42 Vice President for Regulatory Affairs
Marc J. Gurwith, M.D., J.D........ 56 Vice President and Associate Medical Director
Anthony A. Huang, Ph.D............ 43 Vice President` for Product Development
Francis J. Martin, Ph.D........... 48 Vice President and Chief Scientific Officer
Joseph J. Vallner, Ph.D........... 49 Senior Vice President for Research and Development
Sally A. Davenport................ 60 Secretary
Donald J. Stewart................. 40 Vice President for Finance and Treasurer
Peter K. Working, Ph.D............ 47 Vice President for Preclinical Research
Robert G. Faris(1)(2)............. 57 Director
Richard C.E. Morgan(1)(2)......... 51 Director
E. Donnall Thomas, M.D............ 75 Director
</TABLE>
- ----------
(1) Member of the Compensation and Plan Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
The Company's By-laws authorize the Board of Directors to set the number
of directors, which is currently fixed at five.
All directors hold office until the next annual meeting of stockholders
and until their successors have been elected. Officers are appointed to serve,
subject to the discretion of the Board of Directors, until their successors are
appointed.
I. Craig Henderson, M.D. has been Chief Executive Officer of SEQUUS
since June 1995 and Chairman of the Board since July 1995 and has served as a
director of the Company since July 1993. Since July 1995, Dr. Henderson has been
an Adjunct Professor of Medicine at University of California, San Francisco.
From 1992 until July 1995, he served as Professor of Medicine, Chief of Medical
Oncology and Director of Clinical Cancer Programs at the University of
California, San Francisco. From 1989 to 1992 he served as a member and, for most
of this time, as Chairman of the Oncologic Drugs Advisory Committee of the FDA.
From 1974 to 1992, Dr. Henderson held an academic appointment at Harvard Medical
School, most recently as Associate Professor of Medicine. Dr. Henderson founded
the Breast Evaluation Center at the Dana-Farber Cancer Institute in 1980 and
served as its director until 1992. He received a M.D. degree from Columbia
University.
L. Scott Minick has been President and Chief Operating Officer of the
Company since June 1995 and a director of the Company since July 1995. From 1994
to 1995, he served as a director, Interim President and Chief Executive Officer
of OncoTherapeutics, Inc. Before that, Mr. Minick was a director, President and
Chief Executive Officer of LXR Biotechnology, Inc. From 1981 to 1993, he was an
executive of Baxter Healthcare, Inc., most recently as President of the Pacific
Rim/Latin America business unit of Baxter Diagnostics. Mr. Minick received a
M.B.A. degree from Northwestern University.
28
<PAGE> 30
Edward F. Schnipper, M.D., joined SEQUUS in January 1996 as Senior Vice
President and Medical Director. Prior to joining SEQUUS, Dr. Schnipper held
several executive and management positions at Hoffmann-La Roche ("Roche")
including Vice President in Clinical Operations; Vice President, Professional
Development and Training; and, Director, Clinical Development,
Hematology/Oncology. Dr. Schnipper originally joined Roche in 1983 as a Research
Physician. While at Roche, Dr. Schnipper had academic appointments in Medicine
and Medical Genetics and Microbiology at the Robert Wood Johnson Medical School.
Prior to this, Dr. Schnipper had a private medical practice from 1985 to 1990.
Dr. Schnipper received his M.D. degree from the Georgetown University School of
Medicine, Washington, D.C. and subsequently held fellowships in Hematology at
the New York University School of Medicine, and in Medical oncology at Memorial
Sloan-Kettering Cancer Center.
Joseph J. Vallner, Ph.D. joined SEQUUS in February 1992 as Vice
President for Development and was appointed Senior Vice President for Research
and Development in April 1995. From 1986 to 1992, Dr. Vallner was Director,
Corporate Technology Transfer, of Syntex. While at Syntex, he also performed
various pharmaceutical development functions ranging from drug design and
development to responsibility for regulatory filings with the FDA. Before
joining Syntex, Dr. Vallner was a Group Leader with G.D. Searle, where he
supervised pharmaceutical formulation development and development of new drug
delivery systems. From 1974 to 1984, Dr. Vallner was Associate Professor of
Pharmaceutics at the University of Georgia. Dr. Vallner received a Ph.D. in
Pharmaceutics from the University of Wisconsin.
Sally A. Davenport is a Company founder and has served as Corporate
Secretary of SEQUUS since the Company's inception. She has been responsible for
various administrative and corporate functions since 1981. Ms. Davenport
received a B.S. degree in Technical Journalism from Iowa State University.
Carl F. Grove was recently appointed Vice President for Corporate
Development after serving as the Company's Vice President of Regulatory Affairs
since January 1992 and as Vice President for R&D Administration and Planning
from 1989 to 1992. Previously, he served the Company and a prior SEQUUS joint
venture, Cooper-Lipotech, in various positions related to R&D project
administration and planning since 1982. Mr. Grove received a M.S. degree in
Urban Planning from the University of Oregon.
Marc J. Gurwith, M.D., J.D. joined SEQUUS in January 1995 as Vice
President and Associate Medical Director. Prior to joining SEQUUS, Dr. Gurwith
was employed by Boehringer Mannheim Pharmaceuticals, most recently as Vice
President of Medical and Scientific Affairs and previously as Senior Director of
Clinical Research. In addition to over 10 years of pharmaceutical industry
experience, Dr. Gurwith has over 20 years experience in teaching and
consultation in the area of infectious disease control and therapy. Dr. Gurwith
received his M.D. degree from Harvard Medical School and his J.D. degree from
Temple University School of Law.
Anthony H. Huang, Ph.D. has been Vice President of Product Development
of SEQUUS since April 1995. He has served in various technical capacities with
the Company for the last 12 years. Before joining the Company, he was a Research
Investigator at Oak Ridge National Laboratory in Oak Ridge, Tennessee. Dr. Huang
received a Ph.D. degree in Pharmacology from the University of California, San
Francisco.
Francis J. Martin, Ph.D. was appointed Vice President and Chief
Scientific Officer of the Company in July 1994. From October 1986 he served as
Vice President for Research and Principal Scientist, with responsibility for
guiding and coordinating SEQUUS internal and extramural research activities for
STEALTH liposome products. From 1981 to 1986, Dr. Martin served the Company in
various capacities, including Director of Liposome Research and Formulations and
was the Technical Director of SEQUUS' former joint venture, Cooper-Lipotech. Dr.
Martin received a Ph.D. degree in Biochemistry from Northwestern University.
29
<PAGE> 31
Donald J. Stewart joined the Company in 1984 as Treasurer and Controller
and was appointed Vice President for Finance in April 1995. Previously, he was
Comptroller at Softcom, Inc. and a certified public accountant with Arthur Young
& Company. Mr. Stewart received a M.B.A. from Santa Clara University.
Peter K. Working, Ph.D., D.A.B.T., has been Vice President of
Preclinical Research at SEQUUS since April 1995. From 1994 to 1995, he served as
Senior Director of Pharmacology and Toxicology, and from 1992 to 1994 as
Director of Pharmacology and Toxicology at SEQUUS. From 1988 to 1992, Dr.
Working was a Senior Experimental Toxicologist at Genentech, Inc. From 1984 to
1988, he was a Staff Scientist in the Department of Cellular and Molecular
Toxicology at the Chemistry Industry Institute of Toxicology in Research
Triangle Park, North Carolina, where he was a Post-Doctoral Fellow from 1982 to
1984. He was board-certified in toxicology in 1989. Dr. Working received a Ph.D.
degree in Human Anatomy from the University of California at Davis.
Robert G. Faris has served as a director of the Company since March
1985. Since 1990, he has been President, Chief Executive Officer and a director
of the Polish American Enterprise Fund, which invests United States government
funds in Poland. From 1971 to 1987, he served as President of Alan Patricof
Associates, Inc., an investment advisor to venture capital partnerships, and
from 1987 to 1990, Mr. Faris was a private investor.
Richard C.E. Morgan has served as a director of SEQUUS since May 30,
1990. Since 1986, he has been a general partner of Wolfensohn Partners L.P., a
venture capital limited partnership, and the general partner of Wolfensohn
Associates L.P. From 1984 to 1986, he served as an executive of James D.
Wolfensohn, Inc., and from 1977 to 1984, he served as General Manager of The
Schroder Strategy Group and director of J. Henry Schroder Wagg & Co. Ltd.
(London). He is a director of Lasertechnics, Inc., a laser systems company,
Celgene Corporation, a biotechnology company, Quidel Corporation, a medical
diagnostics company, and MediSense, Inc., a blood glucose monitoring system
company.
E. Donnall Thomas, M.D. has served as a director of SEQUUS since May 27,
1993. Dr. Thomas currently is Professor Emeritus of Medicine, University of
Washington School of Medicine in Seattle and a member of the Fred Hutchinson
Cancer Research Center in Seattle. Dr. Thomas previously served, from 1974 to
1989, as Director of Medical Oncology and Director of Clinical Research Programs
at the Fred Hutchinson Cancer Research Center and, from 1963 to 1985, he headed
the Division of Oncology at the University of Washington School of Medicine in
Seattle. Dr. Thomas received the Nobel Prize in Medicine and the Presidential
Medal of Science in 1990. He received a M.D. degree from Harvard Medical School.
30
<PAGE> 32
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Stock is traded on the over-the-counter market
under the Nasdaq National Market symbol SEQU. The table below sets forth the
high and low sales prices for the Company's Common Stock as reported on the
Nasdaq National Market for each calendar quarter within 1995 and 1994. These
over-the-counter quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not necessarily represent the sales prices in
actual transactions.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1995:
Fourth Quarter $14 1/4 $ 9 3/4
Third Quarter 15 1/8 10 1/4
Second Quarter 12 1/8 5 3/4
First Quarter 10 5 1/2
1994:
Fourth Quarter $ 8 1/8 $ 4 1/2
Third Quarter 7 3/4 4 3/4
Second Quarter 8 3/4 5 3/4
First Quarter 12 1/2 7 1/2
</TABLE>
(b) HOLDERS
As of January 31, 1996, there were approximately 508 holders of record
of the Company's Common Stock.
(c) DIVIDENDS
The Company has not paid any cash dividends on its Common
Stock and does not plan to pay any cash dividends in the foreseeable future. The
Company's future dividend policy will be determined by its Board of Directors
based on many factors, including results of operations, capital requirements and
general business conditions.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data are shown in Exhibit 13 of this Annual Report on
Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis of financial condition and results
of operations appears in Exhibit 13 to this Annual Report on Form 10-K.
31
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements appear in Exhibit 13 to this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
32
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates by reference the information set forth under
the caption "Election of Directors" in the Company's Proxy Statement to be filed
with the Securities and Exchange Commission not later than April 29, 1996, and
to be mailed to stockholders in connection with the Company's Annual Meeting of
Stockholders (the "Proxy Statement"). Certain information relating to executive
officers of the Company appears on pages 28 - 30 of this Annual Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates by reference the information set forth under
the caption "Executive Compensation" of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates by reference the information set forth under
the caption "Security Ownership of Certain Beneficial Owners and Management" of
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information set forth under
the caption "Certain Transactions" of the Proxy Statement.
33
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. AND 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following documents appear in Exhibit 13 to this Annual Report on
Form 10-K and are filed as part hereof.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 45
Balance Sheets at December 31, 1995 and 1994 46
Statement of Operations for the years ended
December 31, 1995, 1994 and 1993 48
Statement of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993 49
Statement of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 50
Notes to Financial Statements 51
Schedule II - Valuation and Qualifying Accounts 58
</TABLE>
All other schedules are omitted because they are not required or the
required information is included in the financial statements or notes thereto.
3. EXHIBITS:
3.1 Restated Certificate of Incorporation (1)
3.2 By-Laws (2)
10.1* 1982 Employee Stock Option Plan (As Amended) (1)
10.1.1* 1987 Employee Stock Option Plan
10.1.2* 1987 Consultant Stock Option Plan
10.1.4* Employee Stock Purchase Plan
10.1.5* 401(k) Plan and Adoption Agreement for 401(k) Plan (1)
10.1.6* LTI Flex Elect Section 125 Cafeteria Plan (1)
10.1.7* 1990 Director Stock Option Plan
10.2 Lease Agreement between Lincoln Property Company N.C. Inc. and
the Company dated August 31, 1983, as amended (3)
10.4* Employment Agreement dated as of June 30, 1983, between the
Company and Sally A. Davenport (2)
10.5 Forms of Confidentiality Agreements entered into by Employees,
Consultants and Advisors of the Company (2)
10.12 Common Stock and Warrant Purchase agreement between the Company
and David Blech dated as of January 25, 1990 (5)
10.14** Agreement between Zeneca Limited and the Company relating to
"Amphocil" dated August 12, 1993, as amended as of March 1,
1994 and July 12, 1994
34
<PAGE> 36
10.15** Manufacturing and Supply Agreement between Ben Venue
Laboratories, Inc. ("Ben Venue") and the Company relating to
DOXIL dated January 1, 1993 (6)
10.16** Manufacturing and Supply Agreement between Ben Venue and the
Company relating to AMPHOCIL dated January 1, 1993 (6)
10.17** Supply Agreement between Meiji Seika Pharma International LTD
and the Company relating to Doxorubicin Hydrochloride, USP
dated September 27, 1994 (6)
10.18** Supply Agreement between A.L. Laboratories and the Company
relating to Amphotericin B, USP dated February 15, 1994 (6)
10.19 Employment Agreement between the Company and I. Craig Henderson
dated June 26, 1995 (7)
10.20 Employment Agreement between the Company and L. Scott Minick
dated June 26, 1995 (7)
13 1995 Annual Report to Security Holders
23 Consent of Independent Auditors See page 38
24 Power of Attorney See page 37
27 Financial Data Schedule
- --------------
*Management or Compensatory plan or arrangement.
(1) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1988
and incorporated herein by reference.
(2) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Registration Statement on Form S-1 (File No. 33-13332) and incorporated
herein by reference.
(3) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1987
and incorporated herein by reference.
(4) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1989
and incorporated herein by reference.
(5) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1990
and incorporated herein by reference.
(6) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Annual Report on Form 10-K/A-2 for the fiscal year ended December 31,
1994 and incorporated herein by reference.
(7) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995
and incorporated herein by reference.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1995.
35
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 28, 1996 By: /s/ I. Craig Henderson
-----------------------
I. Craig Henderson
Chief Executive Officer
36
<PAGE> 38
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below does hereby constitute and appoint I. Craig Henderson and Sally A.
Davenport, and each of them, with full power of substitution and full power to
act without the other, his true and lawful attorney-in-fact and agent to act for
him in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-K, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully, to all intents and purposes, as they
or he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause do be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ I. Craig Henderson Chairman of the Board, March 28, 1996
- ---------------------------------- Chief Executive Officer
I. Craig Henderson, M.D., F.A.C.P.
/s/ L. Scott Minick President and Chief Operating Officer March 28, 1996
- ----------------------------------
L. Scott Minick
/s/ Donald J. Stewart Vice President, Finance and Treasurer March 28, 1996
- ---------------------------------- (Principal Financial Officer)
Donald J. Stewart
/s/ Robert G. Faris Director March 28, 1996
- ----------------------------------
Robert G. Faris
/s/ Richard C. E. Morgan Director March 28, 1996
- ----------------------------------
Richard C. E. Morgan
/s/ E. Donnall Thomas Director March 28, 1996
- ----------------------------------
E. Donnall Thomas, M.D.
</TABLE>
37
<PAGE> 39
SEQUUS PHARMACEUTICALS, INC.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 and S-3 Nos. 33-20301 and 33-35198) pertaining to the 1982 and 1987 Employee
Stock Option Plans, Registration Statement (Form S-8 No. 33-30578) pertaining to
the 401(k) Plan, Registration Statement (Form S-8 No. 33-37094) pertaining to
the Employee Stock Purchase Plan, Registration Statement (Form S-3 No. 33-35129)
pertaining to the 1990 Director Stock Option Plan, Registration Statement (Form
S-3 No. 33-41880) pertaining to the March 1991 private placement of 1,250,000
units, of our report dated February 2, 1996, with respect to the financial
statements included in this Annual Report (Form 10-K) of SEQUUS Pharmaceuticals,
Inc.
Our audits also included the financial statement schedule of SEQUUS
Pharmaceuticals, Inc. listed in Item 14(a). This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statement taken as a
whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Palo Alto, California
March 28, 1996
38
<PAGE> 1
1987 EMPLOYEE STOCK OPTION PLAN
OF
SEQUUS PHARMACEUTICALS, INC.
1. PURPOSE OF THE PLAN
The purposes of the 1987 Employee Stock Option Plan (the
"Plan") of SEQUUS Pharmaceuticals, Inc., a Delaware corporation (the "Company")
are to;
(a) Furnish incentive to individuals chosen to receive options
because they are considered capable of responding by improving operations and
increasing profits;
(b) Encourage selected employees to accept or continue
employment with the Company or its Affiliates; and
(c) Increase the interest of selected employees in the
Company's welfare through their participation in the growth in value of the
Common Stock of the Company (the "Common Stock").
To accomplish the foregoing objectives, this Plan provides a
means whereby employees of the Company and its Affiliates may receive options to
purchase Common Stock. Options granted under this Plan will be either incentive
stock options ("ISOs") intended to qualify as such under Section 422A of the
Internal Revenue Code of 1986, as amended (the "Code") or nonqualified options
("NQOs") not intended to qualify as ISOs.
2. ELIGIBLE PERSONS
Every person who at the date of grant is a full-time employee
of the Company or of any Affiliate (as defined below) of the Company is eligible
to receive NQOs or ISOs under this Plan. The term "Affiliate" as used in the
Plan means a parent or subsidiary corporation as defined in the applicable
provisions (currently Section 425) of the Code. The term "employee" includes an
officer or director who is an employee, as well as a non-officer, non-director
regular employee of the Company.
3. STOCK SUBJECT TO THIS PLAN
The total number of shares of stock which may be granted
pursuant to this Plan is 5,000,000 shares of Common Stock. Grants to the
directors of the Company of options under this Plan may not account for more
than 250,000 shares of Common Stock, unless the Administrator (as defined in
Section 4) determines that the foregoing provision is not necessary to comply
with the provisions of Rule 16b-3 promulgated by the Securities and Exchange
commission ("Rule 16b-3") or that Rule 16b-3 is not applicable to the Plan. The
Company may not issue
<PAGE> 2
options to purchase more than 400,000 shares of stock to any one participant in
any one year. The shares covered by the portion of any grant which expires
unexercised under the Plan shall become available again for grants under the
Plan. The number of shares reserved for purchase under the Plan is subject to
adjustment in accordance with the provisions for adjustment in the Plan.
4. ADMINISTRATION
This Plan shall be administered by the Board of Directors of
the Company (the "Board") or by a committee appointed by the Board which shall
not have less than two Board members (in either case, the "Administrator"). No
option shall be granted to (a) a director of the Company except (i) by the Board
when a majority of the members of the Board, and a majority of the directors
acting in the matter, are disinterested persons, or (ii) by the Administrator
when the Administrator is composed of three or more persons having full
authority to act in the matter and each member of the Administrator is a
disinterested person, or (b) to an officer of the Company except (i) by the
Board, or (ii) by the Administrator when the Administrator is composed solely of
three or more directors, or is composed of three or more persons having full
authority to act in the matter and each member of the Administrator is a
disinterested person, unless, in either case, the Administrator determines that
the foregoing provision is not necessary to comply with the provisions of Rule
16b-3 or that Rule 16b-3 is not applicable to the Plan. "Disinterested person,"
for this purpose, shall have the same meaning as in Rule 16b-3 or any successor
rule under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Administrator may delegate nondiscretionary administrative duties to such
employees of the Company as it deems proper. Subject to the provisions of this
Plan, the Administrator shall have the authority to select the persons to
receive options under this Plan, to fix the number of shares that each optionee
may purchase, to set the terms and conditions of each option (including whether
each option should be a NQO or an ISO), and to determine all other matters
relating to this Plan. No member of the Administrator shall be liable for any
act or omission on such member's own part, including but not limited to the
exercise of any power or discretion given to such member under this Plan, except
for those acts or omissions resulting from such member's own gross negligence or
willful misconduct. All questions of interpretation, implementation, and
application of this Plan shall be determined by the Administrator. Such
determinations shall be final and binding on all persons.
5. GRANTING OF OPTIONS
No options shall be granted under this Plan after ten years
from the date of adoption of this Plan by the Board of Directors.
-2-
<PAGE> 3
Each option shall be evidenced by a written stock option
agreement, in form satisfactory to the Company, executed by the Company and the
person to whom such option is granted; provided, however, that the failure by
the Company, the optionee, or both to execute such an agreement shall not
invalidate the granting of an option. The agreement shall specify whether each
option it evidences is a NQO or an ISO.
The Administrator may approve the grant of options under this
Plan to persons who are expected to become employees of the Company, but are not
employees at the date of approval. In such cases, the option shall be deemed
granted, without further approval, on the date the grantee becomes an employee
and must satisfy all requirements of this Plan for options granted on that date.
6. TERMS AND CONDITIONS OF OPTIONS
Each option granted under this Plan shall be designated as a
NQO or an ISO. Each option shall be subject to the terms and conditions set
forth in Section 6.1. NQOs shall be also subject to the terms and conditions set
forth in Section 6.2, but not those set forth in Section 6.3. ISOs shall also be
subject to the terms and conditions set forth in Section 6.3, but not those set
forth in Section 6.2.
6.1 Terms and Conditions to Which All Options Are Subject. All
options granted under this Plan shall be subject to the following terms and
conditions:
6.1.1 Changes in Capital Structure. Subject to
Section 6.1.2, if the stock Of the Company is changed by reason of a stock
split, reverse stock split, stock dividend, or recapitalization, or converted
into or exchanged for other securities as a result of a merger, consolidation or
reorganization, appropriate adjustments shall be made in (a) the number and
class of shares of stock subject to this Plan and each option outstanding under
this Plan, and (b) the exercise price of each outstanding option; provided,
however, that the Company shall not be required to issue fractional shares as a
result of any such adjustments. Each such adjustment shall be subject to
approval by the Board of Directors in its sole discretion.
6.1.2 Corporate Transactions. New option rights may
be substituted for the option rights granted under this Plan, or the Company's
obligations as to options outstanding under this Plan may be assumed, by an
employer corporation other than the Company, or by a parent or subsidiary of
such employer corporation, in connection with any merger, consolidation,
acquisition, separation, reorganization, liquidation or like occurrence in which
the Company is involved, in such manner that the then outstanding options which
are ISOs will continue to be "incentive stock options" within the meaning of
Section 422A of the Code to the full extent permitted thereby. Notwithstanding
the foregoing or the provisions of Section 6.1.1, if such
-3-
<PAGE> 4
employer corporation, or parent or subsidiary of such employer corporation, does
not substitute new and substantially equivalent option rights for the option
rights granted hereunder, or assume the option rights granted hereunder, the
option rights granted hereunder shall terminate (a) upon dissolution or
liquidation of the Company, or similar occurrence, or (b) upon any merger,
consolidation, acquisition, separation, or similar occurrence, where the Company
will not be a surviving corporation; provided, however, that each optionee shall
be mailed notice at least thirty-five (35) days prior to such dissolution,
liquidation, merger, consolidation, acquisition, separation, or similar
occurrence, and shall have at least thirty (30) days after the mailing of such
notice to exercise any unexpired option rights granted hereunder to the extent
exercisable on the date of such event.
6.1.3 Time of Option Exercise. Except as determined
otherwise by the Administrator, options granted under this Plan shall be
exercisable (a) immediately as of the effective date of the stock option
agreement granting the option, or (b) at such other times as are specified in
the written stock option agreement relating to such option.
6.1.4 Option Grant Date. Except in the case of
advance approvals described in Section 5, the date of grant of an option under
this Plan shall be the date as of which the Administrator approves the grant. No
option shall be exercisable, however, until a written stock option agreement in
form satisfactory to the Company is executed by the Company and the optionee.
6.1.5 Nonassignability of Option Rights. No option
granted under this Plan shall be assignable or otherwise transferable by the
optionee except by will or by the laws of descent and distribution. During the
life of the optionee, an option shall be exercisable only by the optionee.
6.1.6 Payment. Except at provided below, payment in
full, in cash, shall be made for all stock purchased at the time written notice
of exercise of an option is given to the Company, and proceeds of any payment
shall constitute general funds of the Company. At the time an option is granted
or exercised, the Administrator, in the exercise of its absolute discretion, may
authorize any one or more of the following additional methods of payment:
(a) Acceptance of the optionee's full
recourse promissory note for all or part of the option price (except for the
aggregate par value of the shares being acquired, which must be paid by means of
consideration lawful under applicable state law other than such promissory note)
payable on such terms and bearing such interest rate as determined by the
Administrator (but in no event less than the minimum interest rate specified by
federal tax law at which no additional interest would be imputed), which
promissory note may be either secured or
-4-
<PAGE> 5
unsecured in such manner as the Administrator shall approve (including, without
limitation, by a security interest in the shares of the Company); and
(b) Delivery by the optionee of Common Stock
already owned by the optionee for all or part of the option price, provided the
value (determined as set forth in Section 6.1.11) of such Common Stock is equal
on the date of exercise to the option price, or such portion thereof as the
optionee is authorized to pay by delivery of such stock; provided, however, that
if an optionee has exercised any portion of any option granted by the Company by
delivery of Common Stock, the optionee may not, within six months following such
exercise, exercise any option granted under this Plan by delivery of Common
Stock.
6.1.7 Termination of Employment. Unless determined
otherwise by the Administrator, in its absolute discretion, option rights
granted under this Plan, to the extent such rights have not then expired or been
exercised, shall terminate (a) three months, in the case of ISOs and for
optionees who are not subject to Section 16(b) of the Exchange Act, and (b)
seven months, in the case of NQOs held by an optionee subject to Section 16(b)
of the Exchange Act, after an optionee ceases, for any reason, to be an employee
or director of the Company or any Affiliate of the Company, and shall not be
exercisable on or after said date; provided, that such option rights are
exercisable after the date of such termination only to the extent they were
exercisable on the date of termination; and provided further, that if
termination of employment is due to the disability or death of the optionee, the
optionee, or the optionee's personal representative or any other person who
acquires the option rights from the optionee by will or the applicable laws of
descent and distribution, may within twelve months after the termination of
employment, exercise the rights to the extent they were exercisable on the date
of the termination. A transfer of an optionee from the Company to an Affiliate
or vice versa, or from one Affiliate to another, or a leave of absence duly
authorized by the Company, shall not be deemed a termination of employment or a
break in continuous employment.
6.1.8 Repurchase of Stock. At the option of the
Administrator, the stock to be delivered pursuant to the exercise of any option
granted to an employee under this Plan may be subject to a right of repurchase
(the "Right of Repurchase") in favor of the Company with respect to any employee
whose employment with the Company is terminated. Such Right of Repurchase shall
be at the option exercise price and shall expire in accordance with a schedule
related to the date of the grant of the option, the date of first employment, or
such other date as may be set by the Administrator (in any case, the "Vesting
Base Date") with respect to each option grant, as determined by the Board of
Directors; provided, that subject to section 6.1.2, in the event of a sale of
the Company or substantially all of the assets or stock of the Company to
another entity, or a merger in
-5-
<PAGE> 6
which the Company is not the surviving entity, the Board of Directors, in its
absolute discretion, may accelerate the expiration of the Right of Repurchase
with respect to all or any portion of the shares issuable upon exercise of any
outstanding option. Determination of the number of shares subject to such Right
of Repurchase shall be made as of the date the employee's employment by the
Company terminates, not as of the date that any option granted to such employee
is exercised.
6.1.9 Withholding and Employment Taxes. At the time
of exercise of an option, the optionee shall remit to the Company in cash all
applicable federal and state withholding and employment taxes. The Administrator
may, in the exercise of the Administrator's sole discretion, permit an optionee
to pay some or all of such taxes by means of a promissory note on such terms as
the Administrator deems appropriate. If and to the extent authorized by the
Administrator in its absolute discretion after March 1, 1989, an optionee may
make an election, by means of a form of election to be prescribed by the
Administrator, to have shares of Common Stock which are acquired upon exercise
of the option or other securities of the Company withheld by the Company or to
tender to the Company other shares of Common Stock or other securities of the
Company owned by the optionee on the date of determination of the amount of tax
to be withheld as a result of exercise of such option (the "Tax Date") to pay
the amount of tax that is required by law to be withheld by the Company as a
result of the exercise of such option from amounts payable to such person,
subject to the following limitations (unless, except in the case of
subparagraphs (a) and (b), Rule 16b-3 is not applicable to Plan):
(a) such election shall be irrevocable;
(b) such election shall be subject to the
disapproval of the Administrator at any time;
(c) such election may not be made within six
months of the grant date of the option the exercise of which resulted in the tax
withholding obligation (except that this limitation shall not apply in the event
of death or disability of such person occurring prior to the expiration of the
six-month period); and
(d) such election must be made either (i) at
least six months prior to the Tax Date, or (ii) in any ten business-day period
beginning on the third business day following the date of release by the Company
for publication of quarterly or annual summary statements of sales or earnings
of the Company.
Any securities so withheld or tendered will be valued by the
Company as of the Tax Date.
6.1.10 Other Provisions. Each option granted under
this Plan may contain such other terms, provisions, and conditions not
inconsistent with this Plan as may be determined
-6-
<PAGE> 7
by the Administrator, and each ISO granted under this Plan shall include such
provisions and conditions as are necessary to qualify the option as an
"incentive stock option" within the meaning of Section 422A of the Code.
6.1.11 Determination of Value. For purposes of the
Plan, the value of Common Stock or other Securities of the Company shall be
determined as follows:
(a) if the stock of the Company is listed on
any established stock exchange or a national market system, including without
limitation the National Market System of the National Association of Securities
Dealers, Inc. Automated Quotation System, its fair market value shall be the
closing sales price for such stock or the closing bid if no sales were reported,
as quoted on such system or exchange (or the largest such exchange) for the date
the value is to be determined (or if there are no sales for such date, then for
the last preceding business day on which there were sales), as reported in the
Wall Street Journal or similar publication.
(b) If the stock of the Company is regularly
quoted by a recognized securities dealer but selling prices are not reported,
its fair market value shall be the mean between the high bid and low asked
prices for the stock on the date the value is to be determined (or if there are
no quoted prices for the date of grant, then for the last preceding business day
on which there were quoted prices).
(c) In the absence of an established market
for the stock, the fair market value thereof shall be determined in good faith
by the Administrator, with reference to the Company's net worth, prospective
earning power, dividend-paying capacity, and other relevant factors, including
the goodwill of the Company, the economic outlook in the Company's industry, the
Company's position in the industry and its management, and the values of stock
of other corporations in the same or a similar line of business.
6.2 Terms and Conditions to Which Only NQOs Are Subject.
Options granted under this Plan which are designated as NQOs shall be subject to
the following terms and conditions:
6.2.1 Exercise Price. The exercise price of a NQO
shall be not less than 85 percent of the fair market value (determined in
accordance with Section 6.1.11) of the stock subject to the option on the date
of grant, except that the exercise price of a NQO granted to any person who
owns, directly or indirectly, (or is treated as owning by reason of attribution
rules, currently set forth in Code Section 425) stock of the Company
constituting more than ten percent of the total combined voting power of all
classes of the outstanding stock of the Company or of any Affiliate of the
Company (a "Ten Percent Stockholder"), shall in no event be less than 110
percent of such fair market value.
-7-
<PAGE> 8
6.2.2 Option Term. Unless an earlier expiration date
is specified by the Administrator at the time of grant, each NQO granted under
this Plan shall expire ten years and two days from the date of its grant, except
that a NQO granted to any Ten Percent Stockholder shall expire five years from
the date of its grant.
6.3 Terms and Conditions to Which Only ISOs Are Subject.
Options granted under this Plan which are designated as ISOs shall be subject to
the following terms and conditions:
6.3.1 Exercise Price. The exercise price of an ISO,
which shall be approved by the Board of Directors, shall be determined in
accordance with the applicable provisions of the Code and shall in no event be
less than the fair market value (determined as described in section 6.1.11) of
the stock covered by the option at the time the option is granted, except that
the exercise price of an ISO granted to any Ten Percent Stockholder shall in no
event be less than 110 percent of such fair market value.
6.3.2 Expiration. Unless an earlier expiration date
is specified by the Administrator at the time of grant, each ISO granted under
this Plan shall expire ten years from the date of its grant, except that an ISO
granted to any Ten Percent Stockholder shall expire five years from the date of
its grant.
6.3.3 Exercise of an ISO by an Employee Who Holds
Other ISOs. An ISO granted under this Plan shall be exercisable in accordance
with Section 6.1.3, subject to the limitations set forth in Sections 5 and
6.3.5.
6.3.4 Disqualifying Dispositions. If stock acquired
by exercise of an ISO granted pursuant to this Plan is disposed of within two
years from the date of grant of the option or within one year after the transfer
of the stock to the optionee, the holder of the stock immediately prior to the
disposition shall promptly notify the Company in writing of the date and terms
of the disposition and shall provide such other information regarding the
disposition as the Company may reasonably require.
7. MANNER OF EXERCISE
An optionee wishing to exercise an option shall give written
notice to the Company at its principal executive office, to the attention of the
officer of the Company designated by the Administrator, accompanied by payment
of the exercise price as provided in Section 6.1.6. The date the Company
receives written notice of an exercise hereunder accompanied by payment of the
exercise price, and, if required, by payment of any federal or state withholding
or employment taxes required to be withheld by virtue of the exercise of the
option, will be considered as the date such option was exercised.
-8-
<PAGE> 9
Promptly after receipt of written notice of exercise of an
option, the Company shall, without stock issue or transfer taxes to the optionee
or other person entitled to exercise the option, deliver to the optionee or such
other person a certificate or certificates for the requisite number of shares of
stock. An optionee or transferee of an optionee shall not have any privileges as
a stockholder with respect to any stock covered by the option until the date of
issuance of a stock certificate.
8. EMPLOYMENT RELATIONSHIP
Nothing in this Plan or any option granted thereunder shall
interfere with or limit in any way the right of the Company or of any of its
Affiliates to terminate any optionee's employment at any time, nor confer upon
any optionee any right to continue in the employ of the Company or any of its
Affiliates.
9. AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN
The Board of Directors may at any time amend, alter, suspend
or discontinue this Plan, except to the extent that stockholder approval is
required by applicable law; provided, however, that no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
optionee under any option theretofore granted, without his consent, or that,
without the affirmative vote of a majority of the votes cast at a meeting at
which a quorum of the voting power of the Company is represented in person or by
proxy, would:
(a) Except as is provided in Section 6.1.1 of this Plan,
increase the total number of shares of stock reserved for the purposes of this
Plan;
(b) Extend the duration of this Plan; or
(c) Change the class of persons eligible to receive options
granted hereunder.
The Board of Directors may, at any time without stockholder
approval, amend the Plan and the terms of any option outstanding under the Plan,
provided that such amendment is designed to maximize federal income tax benefits
accorded to employee stock options and provided further, that with respect to
outstanding options, the optionee consents to such amendment.
10. EFFECTIVE DATE OF THIS PLAN
This Plan shall become effective upon adoption by the Board of
Directors, provided, however, that no option shall be exercisable unless and
until written consent of the stockholders, of the Company, or approval by
stockholders of the Company voting at a validly called stockholders meeting and
holding a majority (or such greater number as may be required by law or
applicable governmental regulations or orders) of the shares entitled to vote,
is obtained within 12 months after adoption by the Board of
-9-
<PAGE> 10
Directors. Options may be granted and exercised under this Plan only after there
has been compliance with all applicable federal and state securities laws.
Plan adopted by the Board of Directors on December 10, 1987.
Plan approved by stockholders on March 1, 1988.
Plan amended by the Board of Directors on January 25, 1990.
Amendments approved by stockholders on May 30, 1990.
Plan amended by Board of Directors on December 12, 1991.
Amendments approved by stockholders on June 16, 1992.
Plan amended by Board of Directors on June 14, 1995.
-10-
<PAGE> 1
1987 CONSULTANT STOCK OPTION PLAN
OF
SEQUUS PHARMACEUTICALS, INC.
1. PURPOSE OF THE PLAN
The purposes of the 1987 Consultant Stock Option Plan (the
"Plan") of SEQUUS Pharmaceuticals, Inc., a Delaware corporation (the "Company")
are to:
(a) Furnish incentive to individuals chosen to receive options
because they are considered capable of responding by improving operations and
increasing profits;
(b) Encourage selected consultants to accept or continue
employment with the Company or its Affiliates; and
(c) Increase the interest of selected consultants in the
Company's welfare through their participation in the growth in value of the
Common Stock of the Company (the "Common Stock").
To accomplish the foregoing objectives, this Plan provides a
means whereby consultants to the Company and its Affiliates may receive options
to purchase Common Stock. Options granted under this Plan will be nonqualified
options ("NQOs") subject to federal income taxation upon exercise.
2. ELIGIBLE PERSONS
Every person who at the date of grant is a consultant to the
Company or to any Affiliate (as defined below) of the Company, other than a
consultant who is also a director of the Company or of any Affiliate, is
eligible to receive NQOs under this Plan. The term "Affiliate" as used in the
Plan means a parent or subsidiary corporation as defined in the applicable
provisions (currently Section 425) of the Internal Revenue Code of 1986, as
amended, or any successor statute (the "Code"). The term "consultant" includes
persons employed by, or otherwise affiliated with, a consultant.
3. STOCK SUBJECT TO THIS PLAN
The total number of shares of stock which may be granted
pursuant to this Plan is 350,000 shares of Common Stock. The shares covered by
the portion of any grant which expires unexercised under the Plan and the share
repurchased by the Company in accordance with the terms of the Plan shall become
available again for grants under the Plan. The number of shares reserved for
purchase under the Plan is subject to adjustment in accordance with the
provisions for adjustment in the Plan.
<PAGE> 2
4. ADMINISTRATION
This Plan shall be administered by the Board of Directors of
the Company (the "Board") or by a committee appointed by the Board which shall
not have less than two Board members (in either case, the "Administrator"). No
option shall be granted to a director of the Company except (a) by the Board
when a majority of the members of the Board, and a majority of the directors
acting in the matter, are disinterested persons, or (b) by the Administrator
when the Administrator is composed of three or more persons having full
authority to act in the matter and each member of the Administrator is a
disinterested person, unless the Administrator determines that the foregoing
provision is not necessary to comply with the provisions of Rule 16b-3
promulgated by the Securities and Exchange Commission ("Rule 16b-3") or that
Rule 16b-3 is not applicable to the Plan. "Disinterested person," for this
purpose, shall have the same meaning as in Rule 16b-3 or any successor rule
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Administrator may delegate nondiscretionary administrative duties to such
employees of the Company as it deems proper. Subject to the provisions of this
Plan, the Administrator shall have the authority to select the persons to
receive options under this Plan, to fix the number of shares that each optionee
may purchase, to set the terms and conditions of each option, and to determine
all other matters relating to this Plan. No member of the Administrator shall be
liable for any act or omission on such member's own part, including but not
limited to the exercise of any power or discretion given to such member under
this Plan, except for those acts or omissions resulting from such member's own
gross negligence or willful misconduct. All questions of interpretation,
implementation, and application of this Plan shall be determined by the
Administrator. Such determinations shall be final and binding on all persons.
5. GRANTING OF OPTIONS
No options shall be granted under this Plan after ten years
from the date of adoption of this Plan by the Board of Directors.
Each option shall be evidenced by a written stock option
agreement, in form satisfactory to the Company, executed by the Company and the
person to whom such option is granted; provided, however, that the failure by
the Company, the optionee, or both to execute such an agreement shall not
invalidate the granting of an Option.
The Administrator may approve the grant of options under this
Plan to persons who are expected to become consultants to the Company, but are
not consultants at the date of approval. In such cases, the option shall be
deemed granted, without further approval, on the date the grantee becomes a
consultant and must satisfy all requirements of this Plan for options granted on
that date.
-2-
<PAGE> 3
6. TERMS AND CONDITIONS OF OPTIONS
Each option shall be subject to the terms and conditions set
forth in this Section 6.
6.1 Changes in Capital Structure. Subject to Section 6.2, if
the stock of the Company is changed by reason of a stock split, reverse stock
split, stock dividend, or recapitalization, or converted into or exchanged for
other securities as a result of a merger, consolidation or reorganization,
appropriate adjustments shall be made in (a) the number and class of shares of
stock subject to this Plan and each option outstanding under this Plan, and (b)
the exercise price of each outstanding option; provided, however, that the
Company shall not be required to issue fractional shares as a result of any such
adjustments. Each such adjustment shall be subject to approval by the Board of
Directors in its sole discretion.
6.2 Corporate Transactions. New option rights may be
substituted for the option rights granted under this Plan, or the Company's
obligations as to options outstanding under this Plan may be assumed, by an
employer corporation other than the Company, or by a parent or subsidiary of
such employer corporation, in connection with any merger, consolidation,
acquisition, separation, reorganization, liquidation or like occurrence in which
the Company is involved. Notwithstanding the foregoing or the provisions of
Section 6.1, if such employer corporation, or parent or subsidiary of such
employer corporation, does not substitute new and substantially equivalent
option rights for the option rights granted hereunder, or assume the option
rights granted hereunder, the option rights granted hereunder shall terminate
(a) upon dissolution or liquidation of the Company, or similar occurrence, or
(b) upon any merger, consolidation, acquisition, separation, or similar
occurrence, where the Company will not be a surviving corporation; provided,
however, that each optionee shall be mailed notice at least thirty-five (35)
days prior to such dissolution, liquidation, merger, consolidation, acquisition,
separation, or similar occurrence, and shall have at least thirty (30) days
after the mailing of such notice to exercise any unexpired option rights granted
hereunder to the extent exercisable on the date of such event.
6.3 Time of Option Exercise. Options granted under this Plan
shall be exercisable (a) immediately as of the effective date of the stock
option agreement granting the option, or (b) at such other times as are
specified in the written stock option agreement relating to such option.
6.4 Option Grant Date. Except in the case of advance approvals
described in Section 5, the date of grant of an option under this Plan shall be
the date as of which the Administrator approves the grant. No option shall be
exercisable, however,
-3-
<PAGE> 4
until a written stock option agreement in form satisfactory to the Company is
executed by the Company and the optionee.
6.5 Nonassignability of Option Rights. No option granted under
this Plan shall be assignable or otherwise transferable by the optionee except
by will or by the laws of descent and distribution. During the life of the
optionee, an option shall be exercisable only by the optionee.
6.6 Payment. Except as provided below, payment in full, in
cash, shall be made for all stock purchased at the time written notice of
exercise of an option is given to the Company, and proceeds of any payment shall
constitute general funds of the Company. At the time an option is granted or
exercised, the Administrator, in the exercise of its absolute discretion, may
authorize any one or more of the following additional methods of payment:
(a) Acceptance of the optionee's full recourse
promissory note for all or part of the option price (except for the aggregate
par value of the shares being acquired, which must be paid by means of
consideration lawful under applicable state law other than such promissory
note), payable on such terms and bearing such interest rate as determined by the
Administrator (but in no event less than the minimum interest rate specified by
federal tax law at which no additional interest would be imputed), which
promissory note may be either secured or unsecured in such manner as the
Administrator shall approve (including, without limitation, by a security
interest in the shares of the Company); and
(b) Delivery by the optionee of Common Stock already
owned by the optionee for all or part of the option price, provided the value
(determined as set forth in Section 6.11) of such Common Stock is equal on the
date of exercise to the option price, or such portion thereof as the optionee is
authorized to pay by delivery of such stock; provided, however, that if an
optionee has exercised any portion of any option granted by the Company by
delivery of Common Stock, the optionee may not, within six months following such
exercise, exercise any option granted under this Plan by delivery of Common
Stock.
6.7 Termination of Consultancy. Unless determined otherwise by
the Administrator, in its absolute discretion, option rights granted under this
Plan, to the extent such rights have not then expired or been exercised, shall
terminate (a) three months for optionees who are not subject to Section 16(b) of
the Exchange Act, and (b) seven months for optionees subject to Section 16(b) of
the Exchange Act, after an optionee ceases, for any reason, to be a consultant
to the Company or any Affiliate of the Company, and shall not be exercisable on
or after said date; provided, that such option rights are exercisable after the
date of such termination only to the extent they were exercisable on the date of
termination; and provided further, that if termination of consultancy is due to
the
-4-
<PAGE> 5
disability or death of the optionee, the optionee, or the optionee's personal
representative or any other person who acquires the option rights from the
optionee by will or the applicable laws of descent and distribution, may within
twelve months after the termination of consultancy, exercise the rights to the
extent they were exercisable on the date of the termination. A transfer of an
optionee from the Company to an Affiliate or vice versa, or from one Affiliate
to another, or a leave of absence duly authorized by the Company, shall not be
deemed a termination of consultancy or a break in continuous consulting
relationship.
6.8 Repurchase of Stock. At the option of the Administrator,
the stock to be delivered pursuant to the exercise of any option granted to a
consultant under this Plan may be subject to a right of repurchase in favor of
the Company with respect to any consultant whose consultancy to the Company is
terminated. Such right of repurchase shall be at the option exercise price and
shall expire on a schedule related to the date of grant of the option, the date
of commencement of the consulting relationship, or such other date as may be set
by the Administrator (in any case, the "Vesting Base Date") with respect to each
option grant, as determined by the Board of Directors. Determination of the
number of shares subject to such right of repurchase shall be made as of the
date the consultant's consulting relationship with the Company terminates, not
as of the date that any option granted to such consultant is exercised.
6.9 Withholding and Employment Taxes. At the time of exercise
of an option, the optionee shall remit to the Company in cash all applicable
federal and state withholding and employment taxes. The Administrator may, in
the exercise of the Administrator's sole discretion, permit an optionee to pay
some or all of such taxes by means of a promissory note on such terms as the
Administrator deems appropriate. If and to the extent authorized by the
Administrator in its absolute discretion after March 1, 1989, an optionee may
make an election, by means of a form of election to be prescribed by the
Administrator, to have shares of Common Stock or other securities of the Company
withheld by the Company or to tender to the Company other shares of Common Stock
or other securities of the Company owned by the optionee on the date of
determination of the amount of tax to be withheld as a result of exercise of
such option (the "Tax Date") to pay the amount of tax that is required by law to
be withheld by the Company as a result of the exercise of such option from
amounts payable to such person, subject to the following limitations (unless,
except in the case of subparagraphs (a) and (b), the Administrator determines
that such limitations are not necessary to comply with the provisions of Rule
16b-3 or that Rule 16b-3 is not applicable to Plan);
(a) such election shall be irrevocable;
(b) such election shall be subject to the disapproval
of the Administrator at any time;
-5-
<PAGE> 6
(c) such election may not be made within six months
of the grant date of the option the exercise of which resulted in the tax
Withholding obligation (except that this limitation shall not apply in the event
of death or disability of such person occurring prior to the expiration of the
six-month period); and
(d) such election must be made either (i) at least
six months prior to the Tax Date, or (ii) in any ten business-day period
beginning on the third business day following the date of release by the Company
for publication of quarterly or annual summary statements of sales or earnings
of the Company.
Any securities so withheld or tendered will be valued by the
Company as of the Tax Date.
6.10 Other Provisions. Each option granted under this Plan may
contain such other terms, provisions, and conditions not inconsistent with this
Plan as may be determined by the Administrator.
6.11 Determination of Value. For purposes of the Plan, the
value of Common Stock or other securities of the Company shall be determined as
follows:
(a) If the stock of the Company is listed on any
established stock exchange or a national market system, including without
limitation the National Market System of the National Association of Securities
Dealers, Inc. Automated Quotation System, its fair market value shall be the
closing sales price for such stock or the closing bid if no sales were reported,
as quoted on such system or exchange (or the largest such exchange) for the date
the value is to be determined (or if there are no sales for such date, then for
the last preceding business day on which there were sales), as reported in the
Wall Street Journal or similar publication.
(b) If the stock of the Company is regularly quoted
by a recognized securities dealer but selling prices are not reported, its fair
market value shall be the mean between the high bid and low asked prices for the
stock on the date the value is to be determined (or if there are no quoted
prices for the date of grant, then for the last preceding business day on which
there were quoted prices).
(c) In the absence of an established market for the
stock, the fair market value thereof shall be determined in good faith by the
Administrator, with reference to the Company's net worth, prospective earning
power, dividend-paying capacity, and other relevant factors, including the
goodwill of the Company, the economic outlook in the Company's industry, the
Company's position in the industry and its management, and the values of stock
of other corporations in the same or a similar line of business.
-6-
<PAGE> 7
6.12 Exercise Price. The exercise price of an option shall be
not less than 85 percent of the fair market value (determined in accordance with
Section 6.11) of the stock subject to the option on the date of grant, except
that the exercise price of an option granted to any person who owns, directly or
indirectly, (or is treated as owning by reason of attribution rules, currently
set forth in Code Section 425) stock of the Company constituting more than ten
percent of the total combined voting power of all classes of the outstanding
stock of the Company or of any Affiliate of the Company (a "Ten Percent
Stockholder"), shall in no event be less than 110 percent of such fair market
value.
6.13 Option Term. Unless an earlier expiration date is
specified by the Administrator at the time of grant, each option granted under
this Plan shall expire ten years and two days from the date of its grant, except
that an option granted to any Ten Percent Stockholder shall expire five years
from the date of its grant.
7. MANNER OF EXERCISE
An optionee wishing to exercise an option shall give written
notice to the Company at its principal executive office, to the attention of the
officer of the Company designated by the Administrator, accompanied by payment
of the exercise price as provided in Section 6.6. The date the Company receives
written notice of an exercise hereunder accompanied by payment of the exercise
price and, if required, by payment of any federal or state withholding or
employment taxes required to be withheld by virtue of exercise of the option,
will be considered as the date such option was exercised.
Promptly after receipt of written notice of exercise of an
option, the Company shall, without stock issue or transfer taxes to the optionee
or other person entitled to exercise the option, deliver to the optionee or such
other person a certificate or certificates for the requisite number of shares of
stock. An optionee or transferee of an optionee shall not have any privileges as
a stockholder with respect to any stock covered by the option until the date of
issuance of a stock certificate.
8. CONSULTING RELATIONSHIP
Nothing in this Plan or any option granted thereunder shall
interfere with or limit in any way the right of the Company or of any of its
Affiliates to terminate any optionee's consulting relationship with the Company
at any time, nor confer upon any optionee any right to continue to consult to
the Company or to any of its Affiliates.
9. FINANCIAL INFORMATION
The Company shall provide during the period an option is
outstanding to each holder of such option a copy of the
-7-
<PAGE> 8
financial statements of the Company as prepared either by the Company or
independent certified public accountants of the Company. Such financial
statements shall be delivered as soon as practicable following the end of the
Company's fiscal year during the period options are outstanding.
10. AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN
The Board of Directors may at any time amend, alter, suspend
or discontinue this Plan, except to the extent that stockholder approval is
required by applicable law; provided, however, that no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
optionee under any option theretofore granted, without his consent, or that,
without the approval of the holders of a majority of the outstanding shares of
the Company, would:
(a) Except as is provided in Section 6.1 of this Plan,
increase the total number of shares of stock reserved for the purposes of this
Plan;
(b) Extend the duration of this Plan; or
(c) Change the class of persons eligible to receive options
granted hereunder.
The Board of Directors may, at any time without stockholder
approval, amend the Plan and the terms of any option outstanding under the Plan,
provided that such amendment is designed to maximize federal income tax benefits
accorded to stock options and provided further, that with respect to outstanding
options, the optionee consents to such amendment.
11. EFFECTIVE DATE OF THIS PLAN
This Plan shall become effective upon adoption by the Board of
Directors, provided, however, that no option shall be exercisable unless and
until written consent of the stockholders of the Company, or approval by
stockholders of the Company voting at a validly called stockholders meeting and
holding a majority (or such greater number as may be required by law or
applicable governmental regulations or orders) of the shares entitled to vote,
is obtained within 12 months after adoption by the Board of Directors. Options
may be granted and exercised under this Plan only after there has been
compliance with all applicable federal and state securities laws.
Plan adopted by the Board of Directors on December 10, 1987.
Plan approved by the stockholders on March 1, 1988.
Plan amended by the Board of Directors on December 12, 1991.
Amendments approved by the stockholders on June 16, 1992.
Plan amended by the Board of Directors on June 14, 1995.
-8-
<PAGE> 9
-9-
<PAGE> 1
SEQUUS PHARMACEUTICALS, INC.
EMPLOYEE STOCK PURCHASE PLAN
1. Purpose
The Employee Stock Purchase Plan (the "Plan") is designed to
encourage and assist employees of SEQUUS Pharmaceuticals, Inc., its parent and
participating subsidiaries, if any (collectively, the "Company") to acquire an
equity interest in the Company through the purchase of shares of Common Stock.
2. Administration
The Plan shall be administered by the Board of Directors (or a
committee of two or more "disinterested" directors, which in either case is
referred to as the "Board") in accordance with Rule 16b-3 of the Securities and
Exchange Commission, as in effect from time to time. Any committee or persons as
the Board may from time to time select (the "Administrator") shall be
responsible for any matters for which a "disinterested administrator" is not
required by Rule 16b-3. Subject to the express provisions of the Plan, to the
overall supervision of the Board, and to the limitations of Section 423 or any
successor provision of the Internal Revenue Code of 1986, as amended (the
"Code"), the Administrator may administer and interpret the Plan in any manner
it believes to be desirable, and any such interpretation shall be conclusive and
binding on the Company and all participants.
3. Number of Shares
The Company has reserved for sale under the Plan 250,000
shares of Common Stock. Shares sold under the Plan may be newly issued shares or
shares reacquired in private transactions or open market purchases, but all
shares sold under the Plan regardless of source shall be counted against the
250,000-share limitation.
In the event of any reorganization, recapitalization, stock
split, reverse stock split, stock dividend, combination of shares, merger,
consolidation, offering of rights, or other similar change in the capital
structure of the Company, the Administrator may make such adjustment, if any, as
it deems appropriate in the number, kind, and purchase price of the shares
available for purchase under the Plan and in the maximum number of shares
subject to any option under the Plan.
4. Eligibility Requirements
Each employee, except those described in the next paragraph,
shall become eligible to participate in the Plan in
<PAGE> 2
accordance with Section 5 on the first Enrollment Date following employment by
the Company. Participation in the Plan is entirely voluntary.
The following employees are not eligible to participate in the
Plan:
(i) employees who would, immediately upon enrollment in the
Plan, own directly or indirectly (including options or rights to acquire), an
aggregate of more than five percent of the total combined voting power or value
of all outstanding shares of all classes of the Company or any subsidiary; and
(ii) employees who are customarily employed by the Company
less than 20 hours per week or less than five months in any calendar year.
"Employee" shall mean any individual who performs services for SEQUUS
Pharmaceuticals, Inc. or any participating subsidiary pursuant to an employment
relationship described in Treasury Regulations Section 31.3401(c)-1 or any
successor provision. "Subsidiary" shall mean any corporation in an unbroken
chain of corporations beginning with SEQUUS Pharmaceuticals, Inc. if, as of the
applicable Enrollment Date, each of the corporations other than the last
corporation in the chain owns stock possessing 50% or more of the combined
voting power of all classes of stock in one of the other corporations in the
chain. A "participating subsidiary" shall mean a subsidiary which has been
designated by the Administrator as covered by the Plan.
5. Enrollment
Any eligible employee may enroll or re-enroll in the Plan as
of the first trading day of any January, April, July, and October, or such other
specific trading days established by the Administrator from time to time
("Enrollment Dates"). In order to enroll an eligible employee must complete,
sign, and submit to the Company an enrollment form. Any enrollment form received
by the Company before the 15th day of the month preceding an Enrollment Date, or
such other date established by the Administrator from time to time ("Cut-Off
Date"), will be effective on that Enrollment Date. As a condition to
participation, each enrollee agrees to inform the Company promptly of the sale
or other disposition of shares acquired under the Plan within either of the
periods specified in Section 423(a)(1) of the Code (currently, two years from
the date of grant of the option pursuant to which such shares were acquired and
one year after the Purchase Date for such shares).
6. Grant of Options on Enrollment
Enrollment by a participant in the Plan on an Enrollment Date
will constitute the grant by the Company to the participant of options to
purchase shares of Common Stock from the Company under the Plan. The number of
options granted will
-2-
<PAGE> 3
equal the number of percentage points of salary that the participant elects to
have withheld. An increase (but not a decrease) in the level of payroll
withholding also constitutes the grant of new options for the incremental change
in the percentage withheld but does not cancel outstanding options. Any
participant whose options expire and who has not withdrawn from the Plan will
automatically be re-enrolled in the Plan and granted new options (equal in
number to the number of expiring options) on the Enrollment Date immediately
following the Purchase Date on which his then-current options expire. Any date
on which a participant is granted options under the Plan is referred to as a
"Grant Date."
Each option granted under the Plan shall have the following
terms:
(i) whether or not all shares have been purchased thereunder,
the option will expire on the earlier to occur of (A) the completion of the
purchase of shares on the last Purchase Date occurring within 27 months of the
Grant Date for such option, or such shorter option period as may be established
by the Board from time to time prior to an Enrollment Date for all options to be
granted on such Enrollment Date, or (B) the date on which participation of such
participant in the Plan terminates for any reason;
(ii) payment for shares purchased under the option will be
made only through payroll withholding in accordance with Section 7;
(iii) purchase of shares upon exercise of the option will be
accomplished only in installments in accordance with Section 8;
(iv) the price per share under the option will be determined
as provided in Section 8;
(v) unless otherwise established by the Board from time to
time prior to an Enrollment Date, the number of shares available for purchase
under each option will be the quotient of (a) 75,000, divided by (b) the then
fair market value of the Common Stock subject to option for all options to be
granted on such Enrollment Date; provided, however, that in no event shall an
option give the participant the right to purchase shares at a rate which accrues
in excess of $75,000 of fair market value of such shares (determined at the
Grant Date of such option) in any calendar year during which the option is
outstanding;
(vi) notwithstanding clause (v), the option (taken together
with all other options then outstanding under this Plan and under all other
similar stock purchase plans of SEQUUS Pharmaceuticals, Inc. or any parent or
subsidiary) will in no event give the participant the right to purchase shares
at a rate which accrues in excess of $25,000 of fair market value of such shares
(determined in accordance with Section 423(b)(8) of the
-3-
<PAGE> 4
Code at the applicable grant dates) in any calendar year during which such
participant is enrolled in the Plan at any time; and
(vii) the option will in all respects be subject to the terms
and conditions of the Plan, as interpreted by the Administrator from time to
time.
7. Payroll Withholding
Each participant may elect to make contributions at a rate
equal to any whole percentage up to a maximum of 10%, or such other maximum
percentage as the Board may establish from time to time before an Enrollment
Date for all options to be granted on such Enrollment Date, of his or her
monthly earnings from the Company. The rate of contribution shall be designated
by the participant in the enrollment form. A participant may change the
contribution rate effective as of any Enrollment Date by delivery to the Company
not later than the related Cut-Off Date of a new enrollment form indicating the
revised rate. An increase (but not a decrease) in the contribution rate
constitutes the grant of new options. If the rate is decreased and there is more
than one option outstanding, the participant may specify the option to which
such decrease should apply.
Contributions shall be credited to a participant's account as
soon as administratively feasible after payroll withholding. The Company shall
be entitled to use of the contributions immediately after payroll withholding
and shall have no obligation to pay interest on the contributions to any
participant.
8. Purchase of Shares
On the last trading day of each March, June, September, and
December, or on such other specific trading days as may be established by the
Board from time to time prior to an Enrollment Date for all options to be
granted on such Enrollment Date ("Purchase Dates"), the Company shall apply the
funds then credited to each participant's account to the purchase of whole and
fractional shares of Common Stock. The cost to the participant for the shares
purchased under any option shall be 85% of the lower of:
(i) the closing price of Common Stock on the NASDAQ National
Market System on the Grant Date for such option;
(ii) the closing price of Common Stock on the NASDAQ National
Market System on that Purchase Date; or
(iii) if no closing price is reported on either of such dates,
the closing price of the Common Stock on the NASDAQ National Market System on
the date next preceding such Grant Date or such Purchase Date, as the case may
be, on which a closing price is reported.
-4-
<PAGE> 5
Certificates evidencing shares purchased on any Purchase Date shall be delivered
as soon as administratively feasible, but participants shall be treated as the
owners of their shares effective as of the Purchase Date. Any cash equal to less
than the price of the smallest fractional share of Common Stock which may be
purchased under the Plan left in a participant's payroll deduction account on a
Purchase Date shall be carried forward in such participant's account for
application on the next Purchase Date.
9. Withdrawal From the Plan
A participant may withdraw from the Plan in full (but not in
part) at any time. All funds credited to a participant's payroll deduction
account shall be distributed to the participant without interest as soon as
administratively feasible after the Company receives the withdrawal notice. An
employee who has withdrawn may not return funds to the Company and require the
Company to apply those funds to the purchase of shares. Any eligible employee
who has withdrawn from the Plan may, however, enroll in the Plan again on any
subsequent Enrollment Date in accordance with Section 5.
10. Termination of Employment
Participation in the Plan terminates immediately when a
participant ceases to be employed by the Company for any reason whatsoever
(including death or disability) or otherwise becomes ineligible to participate
in the Plan. As soon as administratively feasible after termination, the Company
shall pay to the participant or his or her beneficiary or legal representative
all amounts credited to the participant's payroll deduction account.
11. Leave of Absence
Unless a participant has voluntarily withdrawn from the Plan,
shares will be purchased for his or her account on the Purchase Date next
following commencement of a leave of absence of such participant. Participation
in the Plan will terminate immediately after the purchase of shares on such
Purchase Date, however, unless:
(i) the leave of absence is of less than 90 days' duration and
is due to illness, injury, or other cause approved by the Administrator; or
(ii) the participant's right to reemployment after such leave
is guaranteed by contract or statute.
12. Designation of Beneficiary
Each participant may designate one or more beneficiaries in
the event of death and may, in his or her sole discretion, change such
designation at any time. Any such
-5-
<PAGE> 6
designation shall be effective upon receipt by the Company and shall control
over any disposition by will or otherwise.
As soon as administratively feasible after the death of a
participant, amounts credited to the participant's payroll deduction account
shall be paid in cash to the designated beneficiaries or, in the absence of a
designation, to the executor, administrator, or other legal representative of
his or her estate. Such payment shall relieve the Company of further liability
with respect to the Plan on account of the deceased participant. If more than
one beneficiary is designated, each beneficiary shall receive an equal portion
of the account unless the participant has given express contrary instructions.
13. Assignment
No participant may assign his or her rights under the Plan by
operation of law or otherwise. No participant may create a lien on any funds,
securities, rights, or other property held by the Company for the account of the
participant under the Plan, except to the extent that there has been a
designation of beneficiaries in accordance with the Plan, and except to the
extent permitted by the laws of descent and distribution if beneficiaries have
not been designated.
A participant's right to purchase shares under the Plan shall
be exercisable only during the participant's lifetime and only by him or her,
except that a participant may direct the Company in the enrollment form to issue
share certificates to the participant jointly with one or more other persons
with right of survivorship, in spousal community property, or to certain forms
of trusts approved by the Administrator.
14. Administrative Assistance
If the Administrator in its discretion so elects, it may
retain a brokerage firm, bank, or other financial institution to assist in the
purchase of shares, delivery of reports, or other administrative aspects of the
Plan. If the Administrator so elects, each participant shall be deemed upon
enrollment in the Plan to have authorized the establishment of an account on his
or her behalf at such institution. Shares purchased by a participant under the
Plan shall be held in the account in the participant's name, or if the
participant so indicates in the enrollment form, in the participant's name
together with the name of one or more other persons, in joint tenancy with right
of survivorship, in spousal community property, or in certain forms of trusts
approved by the Administrator.
15. Costs
The Company shall pay all costs and expenses incurred in
administering the Plan excepting stamp duties or transfer taxes applicable to
participation in the Plan, which it may charge to the participant's account. The
Company shall pay
-6-
<PAGE> 7
brokerage fees for the purchase of shares by a participant, but brokerage fees
for the resale of shares by a participant shall be borne by the participant.
16. Reports
The Company shall provide or cause to be provided to each
participant a report of his or her contributions and the shares purchased by the
participant on each Purchase Date.
17. Equal Rights and Privileges
All eligible employees shall have equal rights and privileges
with respect to the Plan so that the Plan qualifies as an "employee stock
purchase plan" within the meaning of Section 423 of the Code and the Treasury
Regulations thereunder. Any provision of the Plan which is inconsistent with
Section 423 of the Code shall without further act or amendment by the Company or
the Board be reformed to comply with the requirements of Section 423 of the
Code. This Section 17 shall take precedence over all other provisions in the
Plan.
18. Applicable Law
The Plan shall be governed by the substantive laws (excluding
the conflict of laws rules) of the State of California.
19. No Right of Employment
Neither the grant nor the exercise of any right to purchase
shares under this Plan nor anything in this Plan shall impose upon the Company
or any subsidiary any obligation to employ or continue to employ any
participant. The right of the Company and any subsidiary to terminate any
employee shall not be diminished or affected because any right to purchase
shares has been granted to such employee.
20. Requirements of Law
(a) The Company shall not be required to sell, issue or
deliver any shares of Common Stock under this Plan if such sale, issuance or
delivery might constitute a violation by the Company or the participant of any
provision of law. Unless a registration statement under the Securities Act of
1933 (the "Act") is in effect with respect to the shares of Common Stock
proposed to be delivered under the Plan, the Company shall not be required to
issue such shares if, in the opinion of the Company or its counsel, such
issuance would violate the Act. Regardless of whether such shares of Common
Stock have been registered under the Act or registered or qualified under the
securities laws of any state, the Company may impose restrictions upon the
hypothecation or further sale or transfer of such shares (including the
placement of appropriate legends on stock certificates) if, in the judgment of
the Company or its counsel,
-7-
<PAGE> 8
such restrictions are necessary or desirable to achieve compliance with the
provisions of the Act, the securities laws of any state, or any other law,
including the Internal Revenue Code. As a condition precedent to the issuance of
any shares of Common Stock under the plan, the Company may require evidence
satisfactory to it or its counsel to the effect that the purchase of such shares
is acquiring the shares for investment and not with a view to their
distribution. Any determination by the Company or its counsel in connection with
any of the foregoing shall be final and binding on all parties.
(b) If, in the opinion of the Company and its counsel, any
legend placed on a stock certificate representing shares of Common Stock issued
under the plan is no longer required or desirable in order to comply with
applicable securities or other laws, the holder of such certificate shall be
entitled to exchange such certificate for a certificate representing a like
number of shares lacking such legend.
(c) The Company may, but shall not be obligated to, register
or qualify any securities covered by the Plan. The Company shall not be
obligated to take any other affirmative action in order to cause the grant or
exercise of any right or the issuance, sale, or delivery of shares pursuant to
the exercise of any right to comply with any law.
21. Corporate Transactions
New option rights may be substituted for the option rights
under the Plan, or the Company's outstanding obligations under the Plan may be
assumed, by an employer corporation other than the Company, or by a parent or
subsidiary corporation of such employer corporation, in connection with any
merger, consolidation, acquisition, separation, reorganization or liquidation,
or like occurrence in which the Company is involved.
22. Modification, Term, and Termination
The Board may amend, alter, or terminate the Plan or any
option at any time. No amendment shall be effective unless within 12 months
after it is adopted by the Board it is approved by the holders of a majority of
the voting power of the Company's outstanding shares, if such amendment would:
(i) increase the number of shares reserved for purchase under
the Plan;
(ii) materially increase the benefits to participants; or
(iii) modify the requirements for participation.
In the event the Plan is terminated, the Board may elect to
terminate all outstanding options immediately or upon completion of the purchase
of shares on the next Purchase Date,
-8-
<PAGE> 9
or may elect to permit options to expire in accordance with their terms (and
participation to continue through such expiration dates). If the options are
terminated prior to expiration, all funds contributed to the Plan that have not
been used to purchase shares shall be returned to the participants as soon as
administratively feasible.
23. Board and Stockholder Approval
This Plan was approved by the Board of Directors on March 20,
1990. This Plan shall be subject to and conditioned upon approval of the Plan by
the affirmative vote of the holders of a majority of the outstanding shares of
Common stock of the Company within 12 months of the date the Plan is approved by
the Board. No right to purchase shares may be exercised in whole or in part
unless and until such stockholder approval is obtained.
Plan approved by the stockholders on May 30, 1990.
Plan amended by the Board of Directors on June 14, 1995.
-9-
<PAGE> 1
SEQUUS PHARMACEUTICALS, INC.
1990 DIRECTOR STOCK OPTION PLAN
1. Purpose.
The purpose of the 1990 Director Stock Option Plan (the
"Plan") of SEQUUS Pharmaceuticals, Inc., a Delaware corporation (the "Company"),
is to compensate non-employee members of the Company's Board of Directors (the
"Board") and to provide a means for such directors to increase their holdings of
Company stock.
2. Definitions.
The following definitions shall apply to this Plan:
(a) "Annual Grant Date" shall mean, for each calendar year,
beginning in 1991, the third business day following the release to the public of
the Company's annual financial results.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Eligible Director" shall mean any person who is a member
of the Board and who is not (i) a full or part-time employee of the Company or
any subsidiary or affiliate of the Company or (ii) a beneficial holder of 10% or
more of the outstanding shares of Common Stock of the Company.
(c) "Grant Date" shall mean the Initial Grant Date or the
Annual Grant Date, as appropriate.
(d) "Initial Grant Date" shall mean the later of (i) January
31, 1990; or (ii) with respect to a grant of an Option to an Eligible Director,
the date on which such Eligible Director is first elected to the Board.
(e) "Option" shall mean an option to purchase Shares granted
under this Plan.
(f) "Option Agreement" shall mean the written agreement
described in Section 6.
(g) "Shares" shall mean shares of common stock of the Company.
3. Administration.
(a) General. This Plan shall be administered by the Board in
accordance with the express provisions of this Plan.
(b) Powers of Board. The Board shall have full and complete
authority to adopt such rules and regulations and to make all such other
determinations not inconsistent with the Plan as may be necessary for the
administration of the Plan.
<PAGE> 2
4. Shares Subject to Plan.
(a) Aggregate Number. Subject to adjustment in accordance with
Section 6(g), an aggregate of 600,000 Shares is reserved for issuance under this
Plan. Shares sold under this Plan may be unissued Shares or reacquired Shares.
If any Options shall for any reason terminate or expire without having been
exercised in full, Shares not purchased thereunder shall be available again for
grant under this Plan.
(b) Rights as Stockholder. An Eligible Director shall have no
rights as a stockholder with respect to Shares acquired by exercise of an Option
until the issuance (as evidenced by the appropriate entry on the books of the
Company or a duly authorized transfer agent) of a stock certificate evidencing
the Shares. Subject to Section 6(g), no adjustment shall be made for dividends
or other events for which the record date is prior to the date the certificate
is issued.
5. Nondiscretionary Grants.
(a) Initial Grant. On the Initial Grant Date, each Eligible
Director shall receive the grant of an Option to purchase 25,000 Shares.
(b) Regular Annual Grants. (i) With respect to Eligible
Directors who are non-employee directors on January 1, 1992, on each Annual
Grant Date, such Eligible Director then in office shall receive the grant of an
Option to purchase 5,000 Shares (except for the 1992 Annual Grant Date, in which
case such grant shall be of an Option to purchase 12,500 Shares); and (ii) with
respect to Eligible Directors who are elected to the Board after January 1,
1992, on the first Annual Grant Date after the Initial Grant Date, each Eligible
Director then in office shall receive the grant of an Option to purchase 12,500
Shares, and on each Annual Grant Date thereafter, each Eligible Director then in
office shall receive the grant of an Option to purchase 5,000 shares; provided
that in the case of both (i) and (ii) above, no Eligible Director shall receive
under this Plan Options to purchase a total of more than 50,000 Shares.
(b) Adjustment. The number of Shares for which Options are
granted in accordance with this Section 5 and the number of Shares subject to
any Option shall be subject to adjustment in accordance with Section 6(g).
6. Terms of Option Agreements.
Upon the grant of each Option, the Company and the Eligible
Director shall enter into an Option Agreement which shall specify the Grant Date
and the exercise price, and shall include or incorporate by reference the
substance of all of the following provisions and such other provisions
consistent with this Plan as the Board may determine:
-2-
<PAGE> 3
(a) Term. The term of the Option shall be ten years from its
Grant Date, subject to earlier termination in accordance with Sections 6(f) or
6(h).
(b) Option Exercise. Each Option held by an Eligible Director
shall become immediately exercisable in full or in part upon the grant of such
Option; provided that the Options granted on the Initial Grant Date shall not be
exercisable until the later of: (i) the approval by the Company's stockholders
of the adoption of this Plan in accordance with Section 11, and (ii) the
effectiveness of any registration statement or qualification required by
applicable law with respect to the issuance of the Shares reserved under the
Plan.
(c) Purchase Price. The purchase price of the Shares subject
to each Option shall be the closing sales price for Shares or the closing bid if
no sales were reported, as quoted on the National Market System of NASDAQ, on
the Grant Date of such Option, or on the last preceding business day if such
Grant Date is not a business day.
(d) Payment of Purchase Price. The purchase price of Shares
acquired pursuant to an Option shall be paid in full at the time the Option is
exercised in cash or by delivery of any property other than cash (including
Shares, or other securities of the Company), so long as such property
constitutes valid consideration for the Shares purchased under applicable law
and is surrendered in good form for transfer, or by some combination of cash and
such other property; provided, however, that Options may not be exercised by the
delivery of Shares more frequently than at six-month intervals.
(e) Transferability. No Option shall be transferable otherwise
than by will or the laws of descent and distribution, and an Option shall be
exercisable during the Eligible Director's lifetime only by the Eligible
Director.
(f) Termination of Membership on the Board. If an Eligible
Director's membership on the Board terminates for any reason, an Option held at
the date of termination may be exercised in whole or in part at any time within
one year after the date of such termination (but in no event after the term of
the Option expires) and shall thereafter terminate.
(g) Capitalization Changes. If any change is made in the
Shares subject to the Plan or subject to any Option granted under the Plan,
through merger, consolidation, reorganization, recapitalization, stock dividend,
dividend in property other than cash, stock split, liquidating dividend,
combination of shares, exchange of shares, change in corporate structure or
otherwise, the Board shall make appropriate adjustments as to the maximum number
of Shares subject to the Plan, the number of Shares covered by any Option grant,
the maximum number of Shares for which Options may be granted to any Eligible
Director, and the
-3-
<PAGE> 4
number of Shares and price per Share covered by outstanding Options.
(h) Change of Ownership. In the event of (x) a dissolution or
liquidation of the Company, (y) a merger or consolidation in which the Company
is not the surviving corporation, or (z) any other capital reorganization in
which more than fifty percent (50%) of the shares of the Company entitled to
vote are exchanged, the Company shall give to the Eligible Director, at the time
of adoption of the plan for liquidation, dissolution, merger, consolidation or
reorganization, either (i) a reasonable time thereafter within which to exercise
the Option, prior to the effectiveness of such liquidation, dissolution, merger,
consolidation or reorganization, at the end of which time the Option shall
terminate, or (ii) the right to exercise the Option as to an equivalent number
of shares of stock of the corporation succeeding the Company or acquiring its
business by reason of such liquidation, dissolution, merger, consolidation or
reorganization.
7. Use of Proceeds.
Proceeds from the sale of Shares pursuant to this Plan shall
be used by the Company for general corporate purposes.
8. Legal Requirements.
The Company shall not be obligated to offer or sell any Shares
except in compliance with all applicable federal and state securities laws and
any rules and regulations thereunder. Any certificates representing shares
purchased upon exercise of an Option shall bear appropriate legends.
9. Amendment of Plan.
The Board may amend the Plan at any time. No amendment adopted
without stockholder approval may increase the number of shares as to which
Options may be granted, reduce the exercise price below the price provided in
the Plan, modify the requirements as to eligibility for participation, or
materially increase the benefits accruing under the Plan. No amendment shall
affect the rights of the holder of any Option, except with that holder's
consent.
10. Termination or Suspension of Plan.
The Board at any time may suspend or terminate this Plan. This
Plan, unless sooner terminated, shall terminate on the tenth anniversary of its
adoption by the Board. No Option may be granted under this Plan while this Plan
is suspended or after it is terminated. Suspension or termination of this Plan
shall not affect the rights of the holder of any Option, except with that
holder's consent.
-4-
<PAGE> 5
11. Stockholder Approval.
This Plan is subject to approval, at a duly held stockholders'
meeting within 12 months after the date the Board approves this Plan, by the
affirmative vote of a majority of the votes cast at which a quorum of the voting
power of the Company is represented in person or by proxy. Options may be
granted, but not exercised, before such stockholder approval. If the
stockholders fail to approve this Plan within the required time period, any
Options granted under this Plan shall be void, and no additional Options shall
be granted.
* * * *
Adopted by the Board of Directors: January 31, 1990
Approved by the stockholders on May 30, 1990.
Amended by the Board of Directors on December 12, 1991.
Amendments approved by the stockholders on June 16, 1992.
Amended by the Board of Directors on June 14, 1995.
-5-
<PAGE> 1
EXHIBIT (13)
1995 ANNUAL REPORT
TO SECURITY HOLDERS
39
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leader in the development, manufacture, marketing and
sale of liposome and lipid-based biopharmaceutical products primarily to treat
cancer and certain fungal infections. In November 1995, SEQUUS received
marketing clearance from the FDA for its proprietary anticancer drug, DOXIL, for
the treatment of AIDS-KS in patients whose KS has progressed on prior
chemotherapy or in patients who are intolerant to such therapy. In December
1995, the Company launched DOXIL in the U.S. SEQUUS recently received a
unanimous opinion from the European CPMP recommending marketing authorization of
DOXIL under the tradename CAELYX, in the 15 member states of the EU, for both
first-line and second-line treatment of AIDS-KS in patients with low CD4 counts
and extensive mucocutaneous or visceral disease. AMPHOTEC, the Company's
proprietary product for treatment of life-threatening systemic fungal
infections, is being marketed in Denmark, Finland, Ireland, Russia, Singapore
and the U.K. and has also received marketing clearance in Brazil and the Czech
Republic for treating systemic fungal infections in patients for whom
conventional therapy (amphotericin B) is contraindicated due to toxicity or
renal failure or for whom previous antifungal therapy was not successful.
The Company has incurred losses in each year since its inception and had
accumulated approximately $133.4 million in net losses through December 31,
1995, including a loss of $33.6 million in 1995. Although the Company has
commenced marketing DOXIL in the U.S. and AMPHOTEC in the U.K. and five other
countries, the Company expects operating losses to continue because of
expenditures associated with research, preclinical testing and clinical trials,
marketing expenses and other expenses relating to the development, manufacture,
marketing and sale of its products. The Company also anticipates that clinical
activity and research and development spending will increase in 1996 as
expenditures for clinical trials of DOXIL in solid tumors are increased.
In 1995, SEQUUS recognized revenue from initial shipments of DOXIL to
distributors based upon evidence of sell-through. The Company expects its
marketing and sales expenses to increase significantly as it proceeds with the
commercialization of DOXIL in the U.S. through its direct sales and marketing
organization. As of December 31, 1995, SEQUUS had recruited a sales force of 25
individuals experienced in the sale of pharmaceutical and biopharmaceutical
products, with particular emphasis on oncology. In addition, the Company
currently uses Ben Venue, a contract manufacturer, for the commercial-scale
manufacturing of its products.
The Company and Zeneca have submitted MAAs for AMPHOTEC in other EU
countries and similar applications in other countries. 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. Based primarily on the CPMP review, SEQUUS believes national approval
will be forthcoming in Austria, Italy, The Netherlands, Portugal and Sweden.
However, 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. A
competitor of the Company has regulatory approval in approximately 20 countries,
primarily in Europe, to sell a liposomal amphotericin B product which targets
indications similar to those targeted by AMPHOTEC. A second
40
<PAGE> 3
competitor 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 and pricing.
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. Sales of AMPHOTEC
to date have been below expectations and Zeneca and the Company have initiated
discussions regarding modifications to their agreement.
RESULTS OF OPERATIONS
Years Ended December 31, 1995 and 1994
Revenues
Total revenues, of which the majority were product sales, were $2.0
million, during the fiscal year ended December 31, 1995 compared with $3.8
million recorded during the fiscal year ended December 31, 1994. DOXIL product
sales represent 49% of total product sales in fiscal 1995 compared to 3% in
1994. The Company recognized revenue from initial shipments of DOXIL to
distributors based upon evidence of sell-through. For the fiscal year ended
December 31, 1995, 41% of the Company's product sales represent sales of
AMPHOTEC to Zeneca as compared to 91% for 1994. A significant portion of the
1994 and 1995 sales reflect pipeline-filling (inventory) orders. Product sales
declined during fiscal 1995 due primarily to no AMPHOTEC shipments to Zeneca
after the first quarter of 1995. One shipment of product was made in the first
quarter of 1996 and the Company anticipates only limited sales to Zeneca for the
foreseeable future.
Operating Expenses
Generally, a majority 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. R&D decreased to $22.7 million in fiscal year 1995, from $25.4 million
in 1994, a reduction of $2.7 million. This reduction in expenses resulted from
higher spending in 1994 associated with clinical trials in preparation for the
NDA filing for DOXIL in the treatment of KS. The Company anticipates that future
clinical trial expenses will increase due to expanded clinical trials of DOXIL
in a variety of solid tumors.
Selling, general and administrative ("S,G&A") expenses increased to
$13.9 million in fiscal year 1995 from $7.6 million in the same period in 1994,
an increase of $6.3 million, principally reflecting an increase in marketing and
sale expenses in anticipation of the December DOXIL launch. The company hired 24
individuals experienced in the sale of pharmaceutical and biopharmaceutical
products and additional internal staff to support sales operations. In addition,
the Company recorded expenses in fiscal 1995 in connection with the departure of
certain officers, which was partially offset by decreased legal activities due
to the settlement of patent-related litigation. The Company expects a material
increase in rent expense in 1996 as a result of additional square footage under
lease.
41
<PAGE> 4
Net Interest Income
Net interest income increased to $1.4 million in fiscal 1995 from $1.0
million in 1994, a increase of $400,000 due to the increase in cash available
for investment resulting from approximately $70.9 million received by the
Company through equity financings during 1995.
Net Loss
The Company's net loss increased to $33.6 million for the year ended
December 31, 1995 from $29.2 million for 1994, an increase of $4.4 million. The
net loss per share was $1.54 for both fiscal year 1995 and 1994. The increase in
the loss was due primarily to an increase in marketing and sales costs in
anticipation of the DOXIL December 1995 launch and a decline in AMPHOTEC sales.
Years Ended December 31, 1994 and 1993
Revenues
Total revenues for fiscal 1994 decreased to $3.8 million from $6.8
million in 1993, a decrease of $3.0 million. During the year ended December 31,
1994, product sales increased to $3.7 million from $1.3 million in fiscal 1993,
an increase of $2.4 million. Ninety-one percent (91%) of the Company's product
revenues in 1994 and 39% of the Company's product revenues in 1993 represented
AMPHOTEC sales to Zeneca. The increase in sales revenue is attributable
principally to the Company's shipments of AMPHOTEC to Zeneca, the majority of
which was pipeline-filling (inventory) orders. The prior year revenues also
included a signing fee and regulatory milestone payment totaling $5.3 million
received from Zeneca.
Operating Expenses
In fiscal 1994, R&D expenses increased to $25.4 million from $21.1
million in 1993, an increase of $4.3 million. The increase was principally due
to the larger number of ongoing clinical trials and increased patient
enrollments. R&D expenses declined in the second half of 1994, principally as a
result of the completion of enrollment of patients in certain of the Company's
trials of DOXIL.
G&A expenses increased to $7.6 million in fiscal 1994 from $6.7 million
in 1993, an increase of $969,000, principally reflecting increased legal
expenses associated with patent litigation, which has since been concluded, and
marketing expenses incurred in preparation for product commercialization.
Net Interest Income
Net interest income decreased to $1.0 million in fiscal 1994, compared
to $1.6 million in 1993, a decrease of $626,000, as the result of the decrease
in the Company's available cash for investment offset in part by higher rates.
Net Loss
The Company did not receive signing or milestone fees and had higher
expenses in fiscal 1994. As a result, the Company's net loss for fiscal 1994
increased to $29.2 million from $19.7 million in 1993, an increase of $9.5
million. The net loss per share was $1.54 in 1994 compared to a net loss per
share of $1.05 in the prior year.
42
<PAGE> 5
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and marketable investments at
December 31, 1995 were $50.3 million, an increase of $38.0 million from $12.3
million at December 31, 1994. This increase represents principally cash provided
by equity financing activities offset by operating and capital expenditures.
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 liposome products. This strategy will require significant operating and
capital expenditures including the construction of a pilot production facility
which is currently in the planning phase.
During fiscal year 1995, the Company raised net proceeds of $70.9
million from three equity financings. On March 31, and April 13, 1995, the
Company raised an aggregate of $11 million of equity capital with the sale of
480,000 shares of Series A Convertible Reset Preferred Stock ("Convertible Reset
Preferred Stock") together with warrants to purchase 808,320 shares of Common
Stock. During 1995, 43,200 shares of Convertible Reseet Preferred Stock were
converted into 144,106 shares of common stock. On February 2, 1996 the Company
elected to convert the remaining 437,200 shares of Convertible Reset Preferred
Stock into 1,472,052 shares of Common Stock. On May 25, 1995, the Company raised
net proceeds $14.3 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 warrant is only
exercisable if the initial Unit purchaser retains the associated Common Stock
for one year. On October 24, 1995 and November 24, 1995 the Company raised an
aggregate of $45.6 million of equity capital with the sale of 4,485,000 of
Common Stock in a public offering. The Company believes that at planned spending
rates its existing cash balances, interest income earned thereon and revenues
from operations will be adequate to fund its planned activities at least through
at least the next 12 months, although it may seek additional financing sooner.
There can be no assurance that adequate financing will be available on
satisfactory terms, if at all.
As of December 31, 1995, the Company had Federal and California net
operating loss carryforwards of approximately $88.0 million and $11.0 million,
respectively. The Company also has Federal and California research and
development tax credit carryforwards of approximately $4.4 million and $2.3
million, respectively. Utilization of the net operating losses and credits may
be subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar California
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
43
<PAGE> 6
SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 1,907 $ 3,664 $ 1,299 $ 293 $ --
Research revenue -- -- -- 300 --
Royalties and license fees 109 91 5,458 125 326
-------- -------- -------- -------- --------
Total revenues 2,016 3,755 6,757 718 326
Expenses:
Cost of goods sold 511 916 232 13 --
Research and development 22,651 25,378 21,128 15,769 7,284
Selling, general and administrative 13,856 7,622 6,653 2,723 1,796
-------- -------- -------- -------- --------
Total expenses 37,018 33,916 28,013 18,505 9,080
-------- -------- -------- -------- --------
Loss from operations (35,002) (30,161) (21,256) (17,787) (8,754)
Interest, net 1,406 976 1,602 2,394 541
-------- -------- -------- -------- --------
Net loss $(33,596) $(29,185) $(19,654) $(15,393) $ (8,213)
======== ======== ======== ======== ========
Net loss per share $ (1.54) $ (1.54) $ (1.05) $ (.84) $ (.66)
======== ======== ======== ======== ========
Common shares used in the
calculation of net loss per share 21,831 18,978 18,789 18,270 12,445
======== ======== ======== ======== ========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short
term marketable investments $ 50,276 $ 11,757 $ 34,658 $ 41,325 $ 32,202
Working capital 45,763 6,262 31,863 41,250 30,649
Long-term marketable
investments -- 500 2,520 12,782 3,985
Total assets 57,808 18,198 45,179 60,523 41,046
Long-term debt and lease
obligations -- -- -- -- 102
Accumulated deficit (133,427) (99,865) (70,668) (51,014) (35,621)
Total stockholders' equity 49,599 10,938 39,318 58,577 39,127
</TABLE>
44
<PAGE> 7
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
SEQUUS Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of SEQUUS Pharmaceuticals, Inc.
as of December 31, 1995 and 1994, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis of our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SEQUUS Pharmaceuticals, Inc. at
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
February 2, 1996
45
<PAGE> 8
SEQUUS PHARMACEUTICALS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
1995 1994
------- -------
(in thousands)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,770 $ 5,448
Short-term marketable investments 43,506 6,309
Trade accounts receivable, net of allowance for bad debts of
$178,000 in 1995 and $258,000 in 1994 1,642 64
Inventories 1,105 558
Prepaid expenses and other current assets 949 1,143
------- -------
Total current assets 53,972 13,522
Net equipment and improvements 3,591 3,808
Long-term marketable investments -- 500
Patents, net of accumulated amortization
of $1,572,000 in 1995 and $1,442,000 in 1994 179 309
Other assets 66 59
------- -------
Total assets $57,808 $18,198
======= =======
</TABLE>
See accompanying notes.
46
<PAGE> 9
SEQUUS PHARMACEUTICALS, INC.
BALANCE SHEETS
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
1995 1994
--------- ---------
(in thousands)
<S> <C> <C>
Current liabilities:
Accounts payable $ 2,773 $ 1,586
Accrued compensation 2,310 797
Accrued clinical costs 1,664 3,954
Other accrued liabilities 746 923
Deferred revenue 716 --
--------- ---------
Total current liabilities 8,209 7,260
Commitments
Stockholders' equity:
Preferred stock, par value $.01; 4,000,000
shares authorized, issuable in series;
437,200 shares of Series A issued and outstanding
in 1995 and none in 1994 4 --
Common stock, par value $0.001; 45,000,000
shares authorized, 26,283,026 shares issued and
outstanding in 1995 and 19,095,867 in 1994 26 19
Additional paid-in capital 182,996 110,784
Accumulated deficit (133,427) (99,865)
--------- ---------
Total stockholders' equity 49,599 10,938
--------- ---------
Total liabilities and stockholders' equity $ 57,808 $ 18,198
========= =========
</TABLE>
See accompanying notes.
47
<PAGE> 10
SEQUUS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
-------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Revenues:
Sales $ 1,907 $ 3,664 $ 1,299
Royalties and license fees 109 91 5,458
-------- -------- --------
Total revenues 2,016 3,755 6,757
Expenses:
Cost of goods sold 511 916 232
Research and development 22,651 25,378 21,128
Selling, general and administrative 13,856 7,622 6,653
-------- -------- --------
Total expenses 37,018 33,916 28,013
-------- -------- --------
Loss from operations (35,002) (30,161) (21,256)
Interest income 1,520 1,002 1,647
Interest/other expense (114) (26) (45)
-------- -------- --------
Net loss $(33,596) $(29,185) $(19,654)
======== ======== ========
Net loss per share $ (1.54) $ (1.54) $ (1.05)
======== ======== ========
Common shares used in the calculation
of net loss per share 21,831 18,978 18,789
======== ======== ========
</TABLE>
See accompanying notes.
48
<PAGE> 11
SEQUUS PHARMACEUTICALS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock Additional Total
Paid-in Accumulated Stockholders
Shares Amount Shares Amount Capital Deficit Equity
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 -- $-- 18,742 $19 $109,572 $ (51,014) $ 58,577
Shares issued for contribution to 401(k)
Plan -- -- 4 -- 40 -- 40
Shares issued under the Employee Stock
Purchase Plan -- -- 22 -- 150 -- 150
Exercise of stock options -- -- 107 -- 205 -- 205
Net loss -- -- -- -- -- (19,654) (19,654)
---- --- ------ --- -------- --------- --------
Balance at December 31, 1993 -- -- 18,875 19 109,967 (70,668) 39,318
Shares issued for contribution to 401(k) Plan -- -- 15 -- 124 -- 124
Shares issued under the Employee Stock Purchase Plan -- -- 45 -- 265 -- 265
Exercise of stock options -- -- 161 -- 428 -- 428
Unrealized loss on available-for-sale securities
-- -- -- -- -- (12) (12)
Net loss -- -- -- -- -- (29,185) (29,185)
---- --- ------ --- -------- --------- --------
Balance at December 31, 1994 -- -- 19,096 19 110,784 (99,865) 10,938
Shares issued for contribution to 401(k)
Plan -- -- 24 -- 157 -- 157
Shares issued under the Employee Stock Purchase Plan -- -- 49 -- 281 -- 281
Exercise of warrants -- -- 22 -- 91 -- 91
Exercise of stock options -- -- 239 -- 813 -- 813
Sale of Preferred Stock in secondary offering, net of
issuance costs of $986 480 4 -- -- 11,010 -- 11,014
Sale of Units in secondary offering, net of issuance
costs of $771 -- -- 2,224 2 14,273 -- 14,275
Sale of Common Stock in secondary
offering, net of issuance costs of $828 -- -- 4,485 5 45,587 -- 45,592
Conversion of Preferred Stock (43) -- 144 -- -- -- --
Unrealized gain on available-for-sale securities -- -- -- -- -- 34 34
Net loss -- -- -- -- -- (33,596) (33,596)
---- --- ------ --- -------- --------- --------
Balance at December 31, 1995 437 $ 4 26,283 $26 $182,996 $(133,427) $ 49,599
==== === ====== === ======== ========= ========
</TABLE>
See accompanying notes.
49
<PAGE> 12
SEQUUS PHARMACEUTICALS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
1995 1994 1993
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (33,596) $(29,185) $(19,654)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 1,957 1,902 1,441
Issuance of common stock to 401(k) plan 157 124 40
Decrease (increase) in assets:
Trade accounts receivable (1,578) 1,242 (877)
Inventories (547) (138) 171
Prepaid expenses and other current assets 194 197 (489)
Other assets (7) 136 25
Increase (decrease) in liabilities:
Accounts payable 1,187 292 941
Accrued compensation 1,513 (53) 637
Accrued clinical costs (2,290) 1,041 1,779
Other accrued liabilities (177) 137 665
Deferred revenue 716 -- --
--------- -------- --------
Net cash used by operating activities (32,471) (24,305) (15,321)
Cash flows from investing activities:
Available-for-sale securities:
Purchases (106,013) (13,512) (35,953)
Sales 30,843 26,329 597
Maturities 38,507 14,467 47,247
Proceeds from sale of equipment 155 -- --
Capital expenditures (1,765) (1,279) (1,856)
--------- -------- --------
Net cash (used) provided by investing activities (38,273) 26,005 10,035
Cash flows from financing activities:
Issuance of common stock 61,052 693 355
Issuance of preferred stock 11,014 -- --
Principal payments under capital lease obligation -- (18) (107)
--------- -------- --------
Net cash provided by financing activities 72,066 675 248
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,322 2,375 (5,038)
Cash and cash equivalents, beginning of the year 5,448 3,073 8,111
--------- -------- --------
Cash and cash equivalents, end of the year $ 6,770 $ 5,448 $ 3,073
========= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ -- $ -- $ 20
========= ======== ========
</TABLE>
See accompanying notes.
50
<PAGE> 13
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
SEQUUS Pharmaceuticals, Inc. ("SEQUUS", the "Company") is engaged in
development, manufacture, marketing and sale of proprietary liposome and
lipid-based products to primarily treat cancer and certain fungal infections.
SEQUUS' strategic emphasis is on indictable pharmaceutical products designed to
improve the efficacy and reduce the toxicity of selected existing and new drugs
used to treat cancer and infectious diseases. SEQUUS distributes DOXIL in the
United States through distributors and AMPHOTEC in various countries outside the
United States through a corporate alliance. The Company's key raw materials are
acquired from a limited number of vendors and a single third party manufactures
all of the Company's finished goods.
INVENTORIES
Inventories are stated at the lower of cost (principally first-in,
first-out) or market. The inventory detail is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
------ ----
(in thousands)
<S> <C> <C>
Raw materials ..... $ 898 $268
Work-in-process ... 68 201
Finished goods .... 139 89
------ ----
$1,105 $558
====== ====
</TABLE>
EQUIPMENT AND IMPROVEMENTS
Equipment is recorded at cost and depreciated on a straight-line basis
over estimated useful lives of three to seven years. Leasehold improvements are
recorded at cost and amortized over the remaining term of the lease, or useful
life of the asset, whichever is less. The equipment and improvement detail is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
-------- --------
(in thousands)
<S> <C> <C>
Office and laboratory equipment $ 7,805 $ 6,308
Leasehold improvements ........ 4,066 3,953
-------- --------
11,871 10,261
Accumulated depreciation and
amortization ................ (8,280) (6,453)
-------- --------
$ 3,591 $ 3,808
======== ========
</TABLE>
CLINICAL COSTS
Clinical costs include costs associated with preclinical testing of
compounds for safety and efficacy, clinical testing and company-funded research
performed by third parties.
51
<PAGE> 14
REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
The Company recognizes revenues upon shipment to customers. However, for
initial shipments of new products, the Company defers recognition of revenue
until such time as evidence of sell through has been obtained. For recurring
product shipments, the Company intends to defer appropriate amounts based on
historical sales return.
Payments under research and development agreements are generally
received in advance and are recognized as revenue, ratably, over the periods of
company performance stated in such agreements, which recognition approximates
incurrence of related costs. Royalties are recognized as revenue based on
licensed product sales. License fees and milestone payments are recognized on
terms set forth in the related license agreements.
The Company sells its products to distributors in the United States and
Europe. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral.
For the years ended December 31, 1993, 1994 and 1995, one customer
represented $512,000, $3,300,000, and $785,000 of sales revenues, respectively.
This customer also contributed $5,250,000 to licensing fees in 1993. Another
customer contributed $208,000, $91,000, and $109,000, to royalties and license
fees for the years ended December 31, 1993, 1994 and 1995, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
LOSS PER SHARE
Loss per share is computed using the weighted average number of common
shares outstanding during each period. Common Stock equivalents, consisting of
outstanding Preferred Stock, stock options and warrants, are excluded from the
computation as their effect is anti-dilutive.
CASH AND CASH EQUIVALENTS AND MARKETABLE INVESTMENTS
The Company invests its excess cash principally in U.S. Treasury Bills
and high-grade investment paper. The Company maintains its cash, cash
equivalents and marketable 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.
As of January 1, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." The impact of adopting the Statement was not significant to
the Company's results of operations or financial position.
Management determines the appropriate classification of debt securities
at the time of purchase and reevaluates such designation as of each balance
sheet date. During 1994 and 1995, all investments were 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-
52
<PAGE> 15
temporary on available-for-sale securities are included in interest. 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:
<TABLE>
<CAPTION>
(in Thousands)
Gross Unrealized Estimated Fair
December 31, 1995 Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government securities $20,234 $ 15 $(10) $20,239
U.S. corporate securities 10,314 8 -- 10,322
Foreign corporate debt
securities 12,936 9 -- 12,945
------- ---- ---- -------
$43,484 $ 32 $(10) $43,506
======= ==== ==== =======
December 31, 1994
U.S. government securities $ 1,321 $ -- $ -- $ 1,321
U.S. corporate securities 2,805 -- (13) 2,792
Foreign corporate debt
securities 2,695 1 -- 2,696
------- ---- ---- -------
$ 6,821 $ 1 $(13) $ 6,809
======= ==== ==== =======
</TABLE>
The gross realized gains and losses on sales of available-for-sale
securities have been immaterial.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company accounts for its stock option plans and its employee stock
purchase plan in accordance with the provision of the Accounting Principles
Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees". In
1995, the Financial Accounting Standards Board released the Statement of
Financial Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based
Compensation". SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The Company expects to continue
to accounts for its stock plans in accordance with APB 25. Accordingly, SFAS 123
is not expected to have any material impact on the Company's financial position
or results of operations.
FINANCIAL STATEMENT PRESENTATION
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. DISTRIBUTION AGREEMENT
In August 1993, the Company signed a distribution agreement with Zeneca
Limited under which Zeneca has the exclusive right to market and sell SEQUUS'
proprietary AMPHOTEC product in most European countries. Under the terms of the
agreement, the Company received and recognized in the third quarter of 1993 a
signing fee and a milestone payment in the amount of $5.3 million which was
earned by
53
<PAGE> 16
the Company's receipt of a product license authorizing the sale of AMPHOTEC in
the United Kingdom. The Company will manufacture and sell AMPHOTEC to Zeneca at
a price which, subject to a minimum, will reflect the price(s) achieved by
Zeneca in the market. The Company will also receive additional milestone
payments upon receipt of product licenses in certain other European countries
and upon the achievement of certain cumulative sales totals.
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. In May 1994,
SEQUUS announced Zeneca's commercial launch of AMPHOTEC in the United Kingdom
and AMPHOTEC sales to Zeneca accounted for 91% and 41% of the Company's product
sales in 1994 and 1995, respectively. A portion of these sales reflects
pipeline-filling orders, and future sales levels will depend on the rate at
which the product penetrates existing approved markets in the United Kingdom,
Ireland, Finland and Russia, as well as the timing of additional product
approvals in other European countries for which applications have been filed.
3. COMMITMENTS
The Company leases its facility and certain equipment under operating
leases. Rent expense under these leases was $886,000, $856,000, and $852,000 for
the years ended December 31, 1993, 1994 and 1995, respectively. Rent expense is
being recognized on a straight-line basis over the lease term of the facility
lease which has scheduled rental payment increases.
Minimum annual rental commitments under all operating leases at December
31, 1995 including a new lease signed subsequent to year end total $660,000 in
1996, $449,000 in 1997, $513,000 in 1998, $506,000 in 1999, $506,000 in 2000 and
$1,182,000 thereafter.
The Company has entered into multiple year supply agreements with two
vendors which supply key raw materials. Under the agreements the Company is
required to purchase its forecasted three months requirement as provided to the
vendors.
4. STOCKHOLDERS' EQUITY
On March 31, and April 13, 1995, the Company raised an aggregate of $11
million of equity capital with the sale of 480,000 shares of Series A
Convertible Reset Preferred Stock ("Convertible Reset Preferred Stock") together
with warrants to purchase 808,320 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 (effectively 3.367 shares
of common stock for each share of preferred stock). During 1995, 43,200 shares
of were converted into 144,106 shares of common stock. On February 2, 1996 the
Company elected to convert the remaining 437,200 shares of Convertible Reset
Preferred Stock into 1,472,052 shares of Common Stock.
On May 25, 1995, the Company raised net proceeds of $14.3 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. That
right to negotiate has expired.
54
<PAGE> 17
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.
On October 24, 1995 and November 24, 1995, the Company raised an
aggregate net proceeds of $45.6 million through the sale of 4,485,000 of Common
Stock in a public offering.
Warrants
At December 31, 1995, warrants to purchase 3.15 million shares of Common
Stock at prices ranging from $4.25 to $7.43 per share remain outstanding. All
unexercised warrants will expire on various dates ranging from March 1997
through May 1999.
Stock Purchase Plan and Stock Option Plans
Under the 1987 Employee Stock Option Plan, as amended, and 1987
Consultant Stock Plan, as amended, (the "Plans") the Company is authorized to
grant stock options to purchase up to 5,000,000 shares of common stock. Options
granted under these Plans will be either non-qualified or incentive stock
options and are immediately exercisable. The stock delivered upon exercise of
any option under these Plans may be subject to the right of repurchase (subject
to determination by the Board of Directors) upon ceasing employment or
consulting relationship with the Company. The Company's right of repurchase
generally expires over a period of three to five years. The exercise price of
non-qualified options not less than 85 percent of fair market value at the date
of the grant. Generally options are exercisable for up to ten years following
the date of grant and for a period ranging from three to seven months after
termination of employment or consulting arrangement.
Under the 1990 Director Stock Option Plan adopted in January 1990, as amended,
the Company is authorized to grant options for up to 600,000 shares of Common
Stock. Each eligible director is entitled to receive an initial grant to
purchase 25,000 shares; and, on the first anniversary of the initial grant, each
eligible director then in office is entitled to receive a grant to purchase
12,500 shares. Upon each annual grant date, an option to purchase an additional
5,000 shares of Common Stock will be granted. The maximum number of shares each
eligible director is entitled to receive is 50,000 shares. The options generally
are immediately exercisable and are not subject to any repurchase rights. The
exercise price will not be less than the fair market value on the date of grant.
Options, if unexercised, terminate 10 years from the date of grant and one year
following termination of directorship.
55
<PAGE> 18
Activities under the above mentioned stock option plans are as follows
(amounts in thousands, except per share information):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------
OPTIONS AVAILABLE NUMBER OF PRICE
FOR GRANT SHARES PER SHARE
--------- ------ ---------
<S> <C> <C> <C>
Balance, December 31, 1992 328 2,126 $1.12-$20.00
Additional authorized 1,200 --
Granted (1,018) 1,018 $6.50-$12.50
Cancellations 294 (294) $1.12-$18.88
Exercised -- (91) $1.12-$ 9.25
------ -----
Balance, December 31, 1993 804 2,759 $1.12-$20.00
Granted (1,599) 1,599 $6.50-$ 9.25
Cancellations 1,185 (1,185) $1.88-$20.00
Exercised -- (161) $1.12-$ 8.88
------ -----
Balance, December 31, 1994 390 3,012 $1.12-$18.88
Additional authorized 2,150 --
Granted (1,427) 1,427 $6.25-$13.50
Cancellations 230 (230) $6.75-$12.50
Exercised -- (239) $1.12-$14.00
------ -----
Balance, December 31, 1995 1,343 3,970 $1.12-$18.88
====== ======
</TABLE>
No shares purchased under the option plans are subject to repurchase at
December 31, 1995.
The Company's Employee Stock Purchase Plan is administered by the Board
of Directors and the Company has reserved for sale under the plan 250,000 shares
of Common Stock. Employees who own less than 5% of the total outstanding Common
Stock of the Company are eligible to participate in the plan, which provides for
the option to purchase a defined number of shares at 85% of the lower of the
fair market value of the stock at the enrollment or purchase date. At December
31, 1995, approximately 129,000 shares of Common Stock had been issued under
this plan.
The Company has a 401(k) Plan under which it may make employer
contributions at the discretion of the Board of Directors, but no such
contributions are required. The Board also has the discretion to determine the
amount of any employer contribution. The Company has reserved 150,000 shares for
issuance under the Plan. For the years ended December 31, 1993, 1994, and 1995
the Company contributed Common Stock to the Plan valued at approximately
$40,000, $124,000, and $157,000, respectively.
As of December 31, 1995, approximately 10.3 million shares of Common
Stock were reserved for future issuance under the Company's stock purchase
plans, stock option plans, 401(k) Plan, exercise of warrants and conversion of
Convertible Reset Preferred Stock.
5. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
56
<PAGE> 19
As of December 31, 1995, the Company has Federal and California net
operating loss carryforwards ("NOLs") of approximately $88 million and $11
million, respectively. The Company also has Federal and California research and
development tax credit carryforwards of approximately $4.4 million and $2.3
million, respectively. The Federal NOLs expire as follows:
<TABLE>
<CAPTION>
YEAR(S) ENDING FEDERAL NOL
DECEMBER 31 EXPIRING
------------- -----------
<S> <C>
1996 - 2000 $ 1,000,000
2001 - 2010 $87,000,000
-----------
$88,000,000
===========
</TABLE>
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar California provisions. The
annual limitation may result in the expiration of net operating losses and
credits before utilization.
The Federal net operating loss carryforward differs from the accumulated
deficit principally due to timing differences in the recognition of certain
revenue and expense items for financial and federal tax reporting purposes,
consisting primarily of capitalized research and development costs and stock
option deductions.
Significant components of the Company's current deferred tax assets for
federal and state income taxes are as follows (amounts in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Capitalized Research and Development.. 15,090 $ 11,890 10,170
Net Operating Loss Carryforwards ..... 31,370 23,050 13,900
Research Credits ..................... 5,840 3,630 2,360
Other -- Net ......................... 2,770 1,250 640
Valuation Allowance .................. (55,070) (39,820) (27,070)
-------- -------- --------
Total ...................... $ -- $ -- $ --
======== ======== ========
</TABLE>
The valuation allowance increased by approximately $8,743,000 in 1993,
$12,750,000 in 1994 and $15,250,000 in 1995. Approximately $1,700,000 of the
valuation allowance for deferred tax assets relates to benefits of stock option
deductions which, when recognized, will be allocated directly to contributed
capital.
57
<PAGE> 20
SCHEDULE II__VALUATION AND QUALIFYING ACCOUNTS
SEQUUS PHARMACEUTICALS, INC.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------------------------------------------------------
Additions
----------------------
Charged to
Balance at Charged to Other
Beginning of Costs and Accounts - Deductions - Balance at End
Description Period Expenses Describe Describe of Period
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1993: $ -- $ 8,000 $ -- $ 8,000
Reserves and allowances deducted from asset
accounts:
Allowance for uncollectible accounts
YEAR ENDED DECEMBER 31, 1994: $ 8,000 $254,000 $ 4,000(1) $258,000
Reserves and allowances deducted from asset
accounts:
Allowance for uncollectible accounts
YEAR ENDED DECEMBER 31, 1995: $258,000 $266,000 $346,000(1) $178,000
Reserves and allowances deducted from asset
accounts:
Allowance for uncollectible accounts
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
58
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 6,770
<SECURITIES> 43,506
<RECEIVABLES> 1,642
<ALLOWANCES> 178
<INVENTORY> 1,105
<CURRENT-ASSETS> 53,972
<PP&E> 11,871
<DEPRECIATION> (8,280)
<TOTAL-ASSETS> 57,808
<CURRENT-LIABILITIES> 8,209
<BONDS> 0
0
4
<COMMON> 26
<OTHER-SE> 49,569
<TOTAL-LIABILITY-AND-EQUITY> 57,808
<SALES> 1,907
<TOTAL-REVENUES> 2,016
<CGS> 511
<TOTAL-COSTS> 37,018
<OTHER-EXPENSES> 114
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (33,596)
<INCOME-TAX> 0
<INCOME-CONTINUING> (33,596)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,596)
<EPS-PRIMARY> (1.54)
<EPS-DILUTED> (1.54)
</TABLE>
