<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1997
REGISTRATION NO. 333-21235
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
SEQUUS PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 2834 94-3031834
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION)
960 HAMILTON COURT, MENLO PARK, CALIFORNIA 94025, (415) 323-9011
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
L. SCOTT MINICK
PRESIDENT AND CHIEF OPERATING OFFICER
960 HAMILTON COURT, MENLO PARK, CALIFORNIA 94025
(415) 323-9011
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
WITH COPIES OF ALL ORDERS, NOTICES AND COMMUNICATIONS TO:
NEIL FLANZRAICH ALAN K. AUSTIN
RICHARD FRIEDMAN ELIZABETH R. FLINT
HELLER EHRMAN WHITE & MCAULIFFE WILSON SONSINI GOODRICH & ROSATI
525 UNIVERSITY AVENUE 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94301 PALO ALTO, CALIFORNIA 94306
TELEPHONE: (415) 324-7000 TELEPHONE: (415) 493-9300
FACSIMILE: (415) 324-0638 FACSIMILE: (415) 493-6811
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 13, 1997
[LOGO OF SEQUUS PHARMACEUTICALS, INC.]
1,000,000 SHARES
$ CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
(CUMULATIVE DIVIDEND, LIQUIDATION PREFERENCE $50 PER SHARE)
The shares of $ Convertible Exchangeable Preferred Stock, par value
$0.01 per share (the "Preferred Stock"), of SEQUUS Pharmaceuticals, Inc.
("SEQUUS" or the "Company") offered hereby are convertible at the option of the
holder at any time, unless previously redeemed or exchanged, into Common Stock,
par value $0.0001 per share (the "Common Stock"), of the Company, at an initial
conversion price of $ (equivalent to a conversion rate of approximately
shares of Common Stock for each share of Preferred Stock). The initial
conversion price with respect to the Preferred Stock is subject to adjustment
in certain events, including a Non-Stock Fundamental Change or a Common Stock
Fundamental Change (each as defined). See "Description of Preferred Stock --
Conversion Rights." On March 12, 1997, the last reported sale price of the
Company's Common Stock as reported on the Nasdaq National Market was $12.6875
per share.
Dividends on the Preferred Stock will be cumulative from the date of original
issue and will be payable quarterly, commencing June 1, 1997 and payable each
March 1, June 1, September 1 and December 1 thereafter, at the annual rate of
$ per share of Preferred Stock. Prior to March 2, 2000, the Preferred
Stock is not redeemable at the option of the Company. Thereafter the Preferred
Stock is redeemable at the option of the Company, in whole or in part, at the
declining redemption prices set forth herein, together with accrued dividends.
See "Description of Preferred Stock -- Optional Redemption." The Preferred
Stock has a liquidation preference of $50 per share, plus accrued and unpaid
dividends.
The Preferred Stock is exchangeable, in whole but not in part, at the option
of the Company on any dividend payment date beginning March 1, 1998, for the
Company's % Convertible Subordinated Debentures due 2007 (the "Debentures")
at the rate of $50 principal amount of Debentures for each share of Preferred
Stock. See "Description of Preferred Stock -- Exchange Provisions." The
Debentures, if issued, will contain conversion and optional redemption
provisions substantially identical to those of the Preferred Stock. See
"Description of Debentures."
Application has been made to have the shares of Preferred Stock approved for
quotation on the Nasdaq National Market under the symbol "SEQUP."
----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 9.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC (1) COMMISSIONS COMPANY (2)
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<S> <C> <C> <C>
Per Share.................. $ $ $
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Total (3).................. $ $ $
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</TABLE>
(1) Plus accrued dividends, if any, from , 1997.
(2) Before deducting expenses payable by the Company, estimated at $375,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 150,000 shares of Preferred Stock solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $ , $ and $ , respectively.
----------
The Preferred Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any
order in whole or in part. It is expected that delivery of such shares will be
made through the offices of Robertson, Stephens & Company LLC ("Robertson,
Stephens & Company"), San Francisco, California, on or about , 1997.
ROBERTSON, STEPHENS & COMPANY
DILLON, READ & CO. INC.
PUNK, ZIEGEL & KNOELL
The date of this Prospectus is , 1997.
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (together with all amendments and
exhibits thereto, the "Registration Statement") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement, part of which has been omitted in
accordance with the rules and regulations of the Commission. For further
information, reference is made to the Registration Statement, including the
exhibits filed as a part thereof and otherwise incorporated therein.
Statements made in this Prospectus as to the contents of any document referred
to are not necessarily complete, and in each instance reference is made to
such exhibit for a more complete description and each such statement is
qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files periodic reports and other information with the Commission.
The Registration Statement, including exhibits, as well as such other reports,
proxy statements and information filed by the Company may be inspected,
without charge, and copied at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549 and
at the Commission's regional offices located at 7 World Trade Center, Suite
1300, New York, New York 10048, and at 500 West Madison St., Suite 1400,
Chicago, Illinois 60661. Reports, proxy and information statements and other
information filed electronically by the Company with the Commission are
available at the Commission's World Wide Web site at http://www.sec.gov.
Copies of such material may also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Common Stock of the Company is traded on the Nasdaq
National Market. Reports and other information concerning the Company may be
inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed or to be filed with the Commission under the
Exchange Act, are hereby incorporated by reference into this Prospectus:
1. The Company's Annual Report on Form 10-K, as amended, for the fiscal
year ended December 31, 1996;
2. The description of the Company's Common Stock set forth in its
Registration Statement on Form 8-A filed with the Commission on May 8,
1987, and the description of the Company's Preferred Stock set forth in its
Registration Statement on Form 8-A filed on February 6, 1997; and
3. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Prospectus and prior to
the termination of the offering shall be deemed to be incorporated by
reference herein and to be a part hereof from the date of filing of such
documents.
Any statement contained in this Prospectus or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request of such person, a copy of any and all of the documents that have been
incorporated by reference herein (other than exhibits incorporated by
reference into such document, unless such exhibits are specifically
incorporated by reference into this Prospectus). Such request may be directed
to SEQUUS Pharmaceuticals, Inc., 960 Hamilton Court, Menlo Park, California
94025, Attention: Secretary, telephone number (415) 323-9011.
---------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED STOCK
AND COMMON STOCK OF THE COMPANY , INCLUDING STABILIZING BIDS, SYNDICATE
COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN
CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN SO AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY OF THE SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH
THEY RELATE OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON OR BY ANYONE IN
ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents By Reference........................... 2
Summary................................................................... 4
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Price Range of Common Stock............................................... 19
Capitalization............................................................ 20
Selected Financial Data................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 27
Management................................................................ 47
Description of Preferred Stock............................................ 50
Description of Debentures................................................. 58
Certain Federal Income Tax Consequences................................... 64
Description of Common Stock............................................... 70
Underwriting.............................................................. 71
Legal Matters............................................................. 72
Experts................................................................... 72
Index to Financial Statements............................................. F-1
</TABLE>
The following trademarks of SEQUUS are used throughout this Prospectus:
STEALTH(R), AMPHOTEC(TM), AMPHOCIL(TM), DOXIL(R), CAELYX(TM) and SEQUUS(TM).
Tradenames and trademarks appearing in this Prospectus are the property of
their respective holders.
3
<PAGE>
SUMMARY
The statements in this Prospectus that relate to future plans, events or
performance are forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following summary is qualified in its entirety by the more
detailed information, including "Risk Factors" and Financial Statements and
Notes thereto, appearing elsewhere in this Prospectus.
THE COMPANY
SEQUUS Pharmaceuticals, Inc. is a leader in developing and commercializing
lipid-based biopharmaceutical products primarily to treat cancer and infectious
diseases. The Company formulates its proprietary STEALTH liposomes with
existing drugs, or with therapeutics under development, to develop new products
with improved safety and efficacy profiles. The Company has developed and is
marketing DOXIL, an anticancer drug, and AMPHOTEC, an antifungal drug, in the
United States through its direct sales organization and internationally through
its marketing partners. The Company is currently conducting additional clinical
trials for the use of DOXIL in the treatment of certain solid tumors, including
a Phase III clinical trial in refractory ovarian cancer and a number of breast
cancer trials. In addition, SEQUUS is currently conducting a Phase I trial of
its STEALTH cisplatin formulation for the treatment of cancer.
Liposomes are microscopic lipid spheres used to encapsulate drugs for
delivery to targeted areas of the body in order to increase efficacy and reduce
toxicity. SEQUUS has created and patented STEALTH liposomes that avoid the
body's natural defense mechanisms and degrade more slowly than conventional
liposomes, thereby significantly increasing circulation time of encapsulated
therapeutic agents in the body. For example, clinical data demonstrate that an
anthracyline encapsulated in STEALTH liposomes (DOXIL) has a circulating half-
life of approximately 55 hours compared to a half-life of approximately five
hours for the other commercially available liposomal anthracycline product.
This long circulation time allows STEALTH liposomes to accumulate in tissues
where new blood vessels are forming, such as tumors and sites of inflammation
or injury, delivering sustained and increased drug concentration to these
target tissues.
SEQUUS developed DOXIL, a proprietary STEALTH liposome formulation
encapsulating a leading anticancer drug, doxorubicin. In November 1995, SEQUUS
received marketing clearance from the United States Food and Drug
Administration ("FDA") for DOXIL 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 ("refractory KS"). In December 1995, the
Company launched DOXIL in the United States, using its own marketing and sales
team, and achieved domestic product sales of approximately $20.9 million in
1996. In June 1996, the Company was granted marketing authorization for DOXIL
under the tradename CAELYX in the 15 member states of the European Union
("EU"), for the treatment of first-line and refractory KS. The Company has
entered into a distribution agreement with Schering-Plough Corporation
("Schering-Plough") under which Schering-Plough has rights to market and sell
CAELYX worldwide, except for the United States, Japan and certain other
countries. In addition, the Company and Schering-Plough are jointly planning
the clinical development of DOXIL for the treatment of solid tumors in the
United States and certain international markets. Schering-Plough will be
responsible for conducting certain of these clinical trials.
The Company used another lipid-based delivery technology to develop AMPHOTEC,
a proprietary formulation of a leading antifungal drug, amphotericin B. In
November 1996, SEQUUS received marketing clearance from the FDA for AMPHOTEC
for the treatment of invasive aspergillosis, a life-threatening fungal
infection, in patients where renal impairment or unacceptable toxicity
precludes the use of conventional amphotericin B therapy in effective doses and
in patients where prior amphotericin B therapy has failed. In December 1996,
the Company launched AMPHOTEC in the United States, using its own marketing and
sales
4
<PAGE>
organization. AMPHOTEC has also received marketing clearance in a number of
other countries for the treatment of systemic fungal infections in patients
refractory to or intolerant of conventional amphotericin B therapy. The
Company's strategy is to commercialize AMPHOTEC in international markets, under
the tradename AMPHOCIL, through distribution partners. The Company has entered
into a number of distribution agreements, including agreements with Zeneca
Limited and Bayer, Inc. in selected countries.
The Company is developing SPI-077, a proprietary STEALTH liposome formulation
of encapsulated cisplatin, a widely used anticancer drug. The utility of
unencapsulated cisplatin is limited by a range of potentially serious and
irreversible toxicities. Based upon results from preclinical studies, the
Company believes that SPI-077 may have safety and efficacy advantages over
unencapsulated cisplatin. In December 1996, the Company began a Phase I
clinical trial of SPI-077 in the treatment of solid tumors. The Phase I trial
is focused on determining the maximum tolerated dose of SPI-077 and
establishing the toxicity profile in patients with advanced malignancies not
amenable to other cancer treatments.
The Company's research and development efforts focus on developing new
products by encapsulating other drugs in, or attaching other drugs to, STEALTH
liposomes and expanding the STEALTH platform to create additional methods of
drug delivery. Products in the development stage include STEALTH liposome
formulations of CD4 for treating people with HIV, a quinolone antibiotic for
treating life-threatening respiratory tract infections or other severe systemic
bacterial infections, and a radiosensitizing agent for treating cancer. The
Company is also conducting research in the field of small molecule, peptide and
gene delivery using STEALTH liposomes.
SEQUUS was incorporated in California in 1981 and was reincorporated in
Delaware in 1987. The Company's principal executive offices are located at 960
Hamilton Court, Menlo Park, California 94025 and its telephone number is (415)
323-9011.
5
<PAGE>
THE OFFERING
Securities Offered.......... 1,000,000 shares of $ Convertible
Exchangeable Preferred Stock (the "Preferred
Stock"), par value $0.01 per share (1,150,000
shares of Preferred Stock if the over-allotment
option is exercised in full).
Dividends................... Cumulative from the date of original issue at the
annual rate of $ per share of Preferred
Stock, payable quarterly on the first day of
March, June, September and December, commencing
June 1, 1997, when, as, and if declared by the
Board of Directors out of funds legally available
therefor. See "Description of Preferred Stock --
Dividends."
Conversion Rights........... The Preferred Stock will be convertible at the
option of the holder at any time, unless
previously redeemed or exchanged, into shares of
Common Stock at an initial conversion price of
$ (equivalent to a conversion rate of
approximately shares of Common Stock for
each share of Preferred Stock). The initial
conversion price with respect to the Preferred
Stock is subject to adjustment in certain events,
including a Non-Stock Fundamental Change or a
Common Stock Fundamental Change (each as
defined). See "Description of Preferred Stock --
Conversion Rights."
Liquidation Preference...... $50 per share of Preferred Stock, plus accrued
and unpaid dividends. See "Description of
Preferred Stock -- Liquidation Rights."
Optional Redemption......... Prior to March 2, 2000, the Preferred Stock is
not redeemable at the option of the Company.
Thereafter, the Preferred Stock is redeemable at
the option of the Company, in whole or in part,
at the declining redemption prices set forth
herein, together with accrued dividends. See
"Description of Preferred Stock -- Optional
Redemption."
Exchange Provisions......... The Preferred Stock is exchangeable in whole, but
not in part, at the option of the Company on any
dividend payment date beginning on March 1, 1998
for the Company's % Convertible Subordinated
Debentures due 2007 (the "Debentures") at the
rate of $50 principal amount of Debentures for
each share of Preferred Stock. See "Description
of Preferred Stock -- Exchange Provisions."
Voting Rights............... Except as provided by law, holders of shares of
Preferred Stock will not be entitled to any
voting rights, except that, among other things,
holders will be entitled to vote as a separate
class to elect two directors if the equivalent of
six or more quarterly dividends (whether or not
consecutive) on the Preferred Stock are in
arrears. These voting rights will continue until
such time as the dividend arrearage on the
Preferred Stock has been paid in full. See
"Description of Preferred Stock -- Voting
Rights."
6
<PAGE>
Debentures.................. The Debentures, if issued, will bear interest at
a rate per annum of % of the principal amount
thereof payable semiannually on March 1 and
September 1 of each year, commencing on the first
interest payment date following the date of
exchange. Prior to March 2, 2000, the Debentures
are not redeemable at the option of the Company.
Thereafter, the Debentures are redeemable at the
option of the Company, in whole or in part, at
the declining redemption prices set forth herein,
together with accrued interest. The Debentures
are not entitled to the benefits of any mandatory
sinking fund payments. At the option of the
holder, the Debentures may be converted into
Common Stock at the same conversion price as
would have been applicable to the Preferred Stock
if the Preferred Stock were outstanding. The
Debentures will be subordinated to all Senior
Indebtedness (as defined). The Indenture will not
limit the amount of additional indebtedness,
including Senior Indebtedness, which the Company
can create, incur, assume or guarantee, nor will
the Indenture limit the amount of indebtedness
that any subsidiary can incur. See "Description
of Debentures."
Use of Proceeds............. For activities related to the clinical trials of
DOXIL and AMPHOTEC for additional indications and
the clinical trial program for SPI-077,
increasing manufacturing capacity, research and
development and other general corporate purposes.
See "Use of Proceeds."
Trading..................... Application has been made to have the shares of
Preferred Stock approved for quotation on the
Nasdaq National Market under the symbol "SEQUP."
The Company's Common Stock is traded on the
Nasdaq National Market under the symbol "SEQU."
Risk Factors................ An investment in the securities offered hereby
involves a high degree of risk. See "Risk
Factors" for a discussion of certain factors that
should be considered in evaluating an investment
in the securities offered hereby.
7
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales.............. $ 293 $ 1,299 $ 3,664 $ 1,907 $ 25,462
Royalties and fees (1)..... 425 5,458 91 109 7,461
-------- -------- -------- -------- --------
Total revenues............... 718 6,757 3,755 2,016 32,923
Operating expenses:
Cost of goods sold......... 13 232 916 511 3,990
Research and development... 15,769 21,128 25,378 22,651 27,652
Selling, general and
administrative............ 2,723 6,653 7,622 13,856 20,302
-------- -------- -------- -------- --------
Total operating expenses..... 18,505 28,013 33,916 37,018 51,944
Loss from operations......... (17,787) (21,256) (30,161) (35,002) (19,021)
Interest income.............. 2,394 1,602 976 1,406 1,844
-------- -------- -------- -------- --------
Net loss..................... $(15,393) $(19,654) $(29,185) $(33,596) $(17,177)
======== ======== ======== ======== ========
Net loss per share........... $ (0.84) $ (1.05) $ (1.54) $ (1.54) $ (0.59)
======== ======== ======== ======== ========
Weighted average shares
outstanding................. 18,270 18,789 18,978 21,831 28,937
Ratio of earnings to combined
fixed charges
and preferred stock
dividends (2)............... -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
AS
ACTUAL ADJUSTED(3)
--------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term marketable
investments............................................ $ 32,946 $ 80,821
Total assets............................................ 54,968 102,843
Accumulated deficit..................................... (150,624) (150,624)
Total stockholders' equity.............................. 44,327 92,202
</TABLE>
- --------
(1) Includes a signing fee and regulatory milestone fee totaling $5.3 million
from Zeneca Limited in 1993 and a distribution rights fee of $5.3 million
from Schering-Plough in 1996.
(2) For the years ended December 31, 1992, 1993, 1994, 1995 and 1996, earnings
were insufficient to cover fixed charges by $15,267,000, $19,496,000,
$29,002,000, $33,421,000 and $16,966,000, respectively. There were no
preferred stock dividends declared or paid by the Company during any of the
years in the five year period ended December 31, 1996. For these reasons,
no ratios are provided.
(3) As adjusted to reflect the sale by the Company of the 1,000,000 shares of
Preferred Stock offered hereby, less estimated underwriting discounts and
commissions and expenses of the offering payable by the Company.
Except as otherwise indicated, the information contained in this Prospectus
assumes no exercise of the Underwriters' over-allotment option.
8
<PAGE>
RISK FACTORS
The statements in this Prospectus that relate to future plans, events or
performance are forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth below and elsewhere in this Prospectus. The
following risk factors should be considered carefully in evaluating the
Company and its business before purchasing the securities offered hereby.
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's future financial performance depends on revenues from and
market acceptance of DOXIL in the United States and international markets. To
date, DOXIL can only be promoted for KS and cannot be promoted for the
treatment of solid tumors. In order for the Company to promote DOXIL for any
solid tumor indications, it must establish the clinical benefit of DOXIL in
clinical trials for each tumor type and gain regulatory clearance to market
for such use. The Company does not expect sales of DOXIL to grow
significantly, if at all, for KS in the United States because the population
of persons with KS is relatively small and may decline, particularly if recent
developments in the treatment of AIDS are successful and decrease the
incidence of KS. In the United States, the Company is prohibited from
marketing DOXIL for indications other than refractory KS. Physicians and
patients are often limited in their use of pharmaceutical products for
indications that have not been cleared by the FDA, as reimbursement by third-
party payors for off-label use may be unavailable. There can be no assurance
that clinical trials will demonstrate that DOXIL is safe and efficacious for
the treatment of solid tumors, that the Company will receive regulatory
approval for any solid tumor indications or that the Company will be able to
achieve reimbursement for or market acceptance in the treatment of solid
tumors with DOXIL.
The Company is also dependent on market acceptance of AMPHOTEC in the United
States and in international markets. To date, the Company has had very limited
sales of AMPHOTEC. The Company only received FDA clearance for AMPHOTEC in
late 1996 and, therefore, cannot predict market acceptance of AMPHOTEC in the
United States. In addition, the Company received marketing clearance in a
limited number of international markets in 1996 and faces intense competition
and price pressure in many of these markets, where a competing liposomal
amphotericin B product has been on the market for a number of years and
another was recently introduced. A number of factors may limit the market
acceptance of DOXIL and AMPHOTEC 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, as well as the success of the
marketing efforts by the Company's sales team which was organized within the
last 18 months. In addition, therapeutic products based on liposome or lipid-
based technology have become commercially available only in the last few
years. 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 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."
INTENSE COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE
The Company's current and potential products compete with existing and new
drugs offered by or under development by pharmaceutical, biopharmaceutical and
biotechnology companies. Many of these companies, both in the United States
and international markets, 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 liposome and lipid-based research and
product development, and many have financial and technical resources and
production and marketing
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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, in obtaining regulatory
approval, and in manufacturing and marketing biopharmaceutical products.
A number of large pharmaceutical companies, including Bristol-Myers Squibb
Company ("Bristol-Myers") and Pfizer Inc., have established strong market
positions for oncology and infectious diseases. For example, AMPHOTEC competes
with traditional amphotericin B therapy, which is currently produced and
marketed by Bristol-Myers and others. The Company also faces competition from
two companies specializing in liposome drug delivery, NeXstar Pharmaceuticals,
Inc. ("NeXstar") and The Liposome Company ("TLC"), both of which have received
regulatory approvals in the United States and internationally for products
competitive with the Company's products. In some cases, the competing
liposomal products have been able to obtain significant market share in
certain territories by being the first to market, have been introduced at
lower prices than the Company's competing products, or have received marketing
clearance covering a broader range of indications than the Company's competing
products. For example, TLC recently received FDA clearance to market its
amphotericin B lipid formulation for treating a broader range of indications
than the indications for which AMPHOTEC has received marketing clearance.
SEQUUS believes that competition in pharmaceutical products and in drug
delivery will continue to be intense as new products enter the market and
advanced technologies become available for drug discovery and development.
Existing products or new products developed by the Company's competitors may
be more effective, or be more effectively marketed and sold, than any that
have been or may be developed by the Company. Competitive products may render
the Company's technology and products obsolete or noncompetitive prior to the
Company's recovery of research, development or commercialization expenses
incurred with respect to any such products, which could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Business -- Competition."
LIMITED MARKETING AND SALES EXPERIENCE; DEPENDENCE ON THIRD-PARTY DISTRIBUTORS
AND AGENTS
The Company has limited experience marketing and selling its products. The
Company currently markets and sells its products in the United States with a
recently expanded sales team of 42 persons. The Company's ability to generate
future revenue in the United States is dependent on the success of its direct
sales team in marketing DOXIL and AMPHOTEC. Future development of its
marketing and sales organization may require significant additional
expenditures, management resources and time. In addition, the loss of certain
key sales personnel could adversely affect the sales effort and have a
material adverse effect on the Company's business, financial condition and
results of operations. Several biotechnology and pharmaceutical companies have
recently expanded their sales forces, particularly in the field of oncology,
which has increased competition for experienced personnel. Furthermore, if the
Company enters into marketing partnerships with other companies to augment its
own sales organization, the Company's margins on these products would be
significantly reduced.
In September 1996, the Company announced an exclusive arrangement with
Schering-Plough under which Schering-Plough has rights to market and sell
DOXIL worldwide, under the tradename CAELYX, except for the United States,
Japan and certain other countries. The Company has also entered into
distribution agreements with a number of corporate partners covering the
marketing and distribution of AMPHOCIL in various international markets. The
Company's future sales of CAELYX and AMPHOCIL outside of the United States
will depend upon the success of marketing efforts by Schering-Plough and other
distribution partners, the continuation of existing distribution arrangements,
market acceptance of the products, availability of third-party reimbursement,
as well as the timing of additional approvals, including pricing approvals, in
other countries, if any. Schering-Plough has the right to terminate the
agreement with the Company at any time if certain clinical results relating to
CAELYX are not achieved, if certain adverse events occur regarding patent
matters and in certain other circumstances. If Schering-Plough or any other
distributor were to 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
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affected. There can be no assurance that the Company will be able to
successfully market its products through its sales team, partners, agents or at
all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, "Business -- Marketing and Sales" and "-- Strategic
Alliances."
DEPENDENCE ON THIRD-PARTY MANUFACTURING AND SOLE-SOURCE SUPPLIERS;
MANUFACTURING RISKS
The Company's internal manufacturing capabilities are limited to producing
products for preclinical development. The Company is dependent on Ben Venue
Laboratories, Inc. ("Ben Venue"), a United States-based contract manufacturer,
to manufacture commercial-scale quantities of AMPHOTEC and DOXIL pursuant to
supply agreements. There can be no assurance that Ben Venue will continue to
meet FDA or product specification standards or that the Company's manufacturing
requirements can be met in a consistent and timely manner. Only a limited
number of contract manufacturers are capable of manufacturing AMPHOTEC and
DOXIL, and any alternative manufacturer would require regulatory approval to
manufacture the product which would likely take several months, if at all. The
Company is in the process of identifying an alternative manufacturer, but to
date has not sought approval of an alternative manufacturer for its products.
The Company has in the past experienced batch failures in the manufacturing
process for AMPHOTEC and DOXIL. Any batch failures in the future could result
in a material increase in cost of goods sold or in the Company's inability to
deliver products on a timely basis. In addition, the Company may be unable to
obtain sufficient contract manufacturing capacity due to competing demands on
the contract manufacturer's capacity or other reasons. In the event of any
interruption of supply from the contract manufacturer due to regulatory
reasons, significant batch failures, capacity constraints 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 limited. The Company has a sole-source
supply agreement with Meiji Seika Pharma International, Ltd., which expires in
1999, to supply the Company with doxorubicin for DOXIL. The Company also has a
sole-source supply agreement with A.L. Laboratories, Inc., which expires in
1999, to supply the Company with amphotericin B for AMPHOTEC. There can be no
assurance that the doxorubicin or the amphotericin B supplied under these
agreements will continue to meet FDA requirements applicable to DOXIL or
AMPHOTEC, which could delay or prevent future sales of DOXIL or AMPHOTEC, if
any, by the Company. The number of alternative qualified suppliers of key raw
materials required for the manufacture of DOXIL and AMPHOTEC 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 impair the Company's
ability to manufacture and market its products which would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Strategic Alliances" and "-- Manufacturing and
Production."
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. The Company's clinical data
in treatment of solid tumors are derived from a limited number of patients and
are not necessarily predictive of future results obtained in subsequent
clinical trials. Moreover, even when a drug does demonstrate activity, it may
not be sufficiently efficacious to
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<PAGE>
replace existing therapies. There can be no assurance that the Company's
research and development efforts will be successful, that any given product
will be approved by appropriate regulatory authorities or that any product
candidate under development will be safe, effective or capable of being
manufactured in commercial quantities at an economical cost, will not infringe
the proprietary rights of others or will achieve market acceptance.
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 have sufficient resources or will successfully address any of
these technological challenges, or others that may arise in the course of
development. See "Business -- Products and Products Under Development" and "--
Government Regulation."
NO ASSURANCE OF REGULATORY APPROVALS; UNCERTAINTY OF GOVERNMENT REGULATION
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 clearance in the United
States for the commercial sale of only two of its products, DOXIL and
AMPHOTEC, and such clearance is only for limited indications. 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 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 its products. 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.
The Company's regulatory clearances to market DOXIL in the United States for
refractory KS and in certain European countries for first-line and refractory
KS were based on extensive clinical data. In 1996, the Company submitted data
from its two randomized clinical trials to the FDA to obtain clearance to
market DOXIL as a first-line therapy. The FDA has informed the Company that it
would require additional information that addresses the methodology of
assessing the response rates seen in the trials in order to approve DOXIL for
a first-line indication. The Company is currently re-analyzing its existing
clinical data, analyzing data not previously submitted, and considering
expanding ongoing trials, if necessary, to support a first-line indication.
There can be no assurance that the Company will provide such data to the FDA
or that any such submission would result in clearance for a KS first-line
indication. The marketing clearance for DOXIL in the United States 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 Company
is conducting a post-marketing clinical trial designed to meet accelerated
approval requirements. Under FDA accelerated approval regulations, the FDA may
withdraw approval following
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product launch if the Company fails to show due diligence in conducting the
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
or that the results will be satisfactory to the FDA. If the Company is unable
to successfully complete the post-marketing clinical trials or if the results
are not satisfactory to the FDA, the Company's business, financial condition
and results of operations could be materially adversely affected. See
"Business -- Government Regulation."
The Company 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. Failure to comply with such regulations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use
in each target indication. The results from preclinical studies and early
clinical trials may not be predictive of results that will be obtained in
large-scale testing, and there can be no assurance that the Company's clinical
trials will demonstrate the safety and efficacy of any products or will result
in marketable products. For example, the Company has only conducted clinical
trials for the use of DOXIL in certain solid tumors on a limited number of
patients. The Company must conduct additional clinical testing in larger
patient populations to expand the indications for DOXIL. Many pharmaceutical
and drug delivery companies have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials.
The rate of completion of the Company's clinical trials is dependent upon,
among other factors, the rate of patient enrollment. The Company is dependent
on third parties including hospitals and physicians to conduct the clinical
trials. In addition, the Company is reliant on Schering-Plough to conduct
certain clinical trials for the use of DOXIL in treatment of solid tumors.
There is substantial competition to enroll patients in clinical trials for
oncology products. Delays in planned patient enrollment can result in
increased costs and delays. If the Company is unable to successfully complete
its clinical trials, its business, financial condition and results of
operations could be materially adversely affected. See "Business -- Products
and Products Under Development," "-- Strategic Alliances " and "-- Government
Regulation."
UNCERTAINTY OF FUTURE FINANCIAL RESULTS; FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results depend upon a variety of factors,
including the price, volume and timing of sales of the Company's approved
products; variations in payments under collaborative agreements, including
royalties, fees and other contract revenues; the availability of third-party
reimbursement; and the regulatory approvals of new products, or expanded
labeling of existing products. The Company's quarterly operating results may
also fluctuate significantly depending on other factors, including the timing
of the expansion of clinical trials for DOXIL and AMPHOTEC and the level of
clinical trials for SP1-077; changes in the Company's level of research and
development; changes in manufacturing capabilities; and variations in gross
margins of the Company's products which may be caused by cost increases from
third-party manufacturers, availability and cost of raw materials, competitive
pricing pressures and the mix between product sales in the United States and
sales to the Company's international marketing partners. In addition, sales of
a product in any given period, including the quarter in which a new product is
initially introduced to the market, may include a significant amount of orders
for inventory by distributors and wholesalers and may not necessarily be
indicative of actual demand for that product by physicians and patients. There
can be no assurance that distributors or wholesalers will be able to forecast
demand for product accurately. Fluctuations in operating results will occur to
the extent that demand by physicians and patients does not meet distributors'
or wholesalers' expectations. The Company expects quarter to quarter
fluctuations to continue in the future.
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In addition, the Company expects operating expenses to increase in 1997, and
there can be no assurance that the Company's revenues will not decline or that
the Company will ever achieve profitability. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH INTERNATIONAL SALES
There are significant challenges and risks to the Company associated with
selling products and conducting business in international markets, including,
but not limited to, varying government regulation of pharmaceutical products,
varying third-party and government reimbursement policies, uncertain
intellectual property protections, delays in establishing international
distribution channels and difficulties in collecting international accounts
receivable. The Company does not have extensive experience in international
sales and is relying on third parties to address these markets. The Company's
international business and financial performance could also be adversely
affected by matters such as currency controls, tariff regulations, foreign
duties and taxes, pricing controls and regulations and difficulties in
obtaining export licenses. In addition, the Company's products are priced in
the currency of the country in which such products are sold. Accordingly, the
prices of such products in dollars will vary as the value of the dollar
fluctuates against such local currencies. Increases in the value of the dollar
against such currencies, therefore, will reduce the dollars realized by the
Company on the sale of its products. The Company does not presently engage in
any hedging or other transactions intended to manage the risks relating to
foreign currency exchange rates or interest rate fluctuations. However, the
Company may in the future undertake such transactions if it determines that it
is advisable to offset such risks, although no assurance can be given that
these efforts will be successful.
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 international markets, including markets the Company is
seeking to enter, pricing of prescription pharmaceuticals is subject to
government price controls. In these markets, once marketing approval is
received, pricing negotiation could take another six to 12 months or longer.
In the United States there have been, and there may continue to be, federal
and state proposals to implement similar government price controls. 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 proposals, if adopted, and such initiatives could
decrease the price that the Company receives for any current or future
products 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 products, the Company's ability to commercialize its products
may be materially adversely affected. In addition, price competition may
result from competing product sales, attempts to gain market share or
introductory pricing programs, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's ability to commercialize DOXIL, AMPHOTEC and other 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 of the
Company's products. Government and other third-party payors are increasingly
attempting to contain health care costs by limiting the level of reimbursement
for new therapeutic products, and by refusing, in some cases, to provide
coverage or reimbursement for indications for which the FDA has not granted
marketing clearance. 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."
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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 $10 million per occurrence and $10
million in the aggregate. A single product liability claim could exceed the
$10 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 at acceptable cost or at all, 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, financial condition and results of operations could be materially
adversely affected by one or more successful product liability claims.
In addition, with respect to the sale of products in the United States, 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 United States as opposed to most other countries. The
Company is required by government 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 such products have already been sold. Such testing and any product
recalls could increase the Company's potential exposure to product liability
claims and may have a material adverse effect on the Company's business,
financial condition and results of operations.
UNCERTAINTIES REGARDING 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, have filed
applications for, or 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 existing 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.
The Company has in the past been a party to litigation regarding
intellectual property rights. In prior litigation in the Patents County Court
in the U.K., a suit brought by NeXstar alleging that the Company's anticancer
drug, DOXIL, 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.
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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 DOXIL, SEQUUS is aware of TLC's United States Patent
No. 5,077,056 (the "056 Patent") relating to the loading of therapeutic drugs
into liposomes. The Company's patent counsel has rendered an opinion that
DOXIL would not infringe any valid claim of this patent. International
equivalent patents to the 056 Patent issued to TLC are now undergoing
opposition proceedings in the European and Japanese patent offices and the
Company is party to such proceedings. Adverse results in such opposition
proceedings could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is also aware of
recently issued United States Patent No. 5,562,925 (the "925 Patent") covering
therapeutic cisplatin compositions held by Research Corporation Technologies
Inc., which the Company believes has been licensed exclusively to Bristol-
Myers. The Company's patent counsel has rendered an opinion that its STEALTH
cisplatin formulation would not infringe any valid claims of the 925 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 DOXIL would not infringe any valid
claim of either of these patents. The Company is also aware of United States
Patent Nos. 4,426,330 and 4,534,899 assigned to Lipid Specialties, Inc.,
relating to conjugates of phospholipids and polyethyleneglycol. The Company's
patent counsel has rendered an opinion that DOXIL would not infringe any valid
claims of these patents.
In November 1991, the Company received a letter from TLC bringing to the
Company's attention TLC's United States Patent No. 5,059,591 for "Reduced
Toxicity" (the "591 Patent") containing claims directed to amphotericin
B/sterol compositions and their method of use. Subsequently, the Company's
patent counsel delivered an opinion to the Company that, among other things,
AMPHOTEC does not infringe any valid claim of the 591 Patent. The Company has
not received any further written correspondence with respect to this issue.
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.
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. The Company has been required to defend itself in patent litigation
in the past and 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. If
another company were to successfully bring legal actions against the Company
claiming patent or other intellectual property right infringements, in
addition to any liability for damages, the Company could be enjoined by a
court from selling such products or processes or might be required to obtain a
license to manufacture or sell the affected product or process. There can be
no assurance that the Company would prevail in any such action or that the
Company could obtain any license required under any such patent on acceptable
terms, if at all. Any litigation, whether or not resolved in favor of the
Company, could be expensive and time-consuming, could consume substantial
management resources, could have a material adverse effect on the Company's
product distribution arrangements and could otherwise have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company relies on unpatented trade secrets and proprietary know-how to
protect certain aspects of its production and other technologies. 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 -- Strategic Alliances" and "-- Patents and Trade
Secrets."
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HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING
The Company has incurred losses in each year since its inception and has
accumulated approximately $150.6 million in net losses through December 31,
1996, including a net loss of $17.2 million in the fiscal year ended December
31, 1996. There can be no assurance that revenues from product sales or other
sources will be sufficient to fund operations or that the Company will achieve
profitability or positive cash flow. Additional financing may be required to
fund the Company's continuing operations and product and business development
activities in the form of debt or equity securities or bank financing. There
can be no assurance that such financing will be available on acceptable terms,
if at all. The unavailability of such financing could delay or prevent the
development, testing, regulatory approval, manufacturing or marketing of some
or all of the Company's products and could have a material adverse effect on
the Company's business, financial conditions or results of operations. See
"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, medical, 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 have joined the management team in the past two years. The new
management team will face significant challenges in transitioning the Company
from research and development to manufacturing and marketing of the Company's
products that have received regulatory approval. There can be no assurance
that the management team can successfully manage the transition of the
Company's business. See "Business -- Employees" and "Management."
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."
MARKET FOR PREFERRED STOCK AND DEBENTURES
Prior to this offering there has been no public market for the Preferred
Stock. Although the Preferred Stock is expected to be listed on the Nasdaq
National Market, there can be no assurance that a liquid trading market in the
Preferred Stock will develop. In addition, if the Preferred Stock is exchanged
for Debentures, the Company is not obligated to list the Debentures, and there
can be no assurances that a market in the Debentures will develop. See
"Description of Preferred Stock" and "Description of Debentures."
UNCERTAINTY OF PAYMENT OF DIVIDENDS ON PREFERRED STOCK
Under Delaware law, dividends or distributions to stockholders may be made
only from the surplus of the Company, or, in certain situations, from the net
profits for the current fiscal year or the fiscal year before which the
dividend or distribution is declared. The Company's ability to pay dividends
in the future will depend upon its financial results, liquidity and financial
condition. The Company has no history of generating positive cash flow or
profits to make periodic dividend payments, and there can be no assurances
that the Company will have the surplus or profit necessary to pay any
dividends. As a result, the Company may be unable to pay the quarterly
installments of the cumulative annual dividend on the Preferred Stock. See
"Description of Preferred Stock."
17
<PAGE>
VOLATILITY OF STOCK PRICE
The market price of the Company's securities, 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,
comments and reports by securities analysts, 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, the
Preferred Stock and the Debentures (if issued). Any large sale of securities
of the Company could have a significant adverse effect on the market price of
the Common Stock, the Preferred Stock and the Debentures (if issued). See
"Price Range of Common Stock."
TAX CONSEQUENCES OF EXCHANGE FOR DEBENTURES
An exchange of Preferred Stock for Debentures will be a taxable event for
federal income tax purposes which may result in tax liability to the holder
without any corresponding receipt of cash by the holder. See "Certain Federal
Income Tax Considerations -- Exchange for Debentures."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Preferred Stock offered by the Company are estimated to be $ 47,875,000
($55,113,000 if the Underwriters' over-allotment option is exercised in full)
after deducting estimated underwriting discounts and commissions and expenses
of the offering payable by the Company.
The Company intends to use the proceeds of this offering for (i) activities
relating to the clinical trials of DOXIL and AMPHOTEC for additional
indications and the clinical trial program for SPI-077; (ii) increased
manufacturing capacity and additional production facilities; (iii) research
and development related to new product opportunities; and (iv) other general
corporate purposes, including working capital and capital expenditures. The
Company may also use a portion of its available cash to acquire technologies
or products complementary to its business. Although the Company does consider
such acquisitions from time to time, as part of normal business operations and
planning, it has no present commitments or agreements with respect to any such
acquisitions.
The precise allocation of the proceeds and the timing of expenditures will
vary depending on numerous factors, including the progress of the Company's
research and development efforts, the results of clinical trials, the timing
of regulatory approvals and strategic partnering activities. Such expenditures
are likely to be substantial and may exceed the proceeds of this offering. The
Company believes that its existing cash balances, interest income, revenues
from operations and the net proceeds of this offering will be adequate to fund
its planned activities at least through 1998. However, the Company may seek
additional financing sooner. Pending their application, the net proceeds will
be invested in investment-grade, short-term, interest-bearing investments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock since its
inception and does not anticipate paying any dividends on the Common Stock in
the foreseeable future. For a discussion of dividends payable on the Preferred
Stock, see "Description of Preferred Stock -- Dividends."
18
<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "SEQU." The following table sets forth, for the calendar periods
indicated, the range of high and low sale prices for the Company's Common
Stock on the Nasdaq National Market. These prices do not include retail
markups, markdowns, or commissions.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
First Quarter............................................ $ 9 1/2 $ 5 1/2
Second Quarter........................................... 12 1/8 5 3/4
Third Quarter............................................ 15 1/8 10 3/4
Fourth Quarter........................................... 14 1/4 9 3/4
1996
First Quarter............................................ 19 1/2 12 3/8
Second Quarter........................................... 22 1/2 13 3/4
Third Quarter............................................ 20 1/8 11 1/2
Fourth Quarter........................................... 17 12 1/4
1997
First Quarter (through March 12, 1997)................... 16 5/8 11 3/8
</TABLE>
As of December 31, 1996 there were approximately 454 holders of record of
the Common Stock. On March 12, 1997, the last sale price reported on the
Nasdaq National Market for the Company's Common Stock was $12.6875 per share.
19
<PAGE>
CAPITALIZATION
The following table sets forth (i) the Company's actual capitalization at
December 31, 1996, and (ii) as adjusted capitalization to reflect the sale by
the Company of 1,000,000 shares of Preferred Stock in the offering, less
estimated underwriting discounts and commissions and expenses of the offering
payable by the Company.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------
AS
ACTUAL ADJUSTED
--------- ---------
(in thousands,
except share
and per share data)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, par value $0.01; 4,000,000 shares
authorized, issuable in series; no shares issued and
outstanding, actual (1,000,000 shares issued and
outstanding, as adjusted)............................. $ -- $ 10
Common Stock, par value $0.0001; 45,000,000 shares
authorized; 29,660,319 shares issued and outstanding,
actual and as adjusted(1)............................. 3 3
Additional paid-in capital............................. 194,948 242,813
Accumulated deficit.................................... (150,624) (150,624)
--------- ---------
Total stockholders' equity........................... 44,327 92,202
--------- ---------
Total capitalization............................... $ 44,327 $ 92,202
========= =========
</TABLE>
- --------
(1) Excludes 4,086,188 shares of Common Stock issuable upon exercise of
outstanding options at a weighted average exercise price of $9.67 per
share and 1,972,023 shares of Common Stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $6.58 per
share. The Company will reserve shares of Common Stock for issuance
upon conversion of the Preferred Stock or Debentures.
20
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1995 and 1996
and for each of the three years in the period ended December 31, 1996 are
derived from the Company's financial statements which have been audited by
Ernst & Young LLP, independent auditors, which are included elsewhere herein.
The selected financial data set forth below as of December 31, 1992, 1993 and
1994 and for each of the two years in the period ended December 31, 1993 are
derived from audited financial statements not included or incorporated by
reference herein. This data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this Prospectus and the financial statements and related notes
included in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
STATEMENT OF OPERATIONS
DATA:
Revenues:
Product sales............ $ 293 $ 1,299 $ 3,664 $ 1,907 $ 25,462
Royalties and fees (1)... 425 5,458 91 109 7,461
-------- -------- -------- --------- ---------
Total revenues............. 718 6,757 3,755 2,016 32,923
Operating expenses:
Cost of goods sold....... 13 232 916 511 3,990
Research and development. 15,769 21,128 25,378 22,651 27,652
Selling, general and
administrative.......... 2,723 6,653 7,622 13,856 20,302
-------- -------- -------- --------- ---------
Total operating expenses... 18,505 28,013 33,916 37,018 51,944
-------- -------- -------- --------- ---------
Loss from operations....... (17,787) (21,256) (30,161) (35,002) (19,021)
Interest income............ 2,394 1,602 976 1,406 1,844
-------- -------- -------- --------- ---------
Net loss................... $(15,393) $(19,654) $(29,185) $ (33,596) $ (17,177)
======== ======== ======== ========= =========
Net loss per share......... $ (0.84) $ (1.05) $ (1.54) $ (1.54) $ (0.59)
======== ======== ======== ========= =========
Weighted average shares
outstanding............... 18,270 18,789 18,978 21,831 28,937
Ratio of earnings to
combined fixed charges
and preferred stock
dividends (2)............. -- -- -- -- --
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents
and short-term marketable
investments............... $ 41,325 $ 34,658 $ 11,757 $ 50,276 $ 32,946
Long-term marketable
investments............... 12,782 2,520 500 -- --
Total assets............... 60,523 45,179 18,198 57,808 54,968
Long-term debt and lease
obligations............... -- -- -- -- --
Accumulated deficit........ (51,014) (70,668) (99,865) (133,427) (150,624)
Total stockholders' equity. 58,577 39,318 10,938 49,599 44,327
</TABLE>
- --------
(1) Includes a signing fee and regulatory milestone fee totaling $5.3 million
from Zeneca Limited in 1993 and a distribution rights fee of $5.3 million
from Schering-Plough in 1996.
(2) For the years ended December 31, 1992, 1993, 1994, 1995 and 1996, earnings
were insufficient to cover fixed charges by $15,267,000, $19,496,000,
$29,002,000, $33,421,000 and $16,966,000, respectively. There were no
preferred stock dividends declared or paid by the Company during any of
the years in the five year period ended December 31, 1996. For these
reasons, no ratios are provided.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations that relate to future plans, events or
performance are forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
The Company is a leader in developing and commercializing lipid-based
biopharmaceutical products primarily to treat cancer and infectious diseases.
The Company formulates its proprietary STEALTH liposomes with existing drugs,
or with therapeutics under development, to develop new products with improved
safety and efficacy profiles. The Company has developed and is marketing
DOXIL, an anticancer drug, and AMPHOTEC, an antifungal drug, in the United
States through its direct sales organization and internationally through its
marketing partners. The Company is currently conducting additional clinical
trials for the use of DOXIL in the treatment of certain solid tumors,
including a Phase III clinical trial in refractory ovarian cancer and a number
of breast cancer trials. In addition, SEQUUS is currently conducting a Phase I
trial of its STEALTH cisplatin formulation for the treatment of cancer.
SEQUUS developed DOXIL, a proprietary STEALTH liposome formulation
encapsulating a leading anticancer drug, doxorubicin. In November 1995, SEQUUS
received marketing clearance from the FDA for DOXIL for the treatment of KS in
people with AIDS 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 team, and
achieved domestic product sales of approximately $20.9 million in 1996. In
June 1996, the Company was granted marketing authorization for DOXIL under the
tradename CAELYX in the 15 member states of the EU for the treatment of first-
line and refractory KS in patients with low CD4 counts and extensive
mucocutaneous or visceral disease. The drug may be used as first-line systemic
chemotherapy, or as second-line chemotherapy, in KS patients with disease that
has progressed with, or in patients who are intolerant to, prior combination
chemotherapy comprising at least two of the following agents: a Vinca
alkaloid, bleomycin, and doxorubicin (or other anthracycline).
The Company has entered into a distribution agreement with Schering-Plough
under which Schering-Plough has rights to market and sell CAELYX worldwide,
except for the United States, Japan and certain other countries. Schering-
Plough will conduct pricing discussions with the appropriate agencies in those
European countries where pricing approval is required. In addition, the
Company and Schering-Plough are jointly planning the clinical development of
DOXIL for the treatment of solid tumors in the United States and certain
international markets. Schering-Plough will be responsible for conducting
certain of these clinical trials. In 1996, the Company received fees of $7.3
million from Schering-Plough.
The Company used another lipid-based delivery technology to develop
AMPHOTEC, a proprietary formulation of a leading antifungal drug, amphotericin
B. In November 1996, SEQUUS received marketing clearance from the FDA for
AMPHOTEC for the treatment of invasive aspergillosis, a life-threatening
fungal infection, in patients where renal impairment or unacceptable toxicity
precludes the use of conventional amphotericin B therapy in effective doses
and in patients where prior amphotericin B therapy has failed. In December
1996, the Company launched AMPHOTEC in the United States, using its own
marketing and sales organization. AMPHOTEC has also received marketing
clearance in a number of other countries for the treatment of 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's strategy is to commercialize AMPHOTEC in
international markets, under the tradename AMPHOCIL, through distribution
partners. The Company has entered into a number of distribution agreements,
including agreements with Zeneca Limited ("Zeneca") and Bayer, Inc. ("Bayer")
in selected countries. A liposome-
22
<PAGE>
based amphotericin B product which targets indications similar to those
targeted by AMPHOCIL has been first to market and captured a significant
portion of market share in many foreign markets. Another competitor introduced
its lipid-based 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
and launched the product as the first lipid-based antifungal agent in the
United States. Competition from these two competitors could have an adverse
effect on the market penetration and pricing of AMPHOTEC in both Europe and in
the United States.
In August 1993, the Company signed a distribution agreement with Zeneca
under which Zeneca was to market and sell AMPHOCIL in most European countries.
In March 1994, SEQUUS and Zeneca announced the expansion of their August 1993
agreement to cover additional markets. In July 1996, SEQUUS announced that it
had reacquired from Zeneca all international marketing and distribution rights
for AMPHOCIL except for nine European countries to which Zeneca had retained
such rights (Denmark, Finland, Iceland, Ireland, Italy, the Netherlands,
Portugal, Sweden and the U.K.). In exchange for the return to SEQUUS of
marketing and distribution rights throughout the rest of the world, SEQUUS
agreed to restructure certain future milestone payments specified in the
original agreement, adjust the pricing terms for AMPHOCIL to provide greater
competitive pricing flexibility, and exchange certain inventory held by
Zeneca.
The Company recognizes product sales upon shipment of product to its
marketing partners internationally and to its customers in the United States.
Historically, sales revenue recorded under the Zeneca agreement has fluctuated
quarter to quarter depending on the number of shipments in each quarter. The
Company's quarterly operating results depend upon a variety of factors,
including the price, volume and timing of sales of the Company's approved
products; variations in payments under collaborative agreements, including
royalties, fees and other contract revenues; the availability of third-party
reimbursement; and the regulatory approvals of new products, or expanded
labeling of existing products. The Company's quarterly operating results may
also fluctuate significantly depending on other factors, including the timing
of the expansion of clinical trials for DOXIL and AMPHOTEC and the level of
clinical trials for SP1-077; changes in the Company's level of research and
development; changes in manufacturing capabilities; and variations in gross
margins of the Company's products which may be caused by cost increases from
third-party manufacturers, availability and cost of raw materials, competitive
pricing pressures and the mix between product sales in the United States and
sales to the Company's international marketing partners. In addition, sales of
a product in any given period, including the quarter in which a new product is
initially introduced to the market, may include a significant amount of orders
for inventory by distributors and wholesalers and may not necessarily be
indicative of actual demand for that product by physicians and patients. There
can be no assurance that distributors or wholesalers will be able to forecast
demand for product accurately. Fluctuations in operating results will occur to
the extent that demand by physicians and patients does not meet distributors'
or wholesalers' expectations. The Company expects quarter to quarter
fluctuations to continue in the future. In addition, the Company expects
operating expenses to increase in 1997, and there can be no assurance that the
Company's revenues will not decline or that the Company will ever achieve
profitability.
The Company has incurred losses in each year since its inception and has
accumulated approximately $150.6 million in net losses through December 31,
1996, including a net loss of approximately $17.2 million in the fiscal year
ended December 31, 1996. Although the Company and its marketing partners have
commenced marketing DOXIL in the United States and certain international
markets and AMPHOTEC in the United States and 19 other countries, there can be
no assurance that revenues from product sales or other sources will be
sufficient to fund operations or that the Company will achieve profitability
or positive cash flow.
The Company expects its research and development expenses to increase as a
result of expanded clinical trials of DOXIL in a variety of solid tumors and
clinical trials of SPI-077. The Company expects its marketing and sales
expenses to increase as it proceeds with the commercialization of DOXIL and
AMPHOTEC through its United States direct sales and marketing organization. As
of December 31, 1996, SEQUUS had a United States sales team of 42 individuals
experienced in the sale of pharmaceutical and biopharmaceutical products, with
particular emphasis on oncology and infectious disease.
23
<PAGE>
The Company's business is subject to significant risks, including, but not
limited to, the risks inherent in seeking market acceptance of current and
future products; managing a marketing and sales organization; depending on
third-party distributors, manufacturers and sole-source suppliers; obtaining
and enforcing patents; uncertainties relating to product development, clinical
trials and the regulatory approval process; uncertainties relating to the
patent rights of others; and uncertainties relating to pharmaceutical pricing
and reimbursement.
RESULTS OF OPERATIONS
Years Ended December 31, 1996 and 1995
Revenues
Total revenues were $32.9 million, of which $25.5 million were product
sales, during the year ended December 31, 1996 compared with $2.0 million
during the year ended December 31, 1995. DOXIL product sales represented 89%
of total product sales in 1996 compared to 49% in 1995. For 1996, 3% of the
Company's product sales represented sales of AMPHOTEC to Zeneca as compared to
41% in 1995. In 1996, the Company received approximately $7.5 million in
upfront fees and payments, which included $7.3 million from Schering-Plough.
Operating Expenses
The Company's gross margin increased to 84% of product sales in 1996 from
73% of net sales in 1995. This increase in the gross margin is due to the
increase in the percentage of direct product sales in 1996 versus 1995. The
Company generally recognizes higher margins on direct product sales in the
United States than it does on sales to the Company's international
distribution partners and agents. Direct product sales were 89% of product
sales in 1996 and were 32% of product sales in 1995. The Company anticipates
that its gross margin will continue to fluctuate depending on the mix between
direct product sales in the United States and sales to the Company's
international distribution partners and agents.
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 expense increased to $27.7 million in 1996, from $22.7 million
in 1995. This increase in expenses resulted from higher spending in 1996
associated with clinical trials for DOXIL, expenses associated with the
regulatory approval of AMPHOTEC and an increase in spending on R&D projects.
The Company anticipates that future clinical trial expenses will increase due
to expanded clinical trials of DOXIL in a variety of solid tumors and on
clinical trials of SPI-077.
Selling, general and administrative expenses increased to $20.3 million in
1996 from $13.9 million in 1995. The increase in selling, general and
administrative expenses was primarily due to the first full year of marketing
DOXIL, and, to a lesser extent, preparation for the launch of AMPHOTEC in
December 1996, which required the hiring of 17 additional sales personnel.
Interest Income
Interest income increased to $1.8 million in 1996 from $1.4 million in 1995,
due to the increase in cash available for investment resulting primarily from
the net proceeds of $45.6 million received by the Company from a public
offering of Common Stock in the fourth quarter of 1995.
Net Loss
The Company's net loss decreased to $17.2 million in 1996 from $33.6 million
in 1995. The net loss per share was $0.59 for 1996 compared to a net loss of
$1.54 per share for 1995. The decrease in the loss was due
24
<PAGE>
primarily to an increase in product sales, partially offset by an increase in
marketing and sales costs in anticipation of the AMPHOTEC December 1996
launch, a full year of marketing and sales expenses for DOXIL and an increase
in clinical and preclinical costs for additional trials.
Years Ended December 31, 1995 and 1994
Revenues
Total revenues, of which the majority were product sales, were $2.0 million,
during the year ended December 31, 1995 compared with $3.8 million recorded
during the year ended December 31, 1994. DOXIL product sales represented 49%
of total product sales in 1995 compared to 3% in 1994. For 1995, 41% of the
Company's product sales represented sales of AMPHOCIL to Zeneca as compared to
91% for 1994. A significant portion of the 1994 and 1995 product sales reflect
orders for inventory. Product sales declined during 1995 due primarily to the
absence of AMPHOCIL shipments to Zeneca after the first quarter of 1995.
Operating Expenses
R&D expenses decreased to $22.7 million in 1995 from $25.4 million in
1994. This reduction resulted from higher spending in 1994 associated with
clinical trials in preparation for the NDA filing for DOXIL in the treatment
of KS.
Selling, general and administrative expenses increased to $13.9 million in
1995 from $7.6 million in 1994, principally reflecting an increase in
marketing and sale expenses in preparation of the December 1995 DOXIL launch.
The Company hired 24 individuals 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.
Interest Income
Interest income increased to $1.4 million in 1995 from $1.0 million in 1994,
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 in 1995 from $29.2 million
in 1994. The net loss per share was $1.54 for both 1995 and 1994. The increase
in the loss was due primarily to an increase in marketing and sales costs in
anticipation of the December 1995 DOXIL launch and a decline in AMPHOTEC sales
to Zeneca.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents and marketable investments at
December 31, 1996 were $32.9 million, a decrease of $17.4 million from $50.3
million at December 31, 1995. This decrease represents net cash used by
operating activities of $25.0 million, capital expenditures of $3.6 million
offset by $11.3 million of cash provided by financing activities. During the
fiscal year ended December 31, 1996, the Company received approximately $10.7
million from the exercise of warrants issued to investors in private
placements and employee stock options. Of this, approximately $3.0 million was
due to the exercise of warrants to purchase approximately 706,000 shares of
Common Stock at $4.25 per share. Approximately $0.9 million was due to the
exercise of warrants to purchase 120,682 shares of Common Stock at $7.43 per
share. Approximately $2.6 million was due to the exercise of warrants to
purchase 352,460 shares of Common Stock at $7.43 per share. At December 31,
1996, the following warrants for shares of the Company's Common Stock were
outstanding: 525,000 shares at $4.25 per share, expiring March 1997; 687,638
shares at $7.43 per share,
25
<PAGE>
expiring April 1998; and 759,385 shares at $7.43 per share, expiring May 1999.
At December 31, 1996, the Company also had outstanding options to purchase
4,068,188 shares of its Common Stock at a weighted average exercise price of
$9.67 per share. In April 1996 the Company completed the conversion of each of
the 480,000 shares of Series A Convertible Reset Preferred Stock into 3.367
shares of Common Stock.
The Company's strategy is to fund from its own cash resources and the
proceeds from this offering, the preclinical development of its proprietary
products, DOXIL, AMPHOTEC and SPI-077, 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.
The Company believes that its existing cash balances, interest income,
revenues from operations and the net proceeds of this offering will be
adequate to fund its planned activities at least through 1998. However, the
Company 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, 1996, the Company had Federal and California net
operating loss carryforwards of approximately $99.0 million and $10.0 million,
respectively. The Company also has Federal and California research and
development tax credit carryforwards of approximately $4.9 million and $3.4
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.
26
<PAGE>
BUSINESS
The statements in this Prospectus that relate to future plans, events or
performance are forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
OVERVIEW
SEQUUS Pharmaceuticals, Inc. is a leader in developing and commercializing
lipid-based biopharmaceutical products primarily to treat cancer and
infectious diseases. The Company formulates its proprietary STEALTH liposomes
with existing drugs, or with therapeutics under development, to develop new
products with improved safety and efficacy profiles. The Company has developed
and is marketing DOXIL, an anticancer drug, and AMPHOTEC, an antifungal drug,
in the United States through its direct sales organization and internationally
through its marketing partners. The Company is currently conducting additional
clinical trials for the use of DOXIL in the treatment of certain solid tumors,
including a Phase III clinical trial in refractory ovarian cancer and a number
of breast cancer trials. In addition, SEQUUS is currently conducting a Phase I
trial of its STEALTH cisplatin formulation for the treatment of cancer.
Liposomes are microscopic lipid spheres used to encapsulate drugs for
delivery to targeted areas of the body in order to increase efficacy and
reduce toxicity. SEQUUS has created and patented STEALTH liposomes that avoid
the body's natural defense mechanisms and degrade more slowly than
conventional liposomes, thereby significantly increasing circulation time of
encapsulated therapeutic agents in the body. For example, clinical data
demonstrate that an anthracycline encapsulated in STEALTH liposomes (DOXIL)
has a circulating half-life of approximately 55 hours compared to a half-life
of approximately five hours for the other commercially available liposomal
anthracycline product. This long circulation time allows STEALTH liposomes to
accumulate in tissues where new blood vessels are forming, such as tumors and
sites of inflammation or injury, delivering sustained and increased drug
concentration to these target tissues.
SEQUUS developed DOXIL, a proprietary STEALTH liposome formulation
encapsulating a leading anticancer drug, doxorubicin. In November 1995, SEQUUS
received marketing clearance from the FDA for DOXIL for the treatment of KS in
people with AIDS whose KS has progressed on prior chemotherapy or in patients
who are intolerant to such therapy ("refractory KS"). In December 1995, the
Company launched DOXIL in the United States, using its own marketing and sales
team, and achieved domestic product sales of approximately $20.9 million in
1996. In June 1996, the Company was granted marketing authorization for DOXIL
under the tradename CAELYX in the 15 member states of the EU for the treatment
of first-line and refractory KS in patients with low CD4 counts and extensive
mucocutaneous or visceral disease. The drug may be used as first-line systemic
chemotherapy, or as second-line chemotherapy, in KS patients with disease that
has progressed with, or in patients who are intolerant to, prior combination
chemotherapy comprising at least two of the following agents: a Vinca
alkaloid, bleomycin, and doxorubicin (or other anthracycline). The Company has
entered into a distribution agreement with Schering-Plough under which
Schering-Plough has rights to market and sell CAELYX worldwide, except for the
United States, Japan and certain other countries. In addition, the Company and
Schering-Plough are jointly planning the clinical development of DOXIL for the
treatment of solid tumors in the United States and certain international
markets. Schering-Plough will be responsible for conducting certain of these
clinical trials.
The Company used another lipid-based delivery technology to develop
AMPHOTEC, a proprietary formulation of a leading antifungal drug, amphotericin
B. In November 1996, SEQUUS received marketing clearance from the FDA for
AMPHOTEC for the treatment of invasive aspergillosis, a life-threatening
fungal infection, in patients where renal impairment or unacceptable toxicity
precludes the use of conventional amphotericin B therapy in effective doses
and in patients where prior amphotericin B therapy has failed. In December
1996, the Company launched AMPHOTEC in the United States, using its own
marketing and sales
27
<PAGE>
organization. AMPHOTEC has also received marketing clearance in a number of
other countries for the treatment of 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's strategy is to commercialize AMPHOTEC in international markets,
under the tradename AMPHOCIL, through distribution partners. The Company has
entered into a number of distribution agreements, including agreements with
Zeneca and Bayer in selected countries.
The Company is developing SPI-077, a proprietary STEALTH liposome
formulation of encapsulated cisplatin, a widely used anticancer drug. The
utility of unencapsulated cisplatin is limited by a range of potentially
serious and irreversible toxicities. Based upon results from preclinical
studies, the Company believes that SPI-077 may have safety and efficacy
advantages over unencapsulated cisplatin. In December 1996, the Company began
a Phase I clinical trial of SPI-077 in the treatment of solid tumors. The
Phase I trial is focused on determining the maximum tolerated dose of SPI-077
and establishing the toxicity profile of SPI-077 in patients with advanced
malignancies not amenable to other cancer treatment.
The Company's research and development efforts focus on developing new
products by encapsulating other drugs, or attaching other drugs to, STEALTH
liposomes and expanding the STEALTH platform to create additional methods of
drug delivery. Products in the early development stage include STEALTH
liposome formulations of CD4 for treating people with HIV, a quinolone
antibiotic for treating life-threatening respiratory tract infections or other
severe systemic bacterial infections, and a radiosensitizing agent for
treating cancer. The Company is also conducting research in the field of small
molecule, peptide and gene delivery using STEALTH liposomes.
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 body and avoiding healthy tissue. As development of
liposome products progressed, two serious limitations emerged. First,
conventional liposomes were attacked by proteins in the blood, causing rupture
and premature release of entrapped drug into the bloodstream. Second,
liposomes that survived rupture were quickly removed from circulation,
primarily by immune cells that line the ducts of the liver.
To address these limitations, SEQUUS developed patented liposomes that are
stable in plasma and avoid rapid removal from the bloodstream. This was
achieved by attaching polyethyleneglycol ("PEG") to the surface of the
liposomes to form the Company's proprietary long-circulating STEALTH
liposomes. For example, clinical data demonstrate that an anthracycline
encapsulated in STEALTH liposomes (DOXIL) has a circulating half-life of
approximately 55 hours compared to a half-life of approximately five hours for
the other commercially available liposomal anthracycline product. In addition,
the STEALTH liposomes are large enough that they typically do not escape out
of the blood stream and into tissues through normal, healthy blood vessels. As
a consequence, STEALTH liposomes continue to circulate intact until they reach
tissues where new blood vessels are forming, such as tumors, sites of
inflammation, and sites of injury. The Company's clinical data have
demonstrated that the STEALTH liposomes leave the blood vessels in these
locations, accumulate in high amounts, and then slowly release the
encapsulated drug. As a result, the Company believes that STEALTH liposomes
target diseased tissue, where the drugs can have a benefit, and avoid healthy
tissues where the drugs will cause damage. For example, the Company has shown
an up to 53-fold increase of DOXIL-delivered doxorubicin in certain tumors as
compared to unencapsulated doxorubicin. An additional significant benefit of
STEALTH technology is that certain molecules which cannot be encapsulated
inside a liposome can be attached to the PEG on the surface of the liposomes.
The Company believes that this may enable it to develop additional drug
delivery products using its STEALTH technology.
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<PAGE>
The Company uses additional lipid-based technology in the development of its
proprietary products. For example, AMPHOTEC is a novel lipid-based colloidal
dispersion which forms a stable suspension of the active drug, amphotericin B.
The Company believes the stability of the formulation enables it to reduce
manufacturing costs, lengthen shelf-life and ease 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
proven drugs and new therapeutics in development with enhanced safety or
efficacy profiles based primarily on its proprietary STEALTH liposome
technology. The Company intends to focus its near-term efforts on: (i) the
commercialization of DOXIL and AMPHOTEC in the United States through its own
sales team and in selected international markets through marketing partners;
(ii) the development of additional uses for DOXIL and AMPHOTEC by establishing
clinical efficacy in a range of additional indications; (iii) the expansion of
the clinical development program for SPI-077; (iv) the development of new
products in the SEQUUS pipeline that utilize STEALTH liposomes; (v) the
increase of its manufacturing capacity and expansion into additional
production facilities; and (vi) the expansion of the STEALTH platform, either
alone or through strategic alliances, to create additional proprietary
products and drug delivery technologies.
29
<PAGE>
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The table below lists the primary therapeutic indications for and current
status of the Company's principal products, potential products under
development and research projects. The table is qualified in its entirety by
reference to the more detailed descriptions elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARKETING/
PRODUCT/DEVELOPMENT PRIMARY INDICATION(S) STATUS(1) DISTRIBUTION RIGHTS
------------------- --------------------- --------- -------------------
<C> <S> <C> <C>
DOXIL KS (refractory) Marketed in U.S. SEQUUS
(STEALTH doxorubicin)
KS (first-line SEQUUS/Schering-
therapy and re- Approved in 15 Plough(2)
fractory) EU countries
Ovarian cancer Phase II and SEQUUS/Schering-
(refractory) Phase III Plough(2)
SEQUUS/Schering-
Breast cancer Phase II Plough(2)
Combination Phase I/II
chemotherapy SEQUUS/Schering-
(e.g. Plough(2) (DOXIL
DOXIL/paclitaxel) only)
Other solid tu- SEQUUS/Schering-
mors Phase I/II Plough(2)
AMPHOTEC Aspergillosis Marketed in U.S. SEQUUS
(Lipid-based amphotericin B) (second-line
therapy)
Systemic fungal SEQUUS/Partners(3)
infections where Approved in 9 EU
amphotericin B and 10 other
therapy has countries; MAAs
failed or is con- pending in 6
traindicated other countries
Aspergillosis
(first-line ther-
apy) Phase III SEQUUS/Partners(3)
Fever of unknown Supplemental NDA SEQUUS/Partners(3)
origin (febrile filed
neutropenia)
SPI-077 Solid tumors Phase I SEQUUS
(STEALTH cisplatin)
SPI-119 HIV/AIDS Preclinical SEQUUS
(Liposome-CD4)
SPI-850 Bacterial infec- Preclinical SEQUUS
(STEALTH quinolones) tions
SPI-40 Solid tumors Preclinical SEQUUS
(Radiosensitizers)
SPI-01 Genetic diseases, Research SEQUUS
(Gene delivery) cancer
</TABLE>
--------
(1) The meaning of terms used to describe the status of the Company's
product development activities are as set forth below. See "--
Government Regulation" for a more complete description. "NDA": "New
Drug Application" filed with FDA for approval to market product for
certain treatment indications. "MAA": "Marketing Authorization
Application" (the European equivalent of a NDA). "Research": Early
stage work to develop formulation or explore feasibility.
"Preclinical": Laboratory pharmacology and/or toxicology testing.
"Phase I" clinical trials: Testing of compounds in humans for safety
and pharmacologic profile in a limited patient population. "Phase
I/II" clinical trials: Testing of compounds in patients for safety and
preliminary efficacy in a relatively limited patient population.
"Phase II" clinical trials: Testing of compounds in patients for
safety and efficacy in a relatively limited patient population. "Phase
III" clinical trials: Expanded controlled and uncontrolled trials of
compounds in patients to evaluate the overall benefit-risk
relationship of the drug and to provide an adequate basis for
physician labeling (required to file a NDA or a MAA). "Supplemental
NDA": Application to expand the approved labeling of a drug cleared by
the FDA to add a new indication.
(2) Schering-Plough has worldwide distribution rights, except the United
States, Japan and certain other countries. See "-- Strategic
Alliances."
(3) Zeneca has marketing and distribution rights in Denmark, Finland,
Iceland, Ireland, Italy, the Netherlands, Portugal, Sweden and the
United Kingdom. Prodesfarma, S.A. has marketing and distribution
rights in Spain, Belgium and Luxembourg. TORREX Pharma G.m.b.H. has
marketing and distribution rights in Austria, the Czech Republic,
Hungary, Poland and Slovenia. Gamida-MedEquip Limited has marketing
and distribution rights in Israel. Bayer has marketing and
distribution rights in Canada. See "-- Strategic Alliances."
30
<PAGE>
DOXIL
Doxorubicin is a widely prescribed anthracycline antibiotic used for the
treatment of many different forms of cancer, including breast and ovarian
cancer, leukemias, sarcomas and Hodgkin's disease. Though effective in
treating these and other cancers, doxorubicin may produce irreversible
myocardial toxicity, manifested in its most severe form by life-threatening
congestive heart failure. The risk of developing congestive heart failure
increases with increasing total cumulative doses of doxorubicin in excess of
450 mg/m/2/. Doxorubicin also causes suppression of white blood cell
production, which may be dose limiting, as well as toxicities such as nausea
and vomiting and hair loss. It is believed that the initial rapid uptake by
the tissues (both diseased and healthy) of doxorubicin is a major contributing
factor to its toxicities, in particular cardiotoxicity. DOXIL, a long-
circulating STEALTH liposome formulation of doxorubicin, is designed to reduce
the toxicities of doxorubicin by sequestering the drug in the liposomes until
it reaches the tumor site (see "-- Technology"), thereby significantly
reducing rapid drug uptake by and concentration in healthy tissues. The
Company conducted a study comparing the cardiotoxicity of DOXIL in 10 KS
patients receiving cumulative doses of doxorubicin encapsulated in STEALTH
liposomes (DOXIL) ranging from 400 mg/m/2/ to greater than 800 mg/m/2/ to a
matched control group of cancer patients treated with the same cumulative
amount of unencapsulated doxorubicin. Data from this preliminary study suggest
that DOXIL may cause significantly less cardiotoxicity than unencapsulated
doxorubicin.
DOXIL for Treating KS
People with AIDS have an increased incidence of developing certain cancers.
The most common cancer in this group 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.
Prior to approval of DOXIL, the most common alternatives for KS treatment
were interferon and two or three drug combinations. Interferon is effective
only for people who have less advanced forms of AIDS. Interferon is associated
with side effects such as fever and flu-like symptoms. If KS patients were no
longer responsive to interferon, they were commonly treated with the same
chemotherapy agents that are used for other types of cancers. The drugs used
most commonly for KS include generic doxorubicin, bleomycin, and vincristine
in combination ("ABV") or bleomycin and vincristine in combination ("BV").
Combination chemotherapy can result 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. People 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.
In November 1995, SEQUUS received marketing clearance from the FDA for the
use of DOXIL in treating 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, and achieved domestic sales of approximately $20.9 million in
1996. The marketing clearance for DOXIL 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 a post-marketing clinical trial designed to meet accelerated
approval requirements and the Company has initiated this trial. 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.
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<PAGE>
The pivotal trial used by SEQUUS to support the New Drug Application ("NDA")
for refractory KS included 383 patients treated with DOXIL as single-agent
therapy at a dose of 20 mg/m/2/ every three weeks. A subset of 77 patients
with advanced KS, 49 of whom had received prior doxorubicin therapy, were
identified as refractory. The tumor responses in this group of refractory
patients were 27% or 48%, depending on the method of assessment used. Based on
the FDA's review and assessment of 42 of the 77 refractory patients, 48%
achieved a response (primarily based on flattening of at least 50% of the
previously raised lesions), 26% had stable disease, and 26% had disease
progression. The Company also included in the NDA safety data on 705 patients,
which showed that DOXIL was generally well tolerated with manageable side
effects.
In June 1996, the Company received 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 KS in patients with low CD4 counts and extensive
mucocutaneous (skin and mucous membrane) or visceral disease. The drug may be
used as first-line systemic chemotherapy, or as second-line chemotherapy, in
KS patients with disease that has progressed with, or in patients who are
intolerant to, prior combination chemotherapy comprising at least two of the
following agents: a Vinca alkaloid, bleomycin, and doxorubicin (or other
anthracycline). In September 1996, the Company announced that it had entered
into a distribution agreement with Schering-Plough under which Schering-Plough
is marketing and selling CAELYX worldwide, except for the United States, Japan
and certain other countries. Schering-Plough is conducting pricing discussions
with the appropriate agencies in those European countries where pricing
approval is required. The EU countries covered by the marketing authorization
are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland,
Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United
Kingdom. In March 1997, the Company announced that Schering-Plough commenced
the sale of CAELYX in the United Kingdom and Germany. See "-- DOXIL for
Treating Solid Tumors."
In support of the European marketing authorization, SEQUUS completed two
trials of DOXIL as first line therapy in KS patients. A total of 258 patients
were enrolled in one trial comparing DOXIL against ABV. Of the 239 evaluable
patients, 46.2% of DOXIL patients responded to therapy as compared with 25.6%
of ABV patients. A total of 241 patients were enrolled in the second trial
comparing DOXIL against BV. Of the 218 evaluable patients, 58.7% of DOXIL
patients responded to therapy as compared with 23.3% of BV patients.
The Company's regulatory clearances to market DOXIL in the United States for
refractory KS and in certain European countries for first-line and refractory
KS were based on extensive clinical data. In 1996, the Company submitted data
from its two randomized clinical trials to the FDA to obtain clearance to
market DOXIL as a first-line therapy. The FDA has informed the Company that it
would require additional information that addresses the methodology of
assessing the response rates seen in the trials in order to approve DOXIL for
a first-line indication. The Company is currently re-analyzing its existing
clinical data, analyzing data not previously submitted, and considering
expanding ongoing trials, if necessary, to support a first-line indication.
There can be no assurance that the Company will provide such data to the FDA
or that any such submission would result in clearance for a KS first-line
indication.
DOXIL for Treating Solid Tumors
Many 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,
although their lives may be extended or the quality of life improved. This is
especially true for common solid tumors such as cancer of the lung, breast,
ovary and colon. However, these patient benefits are often offset by the
considerable toxicity associated with chemotherapy drugs. The side effects
include increased susceptibility to infection due to decreased white blood
cells, nausea, vomiting, hair loss, rash, numbness and tingling of the hands
and feet and increased susceptibility to bleeding due to reduction in
platelets. In almost all cases in which chemotherapy is effective a
combination of drugs is used. Generally drugs are used in combination that
32
<PAGE>
have been shown to be effective individually and have non-overlapping
toxicities. Because of the limited benefits of chemotherapy and severe
toxicities, market opportunities exist for drugs that are more effective, less
toxic or both.
Pursuant to the distribution agreement between the Company and Schering-
Plough, the clinical development of DOXIL for the treatment of solid tumors is
being planned by a joint development team of SEQUUS and Schering-Plough
personnel. In addition, Schering-Plough will be responsible for conducting
certain clinical trials in Europe and the United States.
The Company is conducting a number of solid tumor trials. The clinical
results reported are preliminary and may not be indicative of results that may
be obtained in additional clinical trials. There can be no assurance that the
Company will submit NDAs based on the following clinical data or future
clinical data, or that, if submitted, any NDA will be approved. As used below,
a "response" is a reduction in the size of a lesion or tumor by at least 50%
and includes a "complete" response (no measurable tumor remaining).
. Ovarian Cancer--Ovarian cancer is the fifth most common cancer in women
in the United States according to the American Cancer Society, which
estimated that the incidence in the United States was approximately
26,700 in 1996. Chemotherapy is used both in the post-surgical setting
to prevent recurrence and to treat advanced disease. The Company has
completed an open label, multi-centered Phase II study in patients with
advanced ovarian cancer who had failed previous therapy with both
platinum and paclitaxel. Of the 35 patients in the study, nine patients
(26%) achieved a response. The median progression free interval was 5.7
months, and the median survival was 11 months (with a range of 1.5 to
24+ months). Thirteen patients experienced mucositis (mouth sores) and
palmar-plantar erythema (reddening of the skin, occasional swelling and
pain in the hands, feet and other pressure points, and, infrequently,
loss of superficial skin). The Company is currently conducting
confirmatory Phase II trials in the United States and Europe. The
Company has initiated one of two planned multi-center, randomized Phase
III trials in patients with ovarian cancer who have relapsed from prior
therapy.
. Breast Cancer--Breast cancer is the most common cancer in women in the
United States according to the American Cancer Society, which estimated
that the incidence in the United States was approximately 184,300 in
1996. 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. The Company has completed a Phase II multi-center trial in
the U.K. in patients with metastatic breast cancer and a high tumor
burden using doses of single-agent DOXIL ranging between 45-60 mg/m/2/
at intervals of three to four weeks. Most of these patients had not
received prior therapy, but 28 had received adjuvant chemotherapy before
entering the Company's trial for metastatic breast cancer. The response
rate in 54 evaluable patients was 32%. This response rate is nearly
identical to that obtained with single agent doxorubicin or epirubicin
in a British randomized trial comparing doxorubicin, epirubicin and
mitoxantrone in a similar patient population. Based on this data, the
Company has decided to conduct additional clinical trials. The Company
has completed another trial in patients with refractory breast cancer,
including patients whose disease had progressed on mitoxantrone.
Patients with tumors resistant to mitoxantrone are usually unresponsive
to doxorubicin. In this trial, however, six of 16 patients (37.5%) had
clinical benefit and objective evidence of tumor shrinkage, and two
additional patients (12.5%) had a true partial response (reduction in
the size of the tumor by at least 50%.) The toxicities were similar to
those seen in the ovarian cancer trial. Palmar-plantar erythema was
substantially reduced with longer intervals between treatments. The
Company is conducting additional clinical trials in breast cancer
patients.
. Combination Chemotherapy--While most cancers are not cured with single
agent therapy, durable clinical responses are often achieved with
combination therapy. Drugs with different mechanisms of action and those
which target different phases of the cell cycle are often combined in an
attempt to
33
<PAGE>
achieve greater activity than that seen with either drug alone. Such
drugs should have non-overlapping toxicities, so that a healthy organ
system, with rapidly dividing cells (such as the bone marrow), is not
exposed to multiple insults and subsequent toxicities. In addition, many
cancer cells are drug resistant as a result of either de novo
(intrinsic) or acquired multidrug resistance. In such cases, diminished
intracellular drug accumulation is evident, and with the use of more
than one drug in combination, a broader range of coverage of resistant
cell lines is provided, and the development of new resistant cells lines
may be slowed or prevented. A number of Phase I/II studies of DOXIL in
combination with paclitaxel, docetaxel, vinorelbine, gemcitabine,
cyclophosphamide, cisplatin, carboplatin, or topotecan are either
underway or planned.
DOXIL has been studied in several hundred patients with many types of solid
tumors, including those listed above. The side effect from doxorubicin that
limits the amount of drug that 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. Based on
preliminary clinical trial results, the Company believes that there is
relatively less depression of the white blood cell counts from treatment with
DOXIL compared to doxorubicin. Instead, the side effects that limit how much
DOXIL can be given are mucositis and palmar-plantar erythema. 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 distributed to other areas of the body while concentrating on the tumor.
Because of the long circulation time of DOXIL, the Company believes variations
in palmar-plantar erythema seen in individual patients may be controlled by
increasing the time period between doses rather than by reducing dose. The
Company believes DOXIL is also associated with less hair loss, nausea and
vomiting than might be expected with a conventional dose schedule of
doxorubicin.
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 people with AIDS, the incidence of such
infections is increasing with the more aggressive use of chemotherapeutics for
cancer and immune-suppressive drugs for organ transplants. While over 80,000
species of fungi have been identified, relatively few are known to infect
humans. However, invasive fungal infections in immunocompromised patients are
life-threatening. Among the most common systemic fungal infections that may
infect these patients include candidiasis, aspergillosis, histoplasmosis, and
cryptococcal meningitis. Invasive aspergillosis is generally considered to be
one of the most difficult fungal infections to treat.
In practice, physicians often begin antifungal therapy when a patient has a
fever that has failed to respond to antibiotics (a "fever of unknown origin"
or "FUO") before a specific fungus can be identified. This is because fungi
grow slowly in the laboratory. Knowledge about which specific fungus has been
treated usually comes some time after treatment has begun, if at all, and this
is true for most clinical trials of antifungal therapy as well.
Currently, amphotericin B is the standard treatment for patients with severe
fungal infections that do not respond to other drugs, and its use is
widespread. Unlike newer compounds, such as Diflucan, which suppress growth of
fungal infections, amphotericin B kills the fungus. Drugs that suppress growth
of fungal infections depend on the body's immune system to kill the fungus.
This may not be possible if the immune system has been suppressed by
chemotherapy or the disease process. As a result, amphotericin B is considered
to be the most powerful antifungal 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. Patients with severe
infections requiring extensive treatment are at particular risk of developing
renal failure as a result of high cumulative doses of amphotericin B. In many
cases, treatment with amphotericin B must be discontinued because of renal
impairment, leaving the patient with the risk of further fungal infection.
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<PAGE>
AMPHOTEC is a novel lipid-based formulation of generic amphotericin B which
the FDA cleared for marketing in November 1996 for the treatment of invasive
aspergillosis in patients where renal impairment or unacceptable toxicity
precludes the use of conventional amphotericin B in effective doses and in
patients where prior systemic antifungal therapy has failed. The Company
believes that AMPHOTEC provides effective therapy while reducing the dose-
limiting toxicities typically associated with conventional amphotericin B.
SEQUUS is further developing AMPHOTEC to treat additional systemic fungal
infections that often afflict immunocompromised patients, such as solid organ
and bone marrow transplant patients receiving immunosuppressant therapy,
people with AIDS, and cancer patients receiving chemotherapy or radiation
treatment.
AMPHOTEC, a one-for-one molecular complex of amphotericin B and cholesteryl
sulfate, is designed to be quickly removed from the bloodstream by macrophage
cells (part of the immune system) that line ducts in the liver, spleen and
other organs. The Company believes that this rapid sequestration of AMPHOTEC
in macrophage cells reduces the amount of drug that enters the kidneys in
toxic levels thereby significantly reducing renal toxicity. Once in the liver
cells, the amphotericin B-cholesteryl sulfate discs are broken apart by
intracellular enzymes and "free" amphotericin B molecules are gradually re-
released into the bloodstream.
SEQUUS commenced marketing AMPHOTEC in the United States in December 1996
directly through its 42-person sales team. The product is supplied in 50 mg
and 100 mg vials as a lyophilized powder, which is readily reconstituted with
sterile water in a matter of seconds and is stable upon reconstitution.
AMPHOTEC is stable at room temperature (59-86(degrees)F) for approximately two
years. The Company believes that AMPHOTEC has significant competitive
advantages in the United States market when compared to other lipid-based
amphotericin B products. These advantages include AMPHOTEC's clinical profile;
its lower approved dosage requirement, which results in a lower cost per
patient day; the availability of two vial sizes, which reduces waste; the
absence of the necessity for filtration or refrigeration; its pharmaceutically
elegant formulation; and the lack of any negative interaction between AMPHOTEC
and cyclosporine in transplant patients who must receive cyclosporine to keep
the body from rejecting the transplanted organ.
AMPHOTEC, known internationally as AMPHOCIL, is also available in 19
countries outside of the United States for the treatment of aspergillosis,
candidiasis and other systemic fungal infections in patients who are
refractory to or intolerant of amphotericin B. AMPHOCIL is available in
Argentina, Austria, Brazil, the Czech Republic, Denmark, Finland, Iceland,
Ireland, Israel, Italy, the Netherlands, Portugal, Russia, Singapore,
Slovakia, Slovenia, Sweden, Turkey and the United Kingdom. The Company has
entered into distribution agreements covering a number of these countries and
intends to pursue distribution arrangements with other strategic partners for
other territories in which it has obtained or is currently pursuing marketing
authorization. To date, the Company has only experienced limited sales of
AMPHOCIL in Europe. MAAs for AMPHOCIL are under assessment in a number of
countries, including other European countries, except in Norway and Germany,
where the MAA has been withdrawn and in France, Spain, Greece and Luxembourg
where the MAA, reviewed in September 1995, was not approved. The Company and
its distribution partners will continue to work with certain of the non-
approving countries to meet their requirements for approval, if possible. If
approvals are received, SEQUUS and its distribution partners intend to
negotiate pricing in each of these countries, which the Company believes will
take up to six to 12 months following marketing approval. There can be no
assurance that marketing approval will be received for AMPHOCIL in any of
these countries. See "-- Strategic Alliances" and "-- Government Regulation."
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Results of AMPHOTEC Clinical Trials
The Company is pursuing the further clinical development of AMPHOTEC for a
variety of life-threatening fungal infections. The clinical results reported
are preliminary and may not be indicative of results that may be obtained in
additional clinical trials. There can be no assurance that the Company will
submit additional supplemental NDAs based on the following clinical data or
future clinical data, or that, if submitted, any supplemental NDA will be
approved.
Aspergillosis. In a retrospective, historical controlled study involving 343
patients with proven or probable invasive aspergillosis infections, 82
patients treated with AMPHOTEC were compared to a cohort of 261 patients at
six cancer or transplant centers, who had been treated with amphotericin B.
The majority of the patients in both groups had aspergillosis infections in
the lung. The data indicated that in a study with an historical control
AMPHOTEC has superior efficacy (49% vs. 23%) to amphotericin B in patients
with proven or probable aspergillosis, and that the AMPHOTEC-treated group had
a higher survival rate at 120 days (50% vs. 28%) than the control group
receiving amphotericin B. Of the amphotericin B patients, 43% developed renal
toxicity during therapy while in the AMPHOTEC treatment group, the renal
toxicity rate was 8%. SEQUUS is conducting a Phase III double-blind,
randomized study comparing AMPHOTEC with amphotericin B in treating patients
with first-line aspergillosis infections.
Bone Marrow Transplant Patients. Data from a Phase I dose-escalation
clinical trial in 76 bone marrow transplant patients with invasive fungal
infections indicate that AMPHOTEC is safe at doses up to 7.5 mg/kg per day
with demonstrated antifungal activity, no appreciable renal toxicity and
manageable infusion-related side effects. In this study, the investigator
reported a response rate of 55% across all dose levels and infections.
Fever of Unknown Origin (Febrile Neutropenia). Data from a single double-
blind, randomized multi-center clinical trial comparing AMPHOTEC with
conventional amphotericin B in the empiric treatment of 213 febrile
neutropenic patients indicate that AMPHOTEC was equally effective and
significantly less toxic to the kidney, as compared to conventional
amphotericin B, the standard therapy, in treating this patient population. The
data also showed that AMPHOTEC had a renal safety advantage over amphotericin
B when used in conjunction with common anti-rejection therapy (cyclosporine or
tacrolimus) in both adults and children. This is clinically important because
cyclosporine and tacrolimus are known to have renal toxicity and are widely
used in transplant patients, a group which is at substantial risk of
developing life threatening fungal infections. The Company is currently
conducting a Phase III clinical trial in patients with febrile neutropenia,
comparing AMPHOTEC with amphotericin B. The Company submitted a supplemental
NDA with the FDA in December 1996 to expand AMPHOTEC's indication to include
empiric treatment of neutropenic patients with fever due to possible fungal
infection. The application was accepted for filing by the FDA on February 21,
1997. The FDA has assigned priority review status to this application which
under the Prescription Drug User Fee Act means that the FDA will issue a
response to the application within six months of the filing date. The FDA's
Anti-Viral Drug Advisory Committee ("ADAC") has tentatively scheduled a review
of this application on April 14, 1997. There can be no assurance that the
review will occur as scheduled, if at all, that ADAC will not recommend
against approval of AMPHOTEC for this indication or request the Company to
conduct additional studies, or, if approval is recommended, that the FDA will
accept this recommendation.
On-Going Clinical Studies. The Company is conducting an extensive clinical
development program for AMPHOTEC, including a Phase III double blind study in
patients with aspergillosis comparing AMPHOTEC with amphotericin B and a Phase
III trial in FUO. There can be no assurance that the Company will complete any
of the clinical trials currently in progress, that the results of such trials,
if completed, will demonstrate the safety and efficacy of AMPHOTEC in treating
other fungal diseases, or that any additional supplemental NDAs filed by the
Company will be accepted or approved by the FDA.
STEALTH Cisplatin (SPI-077)
Cisplatin is a widely used cytotoxic drug for the treatment of many types of
cancers, including lung, ovarian, head and neck, bladder, melanoma,
testicular, cervical and gastrointestinal. The tumors that respond to
cisplatin are usually relatively insensitive to doxorubicin and vice versa.
Although cisplatin is one of the most
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active single agents available, its clinical utility is limited by a range of
potentially serious and irreversible toxicities. These toxicities include bone
marrow suppression, nausea and vomiting, kidney damage and nerve damage.
Special precautions to address these toxicities can include administration of
fluids (hydration) and diuretics, and hospitalization of patients is often
required, adding significant cost to cisplatin therapy. The Company has
developed a STEALTH liposome formulation of cisplatin, SPI-077. The Company
has conducted multiple studies in in vivo laboratory models. In summary, the
Company believes the unpublished results of these studies show: (i) as with
DOXIL, this formulation avoids immune detection, resulting in a significantly
longer circulation time than cisplatin, (ii) SPI-077 causes less kidney
toxicity than comparable doses of cisplatin in such models, and (iii) SPI-077
has shown meaningful anti-tumor activity and was more effective than cisplatin
in producing a prolonged response to treatment, with persistent inhibition of
tumor growth. The Company filed an Investigational New Drug application for
SPI-077 in October 1996 and initiated a Phase I safety study of SPI-077 in
cancer patients in December 1996. The Phase I study is focused on determining
the maximum tolerated dose of SPI-077 and establishing the toxicity profile of
SPI-077 in patients with advanced malignancies not amenable to other cancer
treatment. See "-- Patents and Trade Secrets."
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. The Company's clinical
data in treatment of solid tumors are derived from a limited number of
patients and are not necessarily predictive of future results obtained in
subsequent clinical trials. Moreover, even when a drug does demonstrate
activity, it may not be sufficiently efficacious to replace existing
therapies. There can be no assurance that the Company's research and
development efforts will be successful, that any given product will be
approved by appropriate regulatory authorities or that any product candidate
under development will be safe, effective or capable of being manufactured in
commercial quantities at an economical cost, will not infringe the proprietary
rights of others or will achieve market acceptance. 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. The Company is dependent on third parties, including hospitals and
physicians to conduct clinical trials. In addition, the Company is reliant on
Schering-Plough to conduct certain clinical trials for DOXIL. The Company and
Schering-Plough face intense competition from other companies developing
cancer treatments to enroll a limited number of eligible cancer patients in
clinical trials for oncology products. Delays in planned patient enrollment
may result in increased costs and delays. If the Company is unable to
successfully complete its clinical trials, its business, financial condition
and results of operations could be materially adversely affected.
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 summary of the Company's additional research
and development projects:
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Liposome-CD4 Technology (SPI-119). The Company has obtained exclusive
worldwide rights to a proprietary liposome-CD4 technology as a potential
HIV/AIDS therapeutic. CD4 is a protein on the surface of T-cells to which the
HIV virus binds in order to infect the cell and replicate. HIV replicates in
T-cells, but in order to enter T-cells the virus must first bind to CD4.
Theoretically, CD4 injected into the blood stream might also bind HIV and, in
this way, prevent the virus from attaching to the T-cells where it can do
damage. Earlier attempts to accomplish this result have not been successful
because unencapsulated CD4 loses its critical three dimensional structure and
also does not accumulate in the lymphatic system. The CD4-liposome complex
behaves as a cell that can bind HIV; existing data indicate that the Company's
STEALTH liposomes accumulate in peripheral lymphatic tissues, such as regional
lymph nodes. Based on preclinical studies, the Company has undertaken
formulation of the liposome-CD4 product.
STEALTH Quinolones (SPI-850). Although quinolone antibiotics are active
against a broad spectrum of bacterial infections, including life-threatening
respiratory tract infections, they must be administered two to four times a
day. A long circulating quinolone antibiotic encapsulated in STEALTH liposomes
could be administered once a day, or possibly even less often, permitting
easier administration outside of the hospital. The Company has formulated and
is currently conducting preliminary studies of SPI-850 which is designed to
reduce the frequency of dosing and concentrate the drug at sites of infection,
thereby improving efficacy.
Radiosensitizers (SPI-40). Indium is a radioactive substance. When it is
encapsulated in liposomes, the distribution of liposomes in the patient can be
traced. Studies in cancer patients have shown that indium administered in a
STEALTH liposome concentrates in tumor tissue. Radiosensitizing agents may
increase the responsiveness of tumors to the therapeutic effects of
radiotherapy. However, to be effective these agents must concentrate in tumors
to a greater extent than in normal tissues, and the agents must stay in the
tumor until the dose of radiotherapy has been administered. The Company
believes that STEALTH liposomes may be an effective way to deliver
radiosensitizers. The Company has formulated and tested two radiosensitizing
agents in preclinical models.
Additional Research Programs. The Company is conducting research in the
fields of small molecule, peptide and gene delivery using STEALTH liposomes.
Currently, three approaches are being investigated for the intravenous
delivery of genetic material to patients: (i) inject "naked" DNA (genetic
material), (ii) use a viral vector to deliver the DNA, and (iii) encapsulate
DNA in liposomes. The Company is investigating the use of STEALTH liposomes to
encapsulate and deliver DNA to tumors and other sites of disease.
A segment of the biotechnology industry is focusing on the development of
small molecules that may inhibit specific activities within a cell. While
potentially medically useful, small molecules are typically cleared from the
body before reaching the target cells. The Company is developing technology to
bind small molecules to the PEG on STEALTH liposomes for use in the
intravenous delivery of small molecules.
The Company's research and development expenses for 1994, 1995 and 1996 were
$25.4 million, $22.7 million and $27.7 million, respectively. Such expenses
encompassed all of the Company's product development programs, including
DOXIL, AMPHOTEC and SPI-077 as well as research projects such as CD4
liposomes, radiosensitizers and gene delivery.
MARKETING AND SALES
As of January 1, 1997, SEQUUS employed a sales and sales management team of
42 professionals to market DOXIL and AMPHOTEC. This team 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. The sales force is deployed in major metropolitan areas
for oncology and infectious disease products. In the first full year of
operations, the sales team sold approximately $20.9 million of DOXIL in the
United States and launched AMPHOTEC. However, the Company faces significant
competition for oncology sales professionals and the loss of certain key sales
personnel could adversely impact the sales effort and have a material adverse
effect on the Company's business, financial condition and results of
operations.
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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, the Company has entered into a
distribution agreement with Schering-Plough for the distribution of CAELYX in
most major markets outside the United States (except Japan) and has entered
into distribution agreements with a number of corporate partners, agents and
distributors, including Zeneca and Bayer, covering the marketing and
distribution of AMPHOCIL in various international markets. The Company's
future sales of CAELYX and AMPHOCIL outside of the United States will depend
to a large extent on the marketing efforts of its distribution partners, the
continuation of the distribution arrangements, market acceptance of products,
availability of third party reimbursement, as well as the timing of additional
approvals, including pricing approvals, in other countries, if any. Schering-
Plough has the right to terminate the agreement with the Company at any time
if certain clinical results relating to CAELYX are not achieved, if certain
adverse events occur regarding patent matters and in certain other
circumstances. If Schering-Plough or any other distributor were to 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. There can be no assurance
that the Company will be able to successfully market its products through its
direct sales force, partners, agents, or at all. See "-- Strategic Alliances"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Overview."
MANUFACTURING AND PRODUCTION
The Company's internal manufacturing capabilities are limited to producing
products for preclinical development. The Company is dependent on Ben Venue to
manufacture commercial-scale quantities of AMPHOTEC and DOXIL sufficient to
meet the Company's forecasted requirements for research and for commercial
production 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. Although the
FDA has approved Ben Venue's facility, processes and procedures for DOXIL and
AMPHOTEC, there can be no assurance that Ben Venue and the Company will
continue to meet FDA or product specification standards for the manufacture of
DOXIL and AMPHOTEC or that the Company's manufacturing requirements can be met
in a consistent and timely manner. Only a limited number of contract
manufacturers are capable of manufacturing AMPHOTEC and DOXIL, and any
alternative manufacturer would require regulatory approval to manufacture the
product which would likely take several months. The Company is in the process
of identifying an alternative manufacturer, but to date has not sought
approval of an alternative manufacturer for its products. The Company has in
the past experienced batch failures in the manufacturing process. Any batch
failures in the future could result in a material increase in cost of goods
sold or in the Company's inability to deliver products on a timely basis. In
addition, the Company may be unable to obtain sufficient contract
manufacturing capacity due to competing demands on the contract manufacturer's
capacity or other reasons. In the event of any interruption of supply from the
contract manufacturer due to regulatory reasons, significant batch failures,
capacity constraints 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
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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.
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 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 in yen its forecasted three months
requirements. 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, including amphotericin B and doxorubicin HCl, 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 impair the Company's
ability to manufacture and market its products which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
STRATEGIC ALLIANCES
The Company's strategy for the development, clinical trials, manufacturing
and commercialization of certain of its products includes maintaining and
entering into various strategic alliances with corporate partners, licensors
and others. In addition to the strategic alliances described below, the
Company intends to continue to evaluate arrangements for the in-licensing of
technology and the distribution of AMPHOTEC and DOXIL. There can be no
assurance that the Company will be able to maintain existing strategic
alliances, negotiate strategic alliances in the future on acceptable terms, if
at all, or that any such strategic alliances will be successful. There can be
no assurance that any of the Company's present or future strategic partners
will devote sufficient resources to marketing the Company's products or
satisfying its obligations to the Company.
Schering-Plough
In September 1996, SEQUUS announced it entered into a distribution agreement
with Schering-Plough. Under the agreement, Schering-Plough has obtained
exclusive rights to distribute, market and sell CAELYX worldwide, except for
the United States, Japan and certain other countries. Under the terms of the
agreement, SEQUUS will receive payments for product sales to Schering-Plough.
In addition, SEQUUS and Schering-Plough will jointly develop a worldwide
clinical plan for investigating the use of CAELYX in the treatment of solid
tumors. Each party will undertake clinical trials in specific indications,
coordinated by a joint development team. As part of the agreement, Schering-
Plough will conduct certain clinical trials for oncology indications, will
apply for regulatory approval in the Schering-Plough territories for all new
indications, and will assist with pharmacoeconomic studies. The agreement
expires in December 2010. The agreement is subject to termination by Schering-
Plough at any time if certain clinical results are not achieved relating to
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the development of CAELYX and in certain other circumstances. The agreement is
also subject to termination by Schering-Plough if certain events occur
regarding patent rights and ongoing patent proceedings which in Schering-
Plough's reasonable judgment materially and adversely impact the development,
manufacture, use or sale of CAELYX in the major European markets. Certain
events which permit Schering-Plough to terminate the agreement are outside the
control of the Company.
International Distribution of AMPHOCIL
The Company has entered into a number of arrangements with distributors and
agents for the marketing and distribution of its AMPHOCIL product in
international markets. In certain instances, the distributor is also assisting
the Company in preparing regulatory filings and, in countries where marketing
clearance has been granted, obtaining pricing approvals. The Company has
granted distribution rights to the following parties for the respective
territories: Zeneca in Denmark, Finland, Iceland, Ireland, Italy, the
Netherlands, Portugal, Sweden and the U.K.; Prodesfarma, S.A. in Spain,
Belgium and Luxembourg; TORREX Pharma G.m.b.H. in Austria, the Czech Republic,
Hungary, Poland and Slovenia; Gamida-MedEquip Limited in Israel; and Bayer in
Canada.
In-Licensing of Technology
The Company has entered into licensing agreements with third parties
covering proprietary technologies used in the production of the Company's
products. Under these agreements, the Company is obligated to pay royalties
upon product sales and to make other payments. The Company is currently in
discussions with one of its licensors regarding the interpretation of the
financial terms of a license agreement. Such agreements also contain
provisions requiring the Company to pursue market development for the licensed
technologies in order for the Company to maintain its license rights. There
can be no assurance that the Company will fulfill its obligations under any of
these agreements and any such failure could result in the loss of the
Company's rights under the agreement.
PATENTS AND TRADE SECRETS
SEQUUS currently owns or controls 58 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, have filed
applications for, or 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 existing 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
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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.
The Company has in the past been a party to litigation regarding intellectual
property rights. In prior litigation in the Patents County Court in the U.K., a
suit brought by NeXstar alleging that the Company's anticancer drug, DOXIL,
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.
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 DOXIL, the Company is aware of TLC's United States
Patent No. 5,077,056 (the "056 Patent") relating to the loading of therapeutic
drugs into liposomes. The Company's patent counsel has rendered an opinion that
DOXIL would not infringe any valid claim of this patent. International
equivalent patents to the 056 Patent issued to TLC are now undergoing
opposition proceedings in the European and Japanese patent offices and the
Company is party to such proceedings. Adverse results in such opposition
proceedings could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company is also aware of
recently issued United States Patent No. 5,562,925 (the "925 Patent") covering
therapeutic cisplatin compositions held by Research Corporation Technologies
Inc., which the Company believes has been licensed exclusively to Bristol-
Myers. The Company's patent counsel has rendered an opinion that its STEALTH
cisplatin formulation would not infringe any valid claims of the 925 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 DOXIL would not infringe any valid
claim of either of these patents. The Company is also aware of United States
Patent Nos. 4,426,330 and 4,534,899 assigned to Lipid Specialties, Inc.,
relating to conjugates of phospholipids and polyethyleneglycol. The Company's
patent counsel has rendered an opinion that DOXIL would not infringe any valid
claims of these patents.
In November 1991, SEQUUS received a letter from TLC bringing to the Company's
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. Subsequently, the Company's patent
counsel delivered an opinion to the Company that, among other things, AMPHOTEC
does not infringe any valid claim of the 591 Patent. The Company has not
received any further written correspondence with respect to this issue.
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.
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. 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. If
another Company were to successfully bring legal actions against the Company
claiming patent or other intellectual property right infringements, in addition
to any liability for damages, the Company could be enjoined by a
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court from selling such products or processes or might be required to obtain a
license to manufacture or sell the affected product or process. There can be
no assurance that the Company would prevail in any such action or that the
Company could obtain any license required under any such patent on acceptable
terms, if at all. Any litigation, whether or not resolved in favor of the
Company, could be expensive and time-consuming, could consume substantial
management resources, could have a material adverse effect on the Company's
product distribution arrangements and could otherwise have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company relies on unpatented trade secrets and proprietary know-how to
protect certain aspects of its production and other technologies. 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 the Company's 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. Whether
undertaken by SEQUUS or an agent or collaborator of SEQUUS, the regulatory
approval process for new products generally takes several years and involves
the expenditure of substantial resources. There can be no assurance that any
such approvals will be granted on a timely basis, if at all.
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, (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") and an Establishment License Application ("ELA") with
respect to a biologic, and (v) FDA approval of the NDA or PLA/ELA 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.
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There can be no assurance that, after the results of the Phase III clinical
trials have been announced, the FDA will not disagree with the design of the
Phase III clinical trial protocols. In addition, the FDA inspects and reviews
clinical trial sites, informed consent forms, data from the clinical trial
sites, including case report forms and record keeping procedures, and the
performance of the protocols by clinical trial personnel to determine
compliance with good clinical practice. The FDA also examines whether there
was bias in the conduct of clinical trials. The conduct of clinical trials is
complex and difficult, especially in Phase III. There can be no assurance that
the design or performance of the Phase III clinical trial protocols will be
successful.
Upon accepting a company's NDA for filing, 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.
Even if regulatory approvals for the Company's product candidates are
obtained, the Company, its products and the facilities used for manufacturing
the Company's products are subject to continual review and periodic
inspection. Each United States drug manufacturing establishment must be
registered with the FDA. Domestic manufacturing establishments are subject to
biannual inspections by the FDA and must comply with the FDA's GMP
regulations. To supply drug products for use in the United States, foreign
manufacturing establishments must comply with the FDA's GMP regulations and
are subject to periodic inspection by the FDA or by regulatory authorities in
those countries under reciprocal agreements with the FDA. In complying with
GMP regulations, manufacturers must expend funds, time and effort in the area
of production and quality control to ensure full technical compliance. The FDA
stringently applies regulatory standards for manufacturing. If violations of
applicable regulations are noted during these inspections, the Company may be
restrained from continued marketing of the product manufactured until such
violations are corrected.
Labeling and promotional activities are regulated by the FDA. The Company
must also report certain adverse events involving its drugs to the agency
under regulations issued by the FDA. 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.
Failure to comply with applicable requirements can result in, among other
things, warning letters, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, refusal of the
government to grant approvals, withdrawal of approvals and criminal
prosecution of the Company and employees.
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 procedures of the Committee on Proprietary and Medicinal
Products ("CPMP"). Since the CPMP is an advisory committee, its vote is not
binding on member countries.
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.
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.
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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 international markets, including markets the Company is
seeking to enter, pricing of prescription pharmaceuticals is subject to
government price controls. In these markets, once marketing approval is
received, pricing negotiation could take another six to 12 months or longer.
In the United States, there has been, and there may continue to be, federal
and state proposals to implement similar government price controls. 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 proposals, if adopted, and such initiatives could
decrease the price that the Company receives for any current or future
products 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 products, the Company's ability to commercialize its products
may be materially adversely affected. In addition, price competition may
result from competing product sales, attempts to gain market share or
introductory pricing programs, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's ability to commercialize DOXIL, AMPHOTEC and other 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 of the
Company's products. 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 or reimbursement for indications as to which the
FDA has not granted marketing clearance. 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 Company's current and potential products compete with existing and new
drugs offered by or under development by pharmaceutical, biopharmaceutical and
biotechnology companies. Many of these companies, both in the United States
and in international markets, 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 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, in obtaining
regulatory approval, and in manufacturing and marketing biopharmaceutical
products.
A number of large pharmaceutical companies, including Bristol-Myers and
Pfizer Inc., have established strong market positions for oncology and
infectious diseases. For example, AMPHOTEC competes with traditional
amphotericin B therapy, which is currently produced and marketed by Bristol-
Myers and others. The Company also faces competition from two companies
specializing in liposome drug delivery, NeXstar and TLC, both of which have
received regulatory approvals for products competitive with the Company's
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products. In some cases, the competing liposomal products have been able to
obtain significant market share in certain territories by being the first to
market, have been introduced at lower prices than the Company's competing
products, or have received marketing clearance covering a broader range of
indications than the Company's competing products. For example, TLC recently
received FDA clearance to market its amphotericin B lipid formulation for
treating a broader range of indications than the indications for which
AMPHOTEC has received marketing clearance.
SEQUUS believes that competition in pharmaceutical products and in drug
delivery will continue to be intense as new products enter the market and
advanced technologies become available for drug discovery and development.
Existing products or new products developed by the Company's competitors may
be more effective, or be more effectively marketed and sold, than any that
have been or may be developed by the Company. Competitive products may render
the Company's technology and products obsolete or noncompetitive prior to the
Company's recovery of research, development or commercialization expenses
incurred with respect to any such products which could have a material adverse
effect on the Company's business, financial condition or results of
operations.
EMPLOYEES
As of December 31, 1996, SEQUUS had 247 full-time employees, of whom 31 hold
Ph.D. or M.D. degrees, 151 employees are engaged in research, development,
clinical and regulatory affairs and pilot manufacturing, 60 employees are
engaged in sales and marketing and 36 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.
The Company's success depends largely upon its ability to attract and retain
qualified personnel in the research, development and commercialization of
pharmaceutical products. The Company faces competition for such personnel from
other companies, academic institutions 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.
FACILITIES
As of December 31, 1996, the Company leased approximately 140,609 square
feet of laboratory, office and warehouse space in Menlo Park, California under
leases that expire in April 2003 and approximately 4,000 square feet of office
space in London under a lease that expires in December 2003. Rent expense for
1996 was approximately $1,358,000.
LEGAL PROCEEDINGS
The Company is not party to any legal proceedings. See "-- Patents and Trade
Secrets."
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MANAGEMENT
Information with respect to the executive officers and directors of the
Company as of January 31, 1997 is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
I. Craig Henderson, M.D. ........ 55 Chairman of the Board and Chief Executive
Officer
L. Scott Minick.................. 45 President, Chief Operating Officer and Director
Edward F. Schnipper, M.D. ....... 48 Senior Vice President and Medical Director
Senior Vice President for Research and
Joseph J. Vallner, Ph.D. ........ 50 Development
David A. DeLong.................. 42 Vice President of Sales
Marc J. Gurwith, M.D., J.D. ..... 57 Vice President and Associate Medical Director
Anthony A. Huang, Ph.D. ......... 44 Vice President for Product Development
Francis J. Martin, Ph.D. ........ 48 Vice President and Chief Scientific Officer
Sally A. Davenport............... 61 Secretary
Donald J. Stewart................ 40 Vice President for Finance and Treasurer
Peter K. Working, Ph.D. ......... 48 Vice President for Preclinical Research
Robert G. Faris(1)(2)............ 58 Director
Richard C.E. Morgan(1)(2)........ 52 Director
E. Donnall Thomas, M.D.(1)(2).... 76 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 the Company
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 an 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 an M.B.A. degree from Northwestern
University.
Edward F. Schnipper, M.D. joined the Company in January 1996 as Senior Vice
President and Medical Director. Prior to joining the Company, Dr. Schnipper
held several executive and management positions at Hoffmann-LaRoche ("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
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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 the Company 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.
David A. DeLong joined the Company in September 1992 as AMPHOCIL
International Product Director and was appointed Senior Director, Sales in
April 1995 and Vice President of Sales in June 1996. Prior to joining the
Company, Mr. DeLong was employed by Genentech, Inc. from 1985 to 1992 where he
served in various sales and marketing management positions, most recently as
Activase Product Manager.
Marc J. Gurwith, M.D., J.D. joined the Company in January 1995 as Vice
President and Associate Medical Director. Prior to joining the Company, 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
the Company since April 1995. He has served in various technical capacities
with the Company for the last 14 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 the Company's 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 the Company's former joint
venture, Cooper-Lipotech. Dr. Martin received a Ph.D. degree in Biochemistry
from Northwestern University.
Sally A. Davenport is a Company founder and has served as the the Company's
Corporate Secretary 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.
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 an M.B.A. from Santa Clara University.
Peter K. Working, Ph.D., D.A.B.T., has been Vice President of Preclinical
Research at the Company 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 of the Company. From 1988 to 1992, Dr.
Working was a
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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 the Company since May 30,
1990. Since January 1996, Mr. Morgan has been a partner of Jackson Hole
Management Inc., a venture capital firm which is the sucessor company to the
Asset Management Division of Wolfensohn Partners, L.P. 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 printing systems company, Celgene Corporation, a
biotechnology company, Quidel Corporation, a medical diagnostics company, and
Indigo N.V., a printing systems company.
E. Donnall Thomas, M.D. has served as a director of the Company since May
27, 1993. Dr. Thomas serves as Chairman of the Scientific Advisory Committee
of Cell Therapeutics, Inc. He is also 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 an M.D.
degree from Harvard Medical School.
49
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DESCRIPTION OF PREFERRED STOCK
The following is a summary of the terms of the Preferred Stock offered
hereby. This summary is not intended to be complete and is subject to and
qualified in its entirety by reference to the Certificate of the Powers,
Designations, Preferences and Rights of the Preferred Stock (the "Certificate
of Designation") to be filed with the Secretary of State of the State of
Delaware amending the Company's Certificate of Incorporation and setting forth
the rights, preferences and limitations of the Preferred Stock, a form of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Whenever particular Sections or defined terms of the
Certificate of Designation are referred to herein, such Sections or defined
terms are incorporated by reference herein.
The Board of Directors has the authority, without further action by the
stockholders, to issue from time to time 4,000,000 shares of undesignated
preferred stock in one or more series and to fix the number of shares,
designations, preferences, powers, and relative, participating, optional or
other rights and the qualifications or restrictions thereof. The rights,
preferences and limitations of different series of preferred stock may differ
with respect to dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund provisions, and
purchase funds and other matters.
The shares of the Preferred Stock, when issued and sold for the
consideration herein contemplated, will be duly and validly issued, fully paid
and nonassessable and the holders thereof will have no preemptive rights in
connection therewith. The Preferred Stock will not be subject to any sinking
fund or other obligation of the Company to redeem or retire the Preferred
Stock. Unless earlier converted, exchanged or redeemed by the Company, the
Preferred Stock will have a perpetual maturity. Any Preferred Stock converted,
exchanged or redeemed or otherwise acquired by the Company will, upon
cancellation of such shares, have the status of authorized but unissued
preferred stock subject to reissuance by the Board of Directors as Preferred
Stock or as shares of preferred stock of any one or more other series.
(Section 6)
DIVIDENDS
Holders of the Preferred Stock are entitled to receive, when, as and if
declared by the Board of Directors, out of the funds of the Company legally
available therefor, cash dividends at an annual rate of $ per share of
Preferred Stock, payable in equal quarterly installments on March 1, June 1,
September 1 and December 1, commencing June 1, 1997 (and, in the case of any
accrued but unpaid dividends, at such additional times and for such interim
periods, if any, as determined by the Board of Directors). Dividends on the
Preferred Stock will be cumulative from the date of original issuance, and
will be payable to holders of record as they appear on the stock books of the
Company on such record dates, which shall be not more than 60 days nor less
than 10 days preceding the payment dates, as shall be fixed by the Board of
Directors. (Section 3(a)) Holders of shares of Preferred Stock called for
redemption on a redemption date falling between a dividend payment record date
and the dividend payment date shall, in lieu of receiving such dividend on the
dividend date fixed therefor, receive such dividend payment together with all
other accrued and unpaid dividends on the date fixed for redemption (unless
such holders convert such shares in accordance with the Certificate of
Designation). Dividends payable on the Preferred Stock for any period greater
or less than a full dividend period will be computed on the basis of a 360-day
year consisting of twelve 30-day months. Accrued but unpaid dividends will not
bear interest. (Section 3(b))
If dividends are not paid in full on the Preferred Stock and any other
preferred stock ranking on a parity as to dividends with the Preferred Stock,
all dividends declared upon shares of Preferred Stock and such other preferred
stock will be declared pro rata so that in all cases the amount of dividends
declared per share on the Preferred Stock and such other preferred stock bear
to each other the same ratio that accrued and unpaid dividends per share on
the shares of the Preferred Stock and such other preferred stock bear to each
other. (Section 3(c)) Except as set forth above, unless full cumulative
dividends on the Preferred Stock have been paid and funds set aside therefor,
dividends (other than dividends paid solely in Common Stock, other stock
ranking junior as to dividends to the Preferred Stock or rights to acquire the
foregoing) may not be paid or
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<PAGE>
declared and set aside for payment and other distribution may not be made on
the Common Stock or any other stock of the Company ranking junior to or on a
parity with the Preferred Stock as to dividends nor may any Common Stock or
any other stock of the Company ranking junior to or on a parity with the
Preferred Stock as to dividends be redeemed, repurchased or otherwise acquired
for any consideration by the Company (except for repurchases from employees
and consultants and by the conversion into or exchange for stock of the
Company ranking junior to the Preferred Stock as to dividends). (Sections 3(d)
and (e))
Under Delaware law, dividends or distributions to stockholders may be made
only from the surplus of the Company or, in certain situations, from the net
profits for the current fiscal year or the fiscal year before which the
dividend or distribution is declared. The Company's ability to pay dividends
in the future will depend upon its financial results, liquidity and financial
condition.
CONVERSION RIGHTS
Each share of Preferred Stock will be convertible at the option of the
holder at any time into such number of shares of Common Stock determined by
dividing the liquidation preference set forth on the cover of this Prospectus
by a conversion price of $ (initially equivalent to approximately
shares of Common Stock for each share of Preferred Stock), subject
to adjustment as described below. No adjustment will be made on conversion of
any share of Preferred Stock for dividends accrued or unpaid thereon or for
dividends on any Common Stock issued. The Company is not required to issue
fractional shares of Common Stock upon conversion of Preferred Stock and, in
lieu thereof, will pay a cash adjustment based upon the market price of the
Common Stock on the last Trading Day (determined as provided in the
Certificate of Designation) prior to the date of conversion. (Section 7(c)) In
the case of Preferred Stock called for redemption, conversion rights will
expire at the close of business on the next business day preceding the date
fixed for redemption, unless the Company defaults in payment of the redemption
price. (Section 7(a))
The right of conversion attaching to each share of Preferred Stock may be
exercised by the holder by delivering the certificate representing such share
of Preferred Stock at the specified office of the transfer agent, accompanied
by a duly signed and completed notice of conversion. The conversion date shall
be the date on which the certificate of such share of Preferred Stock and the
duly signed and completed notice of conversion have been delivered to the
transfer agent. (Section 7(b)) A holder delivering a certificate of such share
of Preferred Stock for conversion will not be required to pay any taxes or
duties payable in respect of the issue or delivery of Common Stock on
conversion, but will be required to pay any tax or duty which may be payable
in respect of any transfer involved in the issue or delivery of the Common
Stock in a name other than the holder of the Preferred Stock. Certificates
representing shares of Common Stock will not be issued or delivered unless all
taxes and duties, if any, payable by the holder have been paid. (Section 7(f))
The conversion price is subject to adjustment upon certain events, including
(i) the issuance of Common Stock as a dividend or distribution on Common Stock
of the Company; (ii) certain subdivisions and combinations of the Common
Stock; (iii) the issuance to all holders of Common Stock of certain rights or
warrants to purchase Common Stock at less than the current market price of the
Common Stock; (iv) the dividend or other distribution to all holders of Common
Stock of shares of capital stock of the Company (other than Common Stock) or
evidences of indebtedness of the Company or assets (including securities, but
excluding those rights, warrants, dividends and distributions referred to
above or paid exclusively in cash); (v) dividends or other distributions
consisting exclusively of cash (excluding any cash portion of distributions
referred to in clause (iv)) to all holders of Common Stock to the extent that
such distributions, combined together with (A) all other such all-cash
distributions made within the preceding 12 months in respect of which no
adjustment has been made plus (B) any cash and the fair market value of other
consideration payable in respect of any tender offers by the Company or any of
its subsidiaries for Common Stock concluded within the preceding 12 months in
respect of which no adjustment has been made, exceeds 10% of the Company's
market capitalization (being the product of the then current market price of
the Common Stock times the number of shares of Common Stock outstanding) on
the record date for such distribution; (vi) the purchase
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of Common Stock pursuant to a tender offer made by the Company or any of its
subsidiaries to the extent that the same involves an aggregate consideration
that, together with (X) any cash and the fair market value of any other
consideration payable in any other tender offer by the Company or any of its
subsidiaries for Common Stock expiring within the 12 months preceding such
tender offer in respect of which no adjustment has been made plus (Y) the
aggregate amount of any such all-cash distributions referred to in clause (v)
above to all holders of Common Stock within the 12 months preceding the
expiration of such tender offer in respect of which no adjustments have been
made, exceeds 10% of the Company's market capitalization on the expiration of
such tender offer; and (vii) payment in respect of a tender offer or exchange
offer by a person other than the Company or any subsidiary of the Company in
which, as of the closing of the offer, the Board of Directors is not
recommending rejection of the offer. The Company is entitled, in lieu of
making certain adjustments under clause (v) above, to provide that, subject to
satisfying certain conditions, upon conversion of the Preferred Stock, the
holders of the Preferred Stock will receive, in addition to the Common Stock
issuable upon conversion of such Preferred Stock, the amount of such
distribution referred to in clause (v). The adjustment referred to in clause
(vii) above will only be made if the tender offer or exchange offer is for an
amount which increases that person's ownership of Common Stock to more than
25% of the total shares of Common Stock outstanding, and only if the cash and
value of any other consideration included in such payment per share of Common
Stock exceeds the current market price per share of Common Stock on the
business day next succeeding the last date on which tenders or exchanges may
be made pursuant to such tender or exchange. The adjustment referred to in
clause (vii) above will not be made, however, if, as of the closing of the
offer, the offering documents with respect to such offer disclose a plan or an
intention to cause the Company to engage in any consolidation with, merger
into, or transfer of all or substantially all of its properties to any other
corporation organized under the laws of the United States or any political
subdivision thereof or therein, provided that each share of Preferred Stock
remain outstanding or unaffected or converted into or exchanged for
convertible exchangeable preferred stock of the successor corporation having
powers, preferences and rights identical to the Preferred Stock. (Sections
7(d)(i) through (vii))
The Certificate of Designation provides that if the Company implements a
stockholder rights plan, such rights plan must provide that upon conversion of
the Preferred Stock the holders will receive, in addition to the Common Stock
issuable upon such conversion, such rights, whether or not such rights have
separated from the Common Stock at the time of such conversion. (Section
7(d)(iv))
The Company from time to time may, to the extent permitted by law, reduce
the conversion price of the Preferred Stock by any amount for any period of at
least 20 days, in which case the Company shall give at least 15 days' notice
of such decrease, if the Board of Directors has made a determination that such
decrease would be in the best interests of the Company, which determination
shall be conclusive. The Company may, at its option, make such reductions in
the conversion price, in addition to those set forth above, as the Board of
Directors deems advisable to avoid or diminish any income tax to holders of
Common Stock resulting from any dividend or distribution of stock (or rights
to acquire stock) or from any event treated as such for income tax purposes.
(Section 7(d)(ix)) See "Certain Federal Income Tax Considerations."
If any transaction shall occur (including, without limitation (a) any
recapitalization or reclassification of shares of Common Stock (other than a
change in par value, or from par value to no par value, or from no par value
to par value, or as a result of a subdivision or combination of Common Stock),
(b) any consolidation of the Company with, or merger of the Company into, any
other person, or any merger of another person into the Company (other than a
merger that does not result in a reclassification, conversion, exchange or
cancellation of Common Stock), (c) any sale, transfer or lease of all or
substantially all of the assets of the Company or (d) any compulsory share
exchange) pursuant to which either shares of Common Stock shall be converted
into the right to receive other securities, cash or other property, or, in the
case of a sale or transfer of all or substantially all of the assets of the
Company, the holders of Common Stock shall be entitled to receive other
securities, cash or other property, then appropriate provision shall be made
so that the holder of each share of Preferred Stock then outstanding shall
have the right thereafter to convert such Preferred Stock only into: (x) in
the case of any such transaction that does not constitute a Common Stock
Fundamental
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Change (as defined below) and subject to funds being legally available for
such purpose under applicable law at the time of such conversion, the kind and
amount of the securities, cash or other property that would have been
receivable upon such recapitalization, reclassification, consolidation,
merger, sale, transfer or share exchange by a holder of the number of shares
of Common Stock issuable upon conversion of such Preferred Stock immediately
prior to such recapitalization, reclassification, consolidation, merger, sale,
transfer or share exchange, after giving effect, in the case of any Non-Stock
Fundamental Change (as defined below), to any adjustment in the conversion
price in accordance with clause (i) of the following paragraph, and (y) in the
case of any such transaction that constitutes a Common Stock Fundamental
Change, common stock of the kind received by holders of Common Stock as a
result of such Common Stock Fundamental Change in an amount determined in
accordance with clause (ii) of the following paragraph. The company formed by
such consolidation or resulting from such merger or that acquires such assets
or that acquires the Company's shares, as the case may be, shall make
provisions in its certificate or articles of incorporation or other
constituent document to establish such right. Such certificate or articles of
incorporation or other constituent document shall provide for adjustments
that, for events subsequent to the effective date of such certificate or
articles of incorporation or other constituent document, shall be as nearly
equivalent as may be practicable to the relevant adjustments provided for in
the preceding paragraphs and in this paragraph.
Notwithstanding any other provisions in the preceding paragraphs to the
contrary, if any Fundamental Change (as defined below) occurs, then the
conversion price in effect will be adjusted immediately after such Fundamental
Change as follows:
(i) in the case of a Non-Stock Fundamental Change, the conversion price
of the Preferred Stock immediately following such Non-Stock Fundamental
Change shall be the lower of (A) the conversion price in effect immediately
prior to such Non-Stock Fundamental Change, but after giving effect to any
other prior adjustments effected pursuant to the preceding paragraphs, and
(B) the product of (1) the greater of the Applicable Price (as defined
below) and the then applicable Reference Market Price (as defined below)
and (2) a fraction, the numerator of which is $50 and the denominator of
which is (x) the amount of the redemption price for one share of Preferred
Stock if the redemption date were the date of such Non-Stock Fundamental
Change (or the date of the period commencing on the first date of original
issuance of the Preferred Stock and to March 1, 1998 or the twelve-month
periods commencing March 1, 1998 and March 1, 1999, the product of %, %
and %, respectively, times $50) plus (y) any then-accrued and unpaid
distributions on one share of Preferred Stock; and
(ii) in the case of a Common Stock Fundamental Change, the conversion
price of the Preferred Stock immediately following such Common Stock
Fundamental Change shall be the conversion price in effect immediately
prior to such Common Stock Fundamental Change, but after giving effect to
any other prior adjustments effected pursuant to the preceding paragraphs,
multiplied by a fraction, the numerator of which is the Purchaser Stock
Price (as defined below) and the denominator of which is the Applicable
Price; provided, however, that in the event of a Common Stock Fundamental
Change in which (A) 100% of the value of the consideration received by a
holder of Common Stock is common stock of the successor, acquiror or other
third party (and cash, if any, paid with respect to any fractional
interests in such common stock resulting from such Common Stock Fundamental
Change) and (B) all of the Common Stock shall have been exchanged for,
converted into or acquired for, common stock of the successor, acquiror or
other third party (and any cash with respect to fractional interests), the
conversion price of the Preferred Stock immediately following such Common
Stock Fundamental Change shall be the conversion price in effect
immediately prior to such Common Stock Fundamental Change multiplied by a
fraction, the numerator of which is one (1) and the denominator of which is
the number of shares of common stock of the successor, acquiror or other
third party received by a holder of one share of Common Stock as a result
of such Common Stock Fundamental Change.
Depending upon whether a Fundamental Change is a Non-Stock Fundamental
Change or a Common Stock Fundamental Change, a holder may receive
significantly different consideration upon conversion. In the event of a Non-
Stock Fundamental Change, the holder has the right to convert Preferred Stock
into the
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kind and amount of the shares of stock and other securities or property or
assets (including cash), except as otherwise provided above, as is determined
by the number of shares of Common Stock receivable upon conversion at the
conversion price as adjusted in accordance with clause (i) of the preceding
paragraph. However, in the event of a Common Stock Fundamental Change in which
less than 100% of the value of the consideration received by a holder of
Common Stock is common stock of the successor, acquiror or other third party,
a holder of Preferred Stock who converts such Preferred Stock following the
Common Stock Fundamental Change will receive consideration in the form of such
common stock only, whereas a holder who converted such Preferred Stock prior
to the Common Stock Fundamental Change would have received consideration in
the form of such common stock as well as any other securities or assets (which
may include cash) issuable upon conversion of such Preferred Stock immediately
prior to such Common Stock Fundamental Change.
The term "Applicable Price" means (i) in the event of a Non-Stock
Fundamental Change in which the holders of Common Stock receive only cash, the
amount of cash received by a holder of one share of Common Stock and (ii) in
the event of any other Fundamental Change, the average of the daily Closing
Price (determined as provided in the Certificate of Designation) for one share
of Common Stock during the 10 Trading Days immediately prior to the record
date for the determination of the holders of Common Stock entitled to receive
cash, securities, property or other assets in connection with such Fundamental
Change or, if there is no such record date, prior to the date upon which the
holders of Common Stock shall have the right to receive such cash, securities,
property or other assets.
The term "Common Stock Fundamental Change" means any Fundamental Change in
which more than 50% of the value (as determined in good faith by the Board of
Directors of the Company) of the consideration received by holders of Common
Stock consists of common stock that, for the 10 Trading Days immediately prior
to such Fundamental Change, has been admitted for listing or admitted for
listing subject to notice of issuance on a national securities exchange or
quoted on Nasdaq National Market, provided, however, that a Fundamental Change
shall not be a Common Stock Fundamental Change unless either (i) the Company
continues to exist after the occurrence of such Fundamental Change and the
outstanding Preferred Stock continues to exist as outstanding Preferred Stock,
or (ii) not later than the occurrence of such Fundamental Change, the
outstanding Preferred Stock is converted into or exchanged for shares of
convertible preferred stock or debentures of a corporation succeeding to the
business of the Company, which convertible preferred stock has powers,
preferences and relative, participating, optional or other rights, and
qualifications, limitations and restrictions substantially similar to those of
the Preferred Stock and which debentures have terms substantially similar to
those of the Debentures.
The term "Fundamental Change" means the occurrence of any transaction or
event or series of transactions or events pursuant to which all or
substantially all of the Common Stock shall be exchanged for, converted into,
acquired for or shall constitute solely the right to receive cash, securities,
property or other assets (whether by means of an exchange offer, liquidation,
tender, offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise); provided, however, in the case of any such
series of transactions or events, for purposes of adjustment of the conversion
price, such Fundamental Change shall be deemed to have occurred when
substantially all of the Common Stock shall have been exchanged for, converted
into or acquired for, or shall constitute solely the right to receive, such
cash, securities, property or other assets, but the adjustment shall be based
upon the consideration that the holders of the Common Stock received in the
transaction or event as a result of which more than 50% of the Common Stock
shall have been exchanged for, converted into or acquired for, or shall
constitute solely the right to receive, such cash, securities, property or
other assets.
The term "Non-Stock Fundamental Change" means any Fundamental Change other
than a Common Stock Fundamental Change.
The term "Purchase Stock Price" means, with respect to any Common Stock
Fundamental Change, the average of the daily Closing Price for one share of
the common stock received by holders of the Common
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Stock in such Common Stock Fundamental Change during the 10 Trading Days
immediately prior to the date fixed for the determination of the holders of
the Common Stock entitled to receive such common stock or, if there is no such
date, prior to the date upon which the holders of the Common Stock shall have
the right to receive such common stock.
The term "Reference Market Price" shall initially mean $ (which is an
amount equal to 66 2/3% of the reported last sale price for Company Common
Stock on the Nasdaq National Market on the date of this Prospectus) and, in
the event of any adjustment to the conversion price other than as a result of
a Fundamental Change, the Reference Market Price shall also be adjusted so
that the ratio of the Reference Market Price to the conversion price after
giving effect to any such adjustment shall always be the same as the ratio of
the initial Reference Market Price to the initial conversion price of $
per share.
No adjustment in the conversion price will be required unless such
adjustment would require a change of at least 1% in the conversion price then
in effect; provided that any adjustment that would otherwise be required to be
made shall be carried forward and taken into account in any subsequent
adjustment. Except as stated above, the conversion price will not be adjusted
for the issuance of Common Stock or any securities convertible into or
exchangeable for Common Stock or carrying the right to purchase any of the
foregoing.
LIQUIDATION RIGHTS
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, before any distribution of assets is made to
holders of Common Stock or any other stock of the Company ranking junior to
the shares of Preferred Stock upon liquidation, dissolution or winding up, the
holders of Preferred Stock shall receive a liquidation preference of $50 per
share and shall be entitled to receive all accrued and unpaid dividends
through the date of distribution, and the holders of any class or series of
preferred stock ranking on a parity with the Preferred Stock as to
liquidation, dissolution or winding up shall be entitled to receive the full
respective liquidation preferences (including any premium), to which they are
entitled and shall receive all accrued and unpaid dividends with respect to
their respective shares through and including the date of distribution. If,
upon such a voluntary or involuntary liquidation, dissolution or winding up of
the Company, the assets of the Company are insufficient to pay in full the
amounts described above as payable with respect to the Preferred Stock and any
class or series of preferred stock of the Company ranking on a parity with the
Preferred Stock as to liquidation, dissolution or winding up, the holders of
the Preferred Stock and of such other class or series of preferred stock will
share ratably in any such distributions of assets of the Company first in
proportion to their respective liquidation preferences until such preferences
are paid in full, and then in proportion to their respective amounts of
accrued but unpaid dividends. After payment of any such liquidating preference
and accrued dividends, the shares of Preferred Stock will not be entitled to
any further participation in any distribution of assets by the Company.
Neither the sale of all or substantially all of the assets of the Company, nor
the merger or consolidation of the Company into or with any other corporation,
nor any liquidation, dissolution, winding up or reorganization of the Company
immediately followed by reincorporation of another corporation, will be deemed
to be a liquidation, dissolution or winding up of the Company.
OPTIONAL REDEMPTION
The Preferred Stock will not be redeemable prior to March 2, 2000. At any
time on or after that date the shares of Preferred Stock may be redeemed at
the Company's option, out of funds legally available therefor, on at least 20
but not more than 60 days notice, as a whole or from time to time in part, at
the following redemption prices per share (expressed as a percentage of the
$50 liquidation preference thereof), plus in each case, an amount equal to
accrued and unpaid dividends, if any, up to but excluding the date fixed for
redemption, whether or not earned or declared. (Section 5(a))
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If redeemed during the 12-month period beginning March 1 (beginning March 2,
2000 and ending on February 28, 2001, in the case of the first such period):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000......................................................... %
2001.........................................................
2002.........................................................
2003.........................................................
2004.........................................................
2005.........................................................
2006.........................................................
</TABLE>
and 100% at March 1, 2007.
If fewer than all of the shares of Preferred Stock are to be redeemed, the
shares to be redeemed shall be selected by lot or pro rata or in some other
equitable manner determined by the Company in its sole discretion. On and
after the date fixed for redemption, provided that the redemption price
(including any accrued and unpaid dividends to but excluding the date fixed
for redemption) has been duly paid or provided for, dividends shall cease to
accrue on the Preferred Stock called for redemption, such shares shall no
longer be deemed to be outstanding and all rights of the holders of such
shares as stockholders of the Company shall cease, except the right to receive
the monies payable upon such redemption, without interest thereon, upon
surrender of the certificates evidencing such shares. (Section 5(c))
EXCHANGE PROVISIONS
The Preferred Stock is exchangeable in whole, but not in part, at the option
of the Company, for Debentures on any dividend payment date beginning on March
1, 1998 at the rate of $50 principal amount of Debentures for each share of
Preferred Stock outstanding at the time of exchange; provided that the
Debentures will be issuable in denominations of $1,000 and integral multiples
thereof. See "Description of Debentures." If the exchange results in an amount
of Debentures that is not an integral multiple of $1,000, the amount in excess
of the closest integral multiple of $1,000 will be paid in cash by the
Company. The Company will mail written notice of its intention to exchange to
each holder of record of the Preferred Stock not less than 30 nor more than 60
days prior to the date fixed for exchange.
Upon the date fixed for exchange of Preferred Stock for Debentures (the
"Exchange Date"), the rights of holders of Preferred Stock as stockholders of
the Company shall cease and their shares of Preferred Stock no longer will be
deemed outstanding and will represent only the right to receive the Debentures
and any accrued and unpaid dividends, without interest thereon. (Section
10(c)) If full cumulative dividends on the Preferred Stock have not been paid
to the Exchange Date (or funds set aside to provide for payment in full of
such dividends), or if an Event of Default under the Indenture (as defined)
has occured and is continuing, the Company may not exercise its option to
exchange the Preferred Stock for the Debentures. (Section 10(f)) The exchange
of Preferred Stock for Debentures will be a taxable event and, therefore, may
result in tax liability for the holder exchanging such stock without any
correlative cash payment to such holder. See "Certain Federal Income Tax
Considerations."
VOTING RIGHTS
The holders of the Preferred Stock will have no voting rights except as
described below or as required by law. In exercising any such vote, each
outstanding share of Preferred Stock will be entitled to one vote, excluding
shares held by the Company or any affiliate of the Company, which shares shall
have no voting rights. (Section 9(a))
Whenever dividends on the Preferred Stock or on any outstanding shares of
preferred stock ranking on a parity as to dividends with the Preferred Stock
have not been paid in an aggregate amount equal to at least six
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quarterly dividends on such shares (whether or not consecutive), the number of
members of the Board of Directors will be increased by two, and the holders of
the Preferred Stock, voting separately as a class, with the holders of
preferred stock ranking on parity as to dividends with the Preferred Stock on
which like voting rights have been conferred and are exercisable, without
regard to series, will be entitled to elect such two additional directors at
any meeting of stockholders at which directors are to be elected held during
the period such dividends remain in arrears. Such voting rights will terminate
when all such accrued and unpaid dividends have been declared and paid or set
apart for payment. The terms of office of all directors so elected will
terminate immediately upon the termination of such voting rights. (Section
9(b))
In addition, so long as any Preferred Stock is outstanding, the Company may
not, without the affirmative vote or consent of the holders of at least 66
2/3% (unless a higher percentage shall then be required by applicable law) of
all outstanding shares of Preferred Stock, voting separately as a class with
the holders of preferred stock ranking on parity as to dividends with the
Preferred Stock on which like voting rights have been conferred and are
exercisable, without regard to series, (i) amend, alter or repeal any
provision of the Company's Certificate of Incorporation (including, without
limitation, the Certificate of Designation) or Bylaws so as to affect
adversely the relative rights, preferences, qualifications, limitations or
restrictions of the Preferred Stock or, (ii) create, authorize or issue, or
reclassify any authorized stock of the Company into, or increase the
authorized amount of, or create, authorize or issue any obligation or security
convertible into or evidencing the right to purchase, any shares of any series
or class of stock that ranks senior to or on a parity with the Preferred Stock
as to dividends or distributions of assets upon liquidation, dissolution or
winding up of the stock, and so long as any Preferred Stock is outstanding,
the Company may not, without the affirmative vote or consent of the holders of
at least 66 2/3% (unless a higher percentage shall then be required by
applicable law) of all outstanding shares of Preferred Stock, voting
separately as a class with the holders of preferred stock ranking on parity as
to dividends with the Preferred Stock on which like voting rights have been
conferred and are exercisable, without regard to series, enter into a share
exchange that affects the Preferred Stock, consolidate with or merge into
another entity, or permit another entity to consolidate with or merge into the
Company, unless in each such case each share of Preferred Stock remains
outstanding and unaffected or is converted into or exchanged for convertible
preferred stock of the surviving entity having powers, preferences and
relative, participating, optional or other rights and qualifications and
restrictions thereof identical to that of a share of Preferred Stock (except
for changes that do not affect the holders of the Preferred Stock adversely).
(Section 9(c))
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services will act as transfer agent and registrar
for the Preferred Stock.
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DESCRIPTION OF DEBENTURES
If the Company elects to issue Debentures in exchange for the Preferred
Stock, the Debentures will be issued under an Indenture, dated as of ,
1997 (the "Indenture"), between the Company and Chemical Trust Company of
California, as trustee (the "Trustee"), at a rate of $50 principal amount of
Debentures for each share of Preferred Stock so exchanged. The Indenture will
be substantially in the form filed as an exhibit to the Registration Statement
of which this Prospectus is a part, with such changes as may be required by
law or usage. The following descriptions of certain provisions of the
Indenture and the Debentures are intended as summaries only and are qualified
in their entirety by reference to the Indenture and the Debentures, including
the definitions therein of certain terms. Whenever particular sections and
defined terms of the Indenture or the Debentures are referred to herein, such
sections and defined terms are to be incorporated by reference herein. As used
in this Description of Debentures, the "Company" refers only to SEQUUS
Pharmaceuticals, Inc. and does not, unless the context otherwise indicates,
include any of its subsidiaries.
The Debentures will be general, unsecured, subordinated obligations of the
Company, limited to an aggregate principal amount equal to the aggregate
liquidation value of the Preferred Stock then outstanding (excluding accrued
and unpaid dividends payable upon liquidation) and will mature on March 1,
2007, unless earlier converted by a holder thereof or redeemed at the option
of the Company.
The Debentures will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple of $1,000.
(Section 2.3) No service charge will be made for any registration of transfer
or exchange of the Debentures, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
with any such transaction. (Section 2.5)
Principal of, premium, if any, and interest on the Debentures will be
payable, the transfer of Debentures will be registrable, and the Debentures
may be presented for conversion at the office of the Company maintained by the
Company for such purposes in New York, New York, which shall initially be an
office or agency of the Trustee in New York, New York. (Section 2.5)
The Company may, but is not required to, apply for listing of the Debentures
on the Nasdaq Stock Market. However, trading of the Debentures is expected to
take place mostly in the over-the-counter market. No assurance can be given,
however, as to the liquidity of or trading markets for the Debentures.
The Indenture does not contain any restrictions on the payment of dividends
or the repurchase of securities of the Company or any financial covenants.
INTEREST
The Debentures, if issued, will bear interest at the rate of % per annum
from the date of issuance, or from the most recent interest payment date to
which interest has been paid or provided for, payable semiannually on March 1
and September 1 of each year to the person in whose name the Debenture (or any
predecessor Debenture) is registered at the close of business on the preceding
February 15 and August 15, respectively. Interest will be computed on the
basis of a 360-day year consisting of twelve 30-day months. Interest may, at
the Company's option, be paid by check mailed to such holders, provided that a
holder of Debentures with an aggregate principal amount in excess of
$2,000,000 will be paid by wire transfer in immediately available funds at the
election of such holder.
CONVERSION RIGHTS
Each Debenture will be converted at the option of the holder at any time
after the date of issuance of the Debentures and on or prior to maturity,
subject to prior redemption, into such number of shares of Common Stock
determined by dividing the principal amount of such Debenture by a conversion
price of $ , subject to adjustment as described below. Except as otherwise
set forth herein, the conversion rights
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of holders of Debentures will be identical to the conversion rights granted to
them as holders of the Preferred Stock. See "Description of Preferred Stock--
Conversion Rights." If Debentures are converted after a record date for the
payment of interest and prior to (but excluding) the next succeeding interest
payment date, such Debentures (other than Debentures called for redemption and
a notice of redemption has been sent by the Company pursuant to the Indenture)
must be accompanied by funds equal to the interest payable on such succeeding
interest payment date on the principal amount so converted. The Company is not
required to issue fractional shares of Common Stock upon conversion of
Debentures, and, in lieu thereof, will pay a cash adjustment based upon the
market price of the Common Stock on the last Trading Day prior to the date of
conversion. (Section 15.3) In the case of Debentures called for redemption,
conversion rights will expire at the close of business on the business day
preceding the date fixed for redemption, unless the Company defaults in
payment of the redemption price. (Section 15.1)
The right of conversion attaching to any Debenture may be exercised by the
holder by delivering the Debenture at the specified office of a conversion
agent, accompanied by a duly signed and completed notice of conversion,
together with any funds that may be required as described in the preceding
paragraph. The conversion date shall be the date on which the Debenture, the
duly signed and completed notice of conversion and any funds that may be
required as described in the preceding paragraph shall have been so delivered.
(Section 15.2) A holder delivering a Debenture for conversion will not be
required to pay any taxes or duties payable in respect of the issue or
delivery of Common Stock on conversion, but will be required to pay any tax or
duty which may be payable in respect of any transfer involved in the issue or
delivery of the Common Stock in a name other than the holder of the Debenture.
Certificates representing shares of Common Stock will not be issued or
delivered unless all taxes and duties, if any, payable by the holder have been
paid. (Section 15.7)
SUBORDINATION
The indebtedness evidenced by the Debentures is subordinated to the extent
provided in the Indenture to the prior payment in full of all Senior
Indebtedness (as defined below). (Section 4.1) Upon any distribution of assets
of the Company upon any dissolution, winding up, liquidation or
reorganization, the payment of the principal of, or premium, if any, and
interest on the Debentures is to be subordinated to the extent provided in the
Indenture in right of payment to the prior payment in full of all Senior
Indebtedness (except that holders of Debentures may receive securities that
are subordinated at least to the same extent as the Debentures are
subordinated to Senior Indebtedness and any securities issued in exchange for
Senior Indebtedness).
In the event of the acceleration of the maturity of any Debentures as a
result of an Event of Default (as defined), the holders of all Senior
Indebtedness will first be entitled to receive payment in full in cash of all
amounts due or to become due thereon before the holders of the Debentures will
be entitled to receive any payment for the principal of or premium, if any,
interest on, or other obligations in respect of, the Debentures (except that
holders of Debentures may receive securities that are subordinated at least to
the same extent as the Debentures are subordinated to Senior Indebtedness and
any securities issued in exchange for Senior Indebtedness). The Indenture will
further require that the Company will promptly notify holders of Senior
Indebtedness if payment of the Debentures is accelerated because of an Event
of Default.
The Company also may not make any payment for the principal of or premium,
if any, interest on, or other obligations in respect of, the Debentures
(except that holders of Debentures may receive securities that are
subordinated at least to the same extent as the Debentures are subordinated to
Senior Indebtedness and any securities issued in exchange for Senior
Indebtedness) if (i) a default in the payment of the principal of, premium, if
any, interest, rent or other obligations in respect of Senior Indebtedness
occurs and is continuing beyond any applicable period of grace or (ii) any
other default occurs and is continuing with respect to Designated Senior
Indebtedness that permits holders of the Designated Senior Indebtedness as to
which such default relates to accelerate its maturity and the Trustee receives
written notice of such default (a "Payment Blockage Notice") from the Company
or other person permitted to give such notice under the Indenture. Payments on
the Indenture may and shall be resumed (a) in the case of a payment default,
upon the date on which such default is cured or waived and (b) in case of any
other default, the earlier of the date on which
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such other default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Senior Indebtedness is accelerated. No new period of payment blockage may be
commenced under clause (ii) above unless and until (i) 365 days have elapsed
since the effectiveness of the immediately prior Payment Blockage Notice and
(ii) all scheduled payments of principal, premium, if any, and interest on the
Debentures that have come due have been paid in full in cash. No default
(other than a payment default) that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made,
the basis for a subsequent Payment Blockage Notice.
By reason of the subordination provisions described above, in the event of
the Company's bankruptcy, dissolution or reorganization, holders of Senior
Indebtedness may receive more, ratably, and holders of the Debentures may
receive less, ratably than the other creditors of the Company. Such
subordination will not prevent the occurrence of any Event of Default under
the Indenture.
"Senior Indebtedness" means the principal of, premium, if any, and interest
on, rent under, and any other amounts payable on or in or in respect of any
Indebtedness of the Company (including, without limitation, any interest
accruing after the filing of a petition by or against the Company under any
bankruptcy law, whether or not allowed as a claim after such filing in any
proceeding under such bankruptcy law), whether outstanding on the date of the
Indenture or thereafter created, incurred, assumed, guaranteed or in effect
guaranteed by the Company (including all deferrals, renewals, extensions or
refundings of, or amendments, modifications or supplements to the foregoing);
provided, however, that Senior Indebtedness does not include (v) Indebtedness
evidenced by the Debentures, (w) any liability for federal, state local or
other taxes owed or owing by the Company, (x) Indebtedness of the Company to
any subsidiary of the Company, (y) any trade payables of the Company incurred
in the ordinary course of business, and (z) any indebtedness in which the
instrument creating or evidencing the same or the assumption or thereof (or
related agreements or documents to which the Company is a party) expressly
provides that such Indebtedness shall not be senior in right of payment to, or
is pari passu with, or is subordinated or junior to, the Debentures.
"Indebtedness" means, with respect to any person, all obligations, whether
or not contingent, of such person (i) (a) for borrowed money, (b) evidenced by
a note, debenture, bond or other written instrument, (c) under a lease
required to be capitalized on the balance sheet of the lessee under generally
accepted accounting principles or under any lease or related document
(including a purchase agreement) that provides that the Company is
contractually obligated to purchase or cause a third party to purchase and
thereby guarantee a minimum residual value of the lease property to the lessor
and the obligations of the Company under such lease or related document to
purchase or to cause a third party to purchase such leased property, (d) in
respect of letters of credit, bank guarantees or bankers' acceptances
(including reimbursement obligations with respect to any of the foregoing),
(e) with respect to Indebtedness secured by a mortgage, pledge, lien,
encumbrance, charge or adverse claim affecting title in an encumbrance to
which the property or assets of such person are subject, whether or not the
obligation secured thereby shall have been assumed by or shall otherwise be
such person's legal liability, (f) in respect of the balance of deferred and
unpaid purchase price of any property or assets, (g) under interest rate or
currency swap agreements, cap, floor and collar agreements, spot and forward
contracts and similar agreements and arrangements; (ii) with respect to any
obligation of others of the type described in the preceding clause (i) or
under clause (iii) below assumed by or guaranteed in any manner by such person
or in effect guaranteed by such person through an agreement to purchase
(including, without limitation, "take or pay" and similar arrangements),
contingent or otherwise (and the obligations of such person under any such
assumptions, guarantees or other such arrangements); and (iii) any and all
Indebtedness constituting deferrals, renewals, extensions, refinancings and
refundings of, or amendments, modifications or supplements to, any of the
foregoing.
"Designated Senior Indebtedness" means any particular Senior Indebtedness in
which the instrument creating or evidencing the same or the assumption or
guarantee thereof (or related agreements or documents to which the Company is
a party) expressly provides that such indebtedness shall be "Designated Senior
Indebtedness" for purposes of the Indenture (provided that such instrument,
agreement or other document may place limitations and conditions on the right
of such Senior Indebtedness to exercise the rights of Designated Senior
Indebtedness).
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In the event that, notwithstanding for foregoing, the Trustee or any holder
of Debentures receives any payment or distribution of assets of the Company of
any kind in contravention of any of the terms of the Indenture, whether in
cash, property or securities, including, without limitation, by way of set-off
or otherwise, in respect of the Debentures before all Senior Indebtedness is
paid in full, then such payment or distribution will be held by the recipient
in trust for the benefit of the holders of Senior Indebtedness of the Company,
and will be immediately paid over or delivered to the holders of Senior
Indebtedness of the Company or their representative or representatives to the
extent necessary to make payment in full of all Senior Indebtedness of the
Company remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of Senior
Indebtedness of the Company. (Section 4.2)
As of December 31, 1996, the Company did not have outstanding any
indebtedness that would have constituted Senior Indebtedness. The Indenture
will not limit the amount of additional indebtedness, including Senior
Indebtedness, which the Company can create, incur, assume or guarantee, nor
will the Indenture limit the amount of indebtedness which any subsidiary of
the Company can create, incur, assume or guarantee.
OPTIONAL REDEMPTION
The Debentures are not redeemable at the option of the Company prior to
March 2, 2000. At any time on or after that date, the Debentures may be
redeemed at the Company's option on at least 20 but not more than 60 days
notice, as a whole or from time to time in part, at the following prices
(expressed in percentages of the principal amount), together with accrued
interest to, but excluding, the date fixed for redemption; provided that if a
redemption date is an interest payment date, the semi-annual payment of
interest becoming due on such date shall be payable to the holders of record
as of the relevant record date.
If redeemed during the 12-month period beginning March 1 (beginning March 2,
2000 and ending on February 28, 2001, in the case of the first such period).
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2000......................................................... %
2001.........................................................
2002.........................................................
2003.........................................................
2004.........................................................
2005.........................................................
2006.........................................................
</TABLE>
and 100% at March 1, 2007.
If fewer than all the Debentures are to be redeemed, the Trustee will select
the Debentures to be redeemed in principal amounts of $1,000 or multiples
thereof by lot or, in its discretion, on a pro rata basis. If any Debenture is
to be redeemed in part only, a new Debenture or Debentures in principal amount
equal to the unredeemed principal portion thereof will be issued. If a portion
of a holder's Debentures is selected for partial redemption and such holder
converts a portion of such Debentures, such converted portion shall be deemed
to be taken from the portion selected for redemption.
No sinking fund is provided for the Debentures.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Indenture as being: (i) a default in
payment of the principal of, or premium, if any, on the Debentures (whether or
not such payment is prohibited by the subordination
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provisions of the Indenture); (ii) default for 30 days in payment of any
installment of interest on the Debentures (whether or not such payment is
prohibited by the subordination provisions of the Indenture); (iii) default by
the Company for 45 days after notice given in accordance with the Indenture in
the observance or performance of any other covenants in the Indenture; (iv)
failure of the Company to make any payment at maturity, including any
applicable grace period, in respect of Indebtedness in an amount of in excess
of $5,000,000 and continuance of such failure of 30 days after notice given in
accordance with the Indenture; (v) default by the Company with respect to any
Indebtedness, which default results in the acceleration of Indebtedness in an
aggregate amount of in excess of $5,000,000 without such Indebtedness having
been discharged or such acceleration having been rescinded, or annulled for 30
days after notice given in accordance with the Indenture; or (vi) certain
events involving bankruptcy, insolvency or reorganization of the Company.
(Section 7.1)
The Indenture provides that the Trustee shall, within 90 days after the
occurrence of a default, give to the registered holders of the Debentures
notice of all uncured defaults known to it, but the Trustee shall be protected
in withholding such notice if it in good faith determines that the withholding
of such notice is in the best interest to such registered holders, except in
the case of a default in the payment of the principal of, or premium, if any,
or interest on, any of the Debentures when due or in the payment of any
redemption obligation. (Section 7.8)
The Indenture provides that if an Event of Default shall have occurred and
be continuing, the Trustee or the holders of not less than 25% in aggregate
principal amount of the Debentures then outstanding may declare the principal
of and premium, if any, on the Debentures to be due and payable immediately,
but if the Company shall cure all defaults (except the nonpayment of interest
on, premium, if any, and principal of any Debentures which shall have become
due by acceleration) and certain other conditions are met, such declaration
may be canceled and past defaults may be waived by the holders of a majority
in principal amount of Debentures then outstanding. If an Event of Default
resulting from certain events of bankruptcy, insolvency or reorganization were
to occur, all unpaid principal of and accrued interest on the outstanding
Debentures will become due and payable immediately without any declaration or
other act on the part of the Trustee or any holders of Debentures, subject to
certain limitations. (Section 7.1)
The Indenture provides that the holders of a majority in principal amount of
the outstanding Debentures may direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on the Trustee, subject to certain limitations specified in
the Indenture. (Section 7.7) Before proceeding to exercise any right or power
under the Indenture at the direction of such holders, the Trustee shall be
entitled to receive from such holders reasonable security or indemnity against
the costs, expenses and liabilities which might be incurred by it in complying
with any such direction. The right of a holder to institute a proceeding with
respect to the Indenture is subject to certain conditions precedent, including
the written notice by such holder of an Event of Default and an offer to
indemnify to the Trustee, along with the written request by the holders of not
less than 25% in aggregate principal amount of the outstanding Debentures,
that such a proceeding be instituted, but the holder has an absolute right to
institute suit for the enforcement of payment of the principal of, and
premium, if any, and interest on, such holder's Debentures when due and to
convert such Debentures. (Section 7.4)
The holders of not less than a majority in aggregate principal amount of the
outstanding Debentures may on behalf of the holders of all Debentures waive
any past defaults, except (i) a default in payment of the principal of, or
premium, if any, or interest on, any Debenture when due, (ii) a failure by the
Company to convert any Debentures into Common Stock or (iii) in respect of
certain provisions of the Indenture which cannot be modified or amended
without the consent of the holder of each outstanding Debenture affected
thereby.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
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LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company may not, directly or indirectly,
consolidate with or merge with or into another person or sell, lease, convey
or transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions,
to another person or group of affiliated persons, unless (i) either (a) the
Company is the surviving entity or (b) the resulting, surviving or transferee
entity is a corporation organized under the laws of the United States, any
state thereof or the District of Columbia and expressly assumes by written
agreement all of the obligations of the Company in connection with the
Debentures and the Indenture; (ii) no default or Event of Default shall exist
or shall occur immediately after giving effect on a pro forma basis to such
transaction; and (iii) certain other conditions are satisfied.
MODIFICATIONS OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the holders of not less than a majority in principal
amount of the Debentures at the time outstanding, to modify the Indenture or
any supplemental indenture or the rights of the holders of the Debenture,
except that no such modification shall (i) extend the fixed maturity of any
Debenture, reduce the rate or extend the time for payment of interest thereon,
reduce the principal amount thereof or premium, if any, thereon, reduce any
amount payable upon redemption thereof, impair or adversely affect the right
of a holder to institute suit for the payment thereof, change the currency in
which the Debentures are payable, or impair or change in any respect adverse
to the holder of the Debentures the right to convert the Debentures into
Common Stock subject to the terms set forth in the Indenture or modify the
provisions of the Indenture with respect to the subordination of the
Debentures in a manner adverse to the holders of the Debentures, without the
consent of the holder of each Debenture so affected, or (ii) reduce the
aforesaid percentage of Debentures, without the consent of the holders of all
of the Debentures then outstanding.
TAXATION OF DEBENTURES
See "Certain Federal Income Tax Considerations" for a discussion of certain
federal tax considerations which will apply to holders of Debentures.
GOVERNING LAW
The Indenture and the Debentures will be governed by, and construed in
accordance with, the laws of the State of New York. (Section 16.4)
CONCERNING THE TRUSTEE
Chemical Trust Company of California, the Trustee under the Indenture, has
been appointed by the Company as the initial paying agent, conversion agent,
registrar and custodian with regard to the Debentures. An affiliate of the
Trustee is the transfer agent for the Company's Common Stock. The Company may
maintain deposit accounts and conduct other banking transactions with the
Trustee or its affiliates in the ordinary course of business, and the Trustee
and its affiliates may from time to time in the future provide banking and
other services to the Company in the ordinary course of their business.
During the existence of an Event of Default, the Trustee will exercise such
rights and powers vested in it under the Indenture and use the same degree and
care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs. (Section 8.1) The
Indenture contains limitations of the rights of the Trustee, should it become
a creditor of the Company, to obtain payment of claims in certain cases or to
realize on certain property received by it in respect of any such claim or
otherwise. (Section 8.8)
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material federal income tax consequences of
acquiring and owning the Preferred Stock and the Debentures. Heller Ehrman
White & McAuliffe has acted as the Company's tax counsel; in its opinion, the
summary is accurate in all material respects. Tax consequences are not
addressed that result from the special tax status or particular circumstances
of holders including, for example, banks, insurance companies, regulated
investment companies, personal holding companies, corporations subject to the
alternative minimum tax, and tax-exempt entities. Not addressed are the
consequences under state, local and foreign tax laws. Also not addressed are
tax consequences to subsequent holders of Preferred Stock and Debentures. The
summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations, court decisions, and Internal Revenue Service
("IRS") rulings now in effect, all of which are subject to change, possibly
with retroactive effect. The summary assumes that Preferred Stock and
Debentures will be held as "capital assets" as defined in the Code.
Prospective purchasers are advised to consult their own tax advisors regarding
the tax consequences of acquiring, holding, or disposing of the Preferred
Stock or Debentures in light of their own investment circumstances.
DIVIDENDS ON PREFERRED STOCK
Distributions with respect to the Preferred Stock will constitute dividends
to the extent that the Company has current or accumulated earnings and profits
for federal income tax purposes. Dividends paid to corporations will generally
be eligible for the dividends-received deduction under section 243 of the
Code, subject to the limitations contained in sections 246 and 246A of the
Code.
In general, the dividends-received deduction is available only if the stock
in respect of which the dividends are paid is held for at least 46 days, or at
least 91 days in the case of a dividend paid with respect to preferred stock
and which is attributable to a period or periods aggregating more than 366
days. A taxpayer's holding period for these purposes is reduced by periods
during which the taxpayer's risk of loss with respect to the stock is
considered diminished by reason of the existence of options, contracts to sell
or other similar transactions. It is possible that the IRS would argue that
days during which the Company's redemption right is outstanding or,
alternatively, is "in the money" are not included in the taxpayer's holding
period for these purposes. The dividends-received deduction will not be
available to the extent that the taxpayer is under an obligations to make
related payments with respect to positions in substantially similar or related
property. The dividends-received deduction is limited to specified percentages
of the holder's taxable income and may be reduced or eliminated if the holder
has indebtedness "directly attributable to [its] investment" in the stock.
Prospective corporate purchasers of Preferred Stock should consult their own
tax advisors to determine whether these limitations might apply to them.
If distributions with respect to the shares of Preferred Stock exceed the
Company's current and accumulated earnings and profits, the excess will be
applied against and reduce the holder's tax basis in the Preferred Stock. Any
amount in excess of the amount of the dividend and the amount applied against
basis will be treated as capital gain.
EXTRAORDINARY DIVIDENDS
If a corporate holder of Preferred Stock receives an "extraordinary
dividend" from the Company with respect to stock which it has not held for two
years on the dividend announcement date, the basis of the Preferred Stock will
be reduced (but not below zero) by the portion of the dividend which is not
taxable because of the dividends-received deduction. If, because of the
limitation on reducing basis below zero, any amount of the non-taxable portion
of an extraordinary dividend has not been applied to reduce basis, such amount
will be treated as gain from the sale or exchange of stock when such stock is
disposed of. An "extraordinary dividend" on the Preferred Stock would include
a dividend that (i) equals or exceeds 5% of the holder's adjusted tax basis in
the stock, treating all dividends having ex-dividend dates within an 85-day
period as one dividend, or (ii) exceeds 20% of the holder's adjusted tax basis
in the stock, treating all dividends
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having ex-dividend dates within a 365-day period as one dividend. A holder may
elect to use the fair market value of the stock rather than its adjusted basis
for purposes of applying the 5% or 20% limitation if the holder is able to
establish such fair market value to the satisfaction of the IRS. An
"extraordinary dividend" would also include any amount treated as a dividend
in the case of a redemption of the Preferred Stock that is non-pro rata as to
all stockholders, without regard to the period the holder held the stock.
Special rules apply with respect to "qualified preferred dividends." A
qualified preferred dividend is any fixed dividend payable with respect to
preferred stock which (i) provides for fixed preferred dividends payable no
less often than annually and (ii) is not in arrears as to dividends when
acquired, provided the actual rate of return, as determined under section
1059(e)(3) of the Code, on such stock does not exceed 15%. Where a qualified
preferred dividend exceeds the 5% or 20% limitation described above, the
extraordinary dividend rules will not apply if the taxpayer holds the stock
for more than five years. If the taxpayer disposes of the stock before it has
been held for more than five years, the aggregate reduction in basis will not
exceed the excess of the qualified preferred dividends paid on such stock
during the period held by the taxpayer over the qualified preferred dividends
that would have been paid during such period on the basis of the stated rate
of return as determined under section 1059(e)(3) of the Code. The length of
time that a taxpayer is deemed to have held stock for this purpose is
determined under principles similar to those applicable for purposes of the
dividends-received deduction discussed above.
REDEMPTION PREMIUM
If (a) preferred stock is, like the Preferred Stock, redeemable only at the
issuer's option, (b) the facts and circumstances on the issue date indicate
that redemption is more likely than not to occur, and (c) the redemption price
of the preferred stock as of the most likely redemption date exceeds the issue
price (so that there is a "redemption premium"), then the redemption premium
may be taxable as a dividend to the extent of the issuing corporation's
current or accumulated earnings and profits over the period from issuance to
the most likely redemption date. If a redemption premium is subject to the
foregoing treatment, a holder of the Preferred Stock would take the amount of
the premium into income under an economic accrual method similar to the method
described under "Original Issue Discount" below. Under applicable Treasury
Regulations, a redemption premium is not subject to the foregoing treatment if
it will be paid "as a result of changes in economic or market conditions over
which neither the issuer nor the holder has legal or practical control" and is
"solely in the nature of a penalty for premature redemption." The Company
believes that any payment of redemption premium by it will be "solely in the
nature of a penalty for premature redemption" within the meaning of the
Regulations. The Regulations also provide a "safe harbor," pursuant to which
redemption will not be treated as likely to occur, as to a given holder, if:
(x) the issuer and the holder are not "related" under certain tests prescribed
by the Code, (y) the issuer is not effectively required or compelled by any
plan, arrangement, or agreement to redeem the stock, and (z) redemption would
not reduce the yield of the stock. The Company expects that the Preferred
Stock will qualify for the "safe harbor." Because the foregoing tests are
based upon an evaluation of all facts and circumstances surrounding the
issuance and redemption of preferred stock, the conclusion cannot be entirely
certain; however, it is the Company's belief that no part of the premium
payable upon redemption of the Preferred Stock will be treated as a
constructive dividend to the holders of the Preferred Stock. It is possible,
however, that upon an actual redemption, the redemption premium would,
together with the other redemption proceeds, be treated as a dividend for
federal income tax purposes. See "Redemption for Cash" below.
REDEMPTION FOR CASH
A redemption of shares of Preferred Stock by the Company for cash will be
treated as a distribution taxable as a dividend (and, possibly, an
"extraordinary dividend"--see above) to redeeming stockholders to the extent
of the Company's current or accumulated earnings and profits unless the
redemption (a) results in a "complete termination" of the stockholder's
interest in the Company (within the meaning of section 302(b)(3) of the Code),
(b) is "substantially disproportionate" (within the meaning of section
302(b)(2)) with respect to the holder, or (c) is "not essentially equivalent
to a dividend" (within the meaning of section
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302(b)(1)). Based upon published IRS rulings, the redemption of a
stockholder's Preferred Stock for cash will be treated as "not essentially
equivalent to a dividend" if, taking into account the constructive ownership
rules, (1) the stockholder does not own shares of any other class in the
Company, either directly or by attribution, and (2) there is a meaningful
reduction in the holder's proportionate interest in the Company. In
determining whether any of these tests has been met, shares considered to be
owned by the holder by reason of the constructive ownership rules set forth in
section 318 of the Code, as well as shares actually owned, will be taken into
account. If any of the foregoing tests is met, the redemption of shares of
Preferred Stock for cash will result in taxable gain or loss equal to the
difference between the amount of cash received (except cash attributable to
accrued, unpaid, declared dividends, which will be taxable as a dividend
described above) and the holder's tax basis in the redeemed shares. Any such
gain or loss will be capital gain or loss and will be long-term capital gain
or loss if the holding period exceeds one year. It is possible that the IRS
would argue that the holding period of Preferred Stock does not begin so long
as the Company's redemption right is outstanding.
EXCHANGE FOR DEBENTURES
An exchange of shares of Preferred Stock for Debentures would also be
subject to the rules of section 302 of the Code described above. Since a
holder of Debentures will be treated under the constructive ownership rules as
owning the Common Stock into which the Debentures are convertible, the
exchange would not by itself satisfy the "complete termination" test or the
"substantially disproportionate" test described above. The "not essentially
equivalent to a dividend" test could be met only if the exchange were regarded
as resulting in a reduction in the holder's proportionate interest in the
Company. If none of these tests is met, the fair market value of the
Debentures received upon the exchange will be taxable as a dividend (and,
possibly, an "extraordinary dividend"--see above) to the extent of the
Company's current or accumulated earnings and profits. Prospective purchasers
should consult their own tax advisors regarding satisfaction of the section
302 tests in their particular circumstances, including the possibility that a
sale of a part of the holder's Preferred Stock or the Debentures received
might be regarded as reducing the holder's interest in the Company, thereby
satisfying one of the tests of section 302(b); in such a case, the stockholder
would recognize capital gain or loss on the exchange. Such gain or loss would
be long-term capital gain or loss if the holding period exceeds one year. It
is possible that the IRS would argue that the holding period of Preferred
Stock does not begin so long as the Company's redemption right is outstanding.
The installment method will not be available for reporting such gain in the
event that the Preferred Stock, the Debentures, or the Common Stock into which
the Debentures are convertible are traded or readily tradable on an
established securities market.
If a redemption does not satisfy any of the tests of section 302(b) and the
fair market value of the Debentures exceeds the Company's current and
accumulated earnings and profits, the excess would be treated as a return of
capital to the extent of the holder's tax basis in the Preferred Stock. Any
amount in excess of the amount of the dividend and the return of capital would
be treated as capital gain. If the holder retains any stock in the Company,
the remaining tax basis in the Preferred Stock will be transferred to the
retained stock. If the holder retains no stock in the Company, it is unclear
whether the remaining tax basis in the Preferred Stock would be transferred to
the Debentures or would be lost.
ORIGINAL ISSUE DISCOUNT AND PREMIUM ON DEBENTURES
Stated interest on the Debentures will be includable in income in accordance
with the holder's method of accounting. There is also a risk that the
Debentures will be treated as having original issue discount taxable as
interest income as discussed below.
If the Preferred Stock is exchanged for Debentures at a time when the stated
redemption price at maturity of the Debentures exceeds their issue price by an
amount equal to or greater than one-fourth of one
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percent of the stated redemption price at maturity multiplied by the number of
complete years to maturity, the Debentures will be treated as having original
issue discount equal to the entire amount of such excess. In the event the
Debentures are traded on an established securities market on or within ten
days after their issue date, the issue price of the Debentures will be their
fair market value as determined as of the first trading date after their issue
date. If the Debentures are not traded on an established securities market at
the time of the exchange, but the Preferred Stock is so traded, the issue
price of the Debentures will be the fair market value of the Preferred Stock
at the time of the exchange. In the event that neither the Preferred Stock nor
the Debentures are traded on an established securities market, the issue price
of the Debentures will be their stated principal amount, assuming that the
Debentures bear "adequate stated interest" within the meaning of section 1274
of the Code. If the Debentures do not bear adequate stated interest, the issue
price will be equal to their "imputed principal amount" as determined under
1274 of the Code.
A holder of a Debenture would generally be required to include in gross
income (irrespective of the holder's method of accounting) a portion of the
original issue discount for each year during which it holds the Debenture even
though the cash to which such income is attributable would not be received
until maturity or redemption of the Debenture. The amount of any original
issue discount included in income for each year would be calculated under a
constant yield to maturity formula that would result in the allocation of less
original issue discount to the early years of the term of the Debenture and
more original issue discount to later years.
If the Preferred Stock is exchanged for Debentures whose issue price exceeds
the amount payable at the maturity (or earlier call date, if appropriate),
such excess (excluding the amount thereof attributable to the conversion
feature) will be deductible by the holder of the Debentures as amortizable
bond premium over the term of the Debentures (taking into account earlier call
dates, as appropriate), under a yield to maturity formula, if an election by
the taxpayer under section 171 of the Code is in effect or is made. Such
election would apply to all obligations owned or subsequently acquired by the
taxpayer. Except as may otherwise be provided in future regulations, the
amortizable bond premium will be treated as an offset to interest income on
the Debentures rather than as a separate deduction item.
REDEMPTION OR SALE OF DEBENTURES
Generally a redemption or sale of the Debentures will result in taxable gain
or loss equal to the difference between the amount of cash and fair market
value of other property received and the holder's tax basis in the Debentures.
To the extent that the amount received is attributable to accrued interest,
however, that amount will be taxed as ordinary income. The tax basis of a
holder who received the Debentures in exchange for shares of Preferred Stock
will generally be equal to the fair market value of the Debentures at the time
of exchange plus any original issue discount included in the holder's income
or minus any premium previously allowed as an offset to interest income on the
Debentures. Such gain or loss will be capital gain or loss and will be long-
term gain or loss if the holding period for the Debentures exceeds one year.
If the Debentures are issued with original issue discount and the Company
were found to have had an intention at the time the Debentures were issued to
call them before maturity, any gain realized on a sale, exchange or redemption
of Debentures prior to maturity would be considered ordinary income to the
extent of any unamortized original issue discount for the period remaining to
the stated maturity of the Debentures. The Company cannot predict whether it
would have an intention, when and if the Debentures are issued, to call the
Debentures before their maturity.
CONVERSION OF PREFERRED STOCK OR DEBENTURES INTO COMMON STOCK
No gain or loss will generally be recognized upon conversion of shares of
Preferred Stock or Debentures into shares of Common Stock, except with respect
to any cash paid in lieu of fractional shares of Common Stock, which will
result in gain or loss to the extent of the difference between the cash paid
and the basis of the Preferred Stock or Debentures allocable to the fractional
shares. Additionally, if the conversion takes place
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when there is a dividend arrearage on the Preferred Stock and the fair market
value of the Common Stock exceeds the issue price of the Preferred Stock, a
portion of the Common Stock received might be treated as a dividend
distribution, taxable as ordinary income. Assuming the conversion is not
treated as resulting in the payment of a dividend, the tax basis of the Common
Stock received upon conversion will be equal to the tax basis of the shares of
Preferred Stock or the Debentures converted (less the amount of basis
allocable to any fractional share of Common Stock for which cash is received),
and the holding period of the Common Stock will include the holding period of
the Shares of Preferred Stock or the Debentures converted. The tax basis of
any Common Stock treated as a dividend will be equal to its fair market value
on the date of the distribution.
ADJUSTMENT OF CONVERSION PRICE
Holders of Preferred Stock or Debentures may be deemed to have received
constructive distributions where the conversion ratio is adjusted to reflect
property distributions with respect to Common Stock into which such Preferred
Stock or Debentures are convertible. Adjustments to the conversion price made
pursuant to a bona fide reasonable adjustment formula which has the effect of
preventing the dilution of the interest of the holders of the Preferred Stock
or Debentures, however, will generally not be considered to result in a
constructive distribution of stock. Certain of the possible adjustments
provided in the Preferred Stock and the Debentures may not qualify as being
pursuant to a bona fide reasonable adjustment formula. If such adjustments
were made, the holders of Preferred Stock or Debentures might be deemed to
have received constructive distribution taxable as dividends.
BACKUP WITHHOLDING
Under the backup withholding provisions of the Code and applicable Treasury
regulations, a holder of Preferred Stock, Debentures or Common Stock may be
subject to backup withholding at the rate of 31% with respect to dividends or
interest paid on, original issue discount accrued with respect to, or the
proceeds of a sale, exchange or redemption of Preferred Stock, Debentures or
Common Stock, unless (a) such holder is a corporation or comes within certain
other exempt categories and when required demonstrates this fact or
(b) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. The amount of any backup
withholding from a payment to a holder will be allowed as a credit against the
holder's federal income tax liability and may entitle such holder to a refund,
provided that the required information is furnished to the IRS.
SPECIAL TAX RULES APPLICABLE TO FOREIGN HOLDERS
For purposes of the following discussion, a "United States Alien Holder" is
any holder who, for United States federal income tax purposes, is a
nonresident alien, a foreign corporation, a nonresident alien fiduciary of a
foreign estate or trust, or a foreign partnership.
Income received by a United States Alien Holder in the form of dividends on
Preferred Stock or Common Stock or interest and original issue discount on the
Debentures will be subject to a United States federal withholding tax at a 30%
rate upon the actual payment of the dividends, interest or original issue
discount except as described below and except where an applicable tax treaty
provides for the reduction or elimination of such withholding tax. However, a
United States Alien Holder generally will be taxable in the same manner as a
United States corporation or resident with respect to such income if it is
effectively connected with the conduct of a trade or business in the United
States. Such effectively connected income received by a United States Alien
Holder that is a corporation may in certain circumstances be subject to an
additional "branch profits tax" at a 30% rate, or if applicable, a lower-
treaty rate.
Payments of interest and original issue discount on the Debentures received
by a United States Alien Holder will not be subject to United States federal
withholding tax provided that (a) the Alien Holder does
68
<PAGE>
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote, (b) the holder
is not a controlled foreign corporation that is related to the Company through
stock ownership, and (c) either (1) the beneficial owner of the Debenture,
under penalties of perjury, provides the Company or its agent with its name
and address and certifies that it is not a United States person or (2) a
securities clearing organization, bank, or other financial institution that
holds customer's securities in the ordinary course of its trade or business (a
"financial institution") certifies to the Company or its agent, under
penalties of perjury, that such a statement has been received from the
beneficial owner by it or another financial institution and furnishes to the
Company or its agent a copy thereof.
A United States Alien Holder generally will not be subject to Unites States
federal income or withholding tax on gain realized on the sale or exchange of
Preferred Stock, Common Stock, or Debentures unless (i) the holder is an
individual who is present in the United States for 183 days or more during the
taxable year and as to whom such gain is from United States sources or (ii)
the gain is effectively connected with a United States trade or business of
the holder. Upon a redemption of the Preferred Stock for a cash or Debentures,
the Company may be required to withhold tax on the entire amount of the
proceeds at a 30% rate or lower treaty rate applicable to dividends. In the
case of an exchange of Preferred Stock for Debentures, this would result in a
United States Alien Holder receiving a reduced principal amount of Debentures.
Dividends paid to United States Alien Holders outside the United States that
are subject to the withholding tax described above will generally be exempt
from United States backup withholding tax and United States information
reporting requirements, other than reporting of dividend payments for purposes
of the withholding tax noted above. Backup withholding and information
reporting generally will not apply to payments of interest if the
certification described above is received, provided the payor does not have
actual knowledge that the holder is a United States person. The payor of the
dividends may generally rely on a payee's address outside the United States in
determining that the regular withholding tax discussed above applies and
consequently that the backup withholding provisions do not apply.
The payment of the proceeds of the sale of Preferred Stock, Common Stock or
Debentures to or through the United States office of a broker will be subject
to information reporting and possible backup withholding at a rate of 31%
unless the owner certifies its non-United States status under penalties of
perjury or otherwise establishes an exemption. The payment of the proceeds of
the sale of Preferred Stock, Common Stock or Debentures to or through the
foreign office of a broker generally will not be subject to this backup
withholding tax. In the case of the payment of proceeds from the disposition
of Preferred Stock, Common Stock or Debentures through a foreign office of a
broker that is a United States person or a "United States related person,"
existing regulations require information reporting on the payment unless the
broker has documentary evidence in its files that the owner is a non-United
States person and the broker has no actual knowledge to the contrary. For this
purpose, a "United States related person" is (i) a "controlled foreign
corporation" for United States federal income tax purposes, or (ii) a foreign
person 50% or more of whose gross income from all sources for a specified
period is derived from activities that are effectively connected with the
conduct of a United States trade or business. While regulations currently in
effect reserve on the question of whether reportable payments made through
foreign offices of a broker that is a United States person or "United States
related person" will be subject to backup withholding, proposed regulations
state that backup withholding will not apply to such payments absent actual
knowledge that the payee is a United States person. Any amounts withheld under
the backup withholding rules from a payment to a United States Alien Holder
will be allowed as a refund or a credit against such United States Alien
Holder's United States federal income tax, provided that the required
information is furnished to the IRS.
69
<PAGE>
DESCRIPTION OF COMMON STOCK
The Company has authority to issue 45,000,000 shares of Common Stock, par
value $0.0001 per share. As of December 31, 1996, there were 29,660,319 shares
of Common Stock issued and outstanding. As of December 31, 1996, the Company
had outstanding options to purchase 4,068,188 shares of Common Stock at a
weighted average exercise price of $9.67 per share, warrants to purchase
525,000 shares of Common Stock at an exercise price of $4.25 per share
expiring in March 1997, warrants to purchase 759,385 shares of Common Stock at
an exercise price of $7.43 per share expiring in May 1999 and warrants to
purchase 687,638 shares of Common Stock at an exercise price of $7.43 per
share expiring in April 1998.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders, including the election of directors.
Stockholders are not entitled to cumulative voting rights, and, accordingly,
the holders of a majority of the shares voting for the election of directors
can elect the entire Board if they choose to do so and, in that event, the
holders of the remaining shares will not be able to elect any person to the
Board of Directors.
The holders of Common Stock are entitled to receive such dividends, if any,
as may be declared from time to time by the Board of Directors, in its
discretion, from funds legally available thereof and subject to prior dividend
rights of holders of any shares of preferred stock of the Company which may be
outstanding. Upon liquidation or dissolution of the Company subject to prior
liquidation rights of the holders of preferred stock of the Company, the
holders of Common Stock are entitled to receive on a pro rata basis the
remaining assets of the Company available for distribution. Holders of Common
Stock have no preemptive or other subscription rights, and there are no
conversion rights or redemption or sinking fund provisions with respect to
such shares.
ChaseMellon Shareholder Services acts as transfer agent and registrar for
the Common Stock.
70
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Dillon, Read & Co. Inc. and Punk, Ziegel &
Knoell, L.P. (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the
Company the numbers of shares of Preferred Stock set forth opposite their
names below at a purchase price of $ per share plus accrued dividends, if
any, from , 1997 to the date of payment and delivery. The Underwriters are
committed to purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Robertson, Stephens & Company LLC..................................
Dillon, Read & Co. Inc.............................................
Punk, Ziegel & Knoell, L.P. .......................................
---------
Total............................................................ 1,000,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Preferred Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession of not more than $ per share, of
which $ may be reallowed to other dealers. After the public offering, the
public offering price, concession and reallowance to dealers may be reduced by
the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.
The Company granted to the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 150,000
additional shares of Preferred Stock at a purchase price of $ per share plus
accrued dividends, if any, from , 1997 to the date of payment and delivery.
To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Preferred
Stock to be purchased by it shown in the above table represents as a
percentage of the 1,000,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those
on which the 1,000,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
Each executive officer and certain directors of the Company have agreed with
the Underwriters for a period of 90 days after the date of the Underwriting
Agreement (the "Lock-Up Period"), subject to certain exceptions, not to offer
to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or
grant any rights with respect to any shares of Common Stock, any options or
warrants to purchase any shares of Common Stock, or any securities convertible
into or exchangeable for shares of Common Stock now owned or hereafter
acquired directly by such holders or with respect to which they have or
hereafter acquire the power of disposition, without the prior written consent
of Robertson, Stephens & Company LLC which may, in its sole discretion and at
any time or from time to time, without notice, release all or any portion of
the securities subject to lock-up agreements. In addition, the Company has
agreed that during the Lock-Up Period, the Company will not, without the prior
written consent of Robertson, Stephens & Company LLC,
71
<PAGE>
subject to certain exceptions, issue, sell, contract to sell, or otherwise
dispose of, any shares of Common Stock, any options or warrants to purchase
any shares of Common Stock or any securities convertible into, exercisable for
or exchangeable for shares of Common Stock other than the issuance of Common
Stock upon the exercise of outstanding options and under the employee stock
purchase plan and the Company's issuance of options under employee stock
option plans.
The offering price for the Preferred Stock has been determined by
negotiations among the Company and the Representatives.
Certain persons participating in the offering may engage in transactions,
including stabilizing bids, syndicate covering transactions or the imposition
of penalty bids, which may have the effect of stabilizing or maintaining the
market price of the Preferred Stock and Common Stock at a level above that
which might otherwise prevail in the open market. A "stabilizing bid" is a bid
for or the purchase of the Preferred Stock or Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the
Preferred Stock or Common Stock. A "syndicate covering transaction" is the bid
for or the purchase of the Preferred Stock or Common Stock on behalf of the
Underwriters to reduce a short position incurred by the Underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
Representatives to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the offering if the
Preferred Stock or Common Stock originally sold by such Underwriter or
syndicate member is purchased by the Representatives in a syndicate covering
transaction and has therefore not been effectively placed by such Underwriter
or syndicate member. The Representatives have advised the Company that such
transactions may be effected on the Nasdaq National Market or otherwise and,
if commenced, may be discontinued at any time.
LEGAL MATTERS
The statements included in the Prospectus under the caption "Certain Federal
Income Tax Consequence" have been reviewed by, and the validity of the shares
of Preferred Stock offered hereby is being passed upon for the Company by
Heller Ehrman White & McAuliffe, Palo Alto, California. Certain legal matters
relating to the offering will be passed upon for the Underwriters by Wilson
Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
EXPERTS
The financial statements of SEQUUS Pharmaceuticals, Inc. at December 31,
1995 and 1996 and for each of the three years in the period ended December 31,
1996 appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The portions of this Prospectus entitled "Risk Factors -- Uncertainties
Regarding Patents and Trade Secrets" and "Business -- Patents and Trade
Secrets," insofar as they constitute a summary of matters of law, have been
reviewed and approved by Dehlinger & Associates, patent counsel for SEQUUS, as
experts in patent law.
72
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statement of Stockholders' Equity.......................................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, 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, 1996 and 1995, and the related statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. 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 audits 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
for 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, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 27, 1997
F-2
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1995 1996
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 6,770 $ 9,997
Short-term marketable investments...................... 43,506 22,949
Trade accounts receivable, net of allowance for bad
debts of $178 in 1995 and $504 in 1996................ 1,642 8,972
Inventories............................................ 1,105 5,697
Prepaid expenses and other current assets.............. 949 1,601
--------- ---------
Total current assets..................................... 53,972 49,216
Net equipment and improvements........................... 3,591 5,564
Other assets............................................. 245 188
--------- ---------
Total assets............................................. $ 57,808 $ 54,968
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 2,773 $ 4,539
Accrued compensation................................... 2,310 3,149
Accrued clinical costs................................. 1,664 1,014
Other accrued liabilities.............................. 746 1,939
Deferred revenue....................................... 716 --
--------- ---------
Total current liabilities................................ 8,209 10,641
Commitments
Stockholders' equity:
Preferred stock, par value $0.01; 4,000,000 shares
authorized, issuable in series; 437,200 shares of
Series A issued and outstanding in 1995 and no shares
of Series A issued and outstanding in 1996............. 4 --
Common stock, par value $0.0001; 45,000,000 shares
authorized, 26,283,026 shares issued and outstanding in
1995 and 29,660,319 in 1996............................ 3 3
Additional paid-in capital.............................. 183,019 194,948
Accumulated deficit..................................... (133,427) (150,624)
--------- ---------
Total stockholders' equity............................. 49,599 44,327
--------- ---------
Total liabilities and stockholders' equity............. $ 57,808 $ 54,968
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Product sales.................................. $ 3,664 $ 1,907 $ 25,462
Royalties and fees............................. 91 109 7,461
-------- -------- --------
Total revenues................................... 3,755 2,016 32,923
Expenses:
Cost of goods sold............................. 916 511 3,990
Research and development....................... 25,378 22,651 27,652
Selling, general and administrative............ 7,622 13,856 20,302
-------- -------- --------
Total expenses................................... 33,916 37,018 51,944
-------- -------- --------
Loss from operations............................. (30,161) (35,002) (19,021)
Interest income.................................. 976 1,406 1,844
-------- -------- --------
Net loss......................................... $(29,185) $(33,596) $(17,177)
======== ======== ========
Net loss per share............................... $ (1.54) $ (1.54) $ (.59)
======== ======== ========
Common shares used in the calculation of net loss
per share....................................... 18,978 21,831 28,937
</TABLE>
See accompanying notes.
F-4
<PAGE>
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,
1993................... -- $-- 18,875 $ 2 $109,984 $ (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
Change in valuation
allowance for
available-for-sale
securities............. -- -- -- -- -- (12) (12)
Net loss................ -- -- -- -- -- (29,185) (29,185)
---- --- ------ --- -------- --------- --------
Balance at December 31,
1994................... -- -- 19,096 2 110,801 (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 -- 14,275 -- 14,275
Sale of Common Stock in
secondary offering, net
of issuance costs of
$828................... -- -- 4,485 1 45,591 -- 45,592
Conversion of Preferred
Stock.................. (43) -- 144 -- -- -- --
Change in valuation
allowance for
available-for-sale
securities............. -- -- -- -- -- 34 34
Net loss................ -- -- -- -- -- (33,596) (33,596)
---- --- ------ --- -------- --------- --------
Balance at December 31,
1995................... 437 4 26,283 3 183,019 (133,427) 49,599
Shares issued for
contribution to 401(k)
Plan................... -- -- 12 -- 174 -- 174
Shares issued under the
Employee Stock Purchase
Plan................... -- -- 83 -- 628 -- 628
Exercise of warrants.... -- -- 1,179 -- 6,514 -- 6,514
Exercise of stock
options................ -- -- 601 -- 4,149 -- 4,149
Common Stock issued in
exchange for research &
development license.... -- -- 30 -- 460 -- 460
Conversion of Preferred
Stock.................. (437) (4) 1,472 -- 4 -- --
Change in valuation
allowance for
available-for-sale
securities............. -- -- -- -- -- (20) (20)
Net loss................ -- -- -- -- -- (17,177) (17,177)
---- --- ------ --- -------- --------- --------
Balance at December 31,
1996................... -- $-- 29,660 $ 3 $194,948 $(150,624) $ 44,327
==== === ====== === ======== ========= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
STATEMENT OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(29,185) $(33,596) $(17,177)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 1,902 1,957 1,767
Issuance of common stock to 401(k) plan........ 124 157 174
Issuance of common stock in exchange for
research and development technology license... -- -- 460
Changes in operating assets and liabilities:
Trade accounts receivable.................... 1,242 (1,578) (7,330)
Inventories.................................. (138) (547) (4,592)
Prepaid expenses and other current assets.... 197 194 (652)
Other assets................................. 136 (7) (44)
Accounts payable............................. 292 1,187 1,766
Accrued compensation......................... (53) 1,513 839
Accrued clinical costs....................... 1,041 (2,290) (650)
Other accrued liabilities.................... 137 (177) 1,193
Deferred revenue............................. -- 716 (716)
-------- -------- --------
Net cash used in operating activities.......... (24,305) (32,471) (24,962)
Cash flows from investing activities:
Available-for-sale securities:
Purchases.................................... (13,512) (106,013) (90,207)
Sales........................................ 26,329 30,843 45,127
Maturities................................... 14,467 38,507 65,617
Capital expenditures, net...................... (1,279) (1,610) (3,639)
-------- -------- --------
Net cash provided by (used in) investing
activities.................................... 26,005 (38,273) 16,898
Cash flows from financing activities:
Issuance of common stock....................... 693 61,052 11,291
Issuance of preferred stock.................... -- 11,014 --
Principal payments under capital lease
obligation.................................... (18) -- --
-------- -------- --------
Net cash provided by financing activities...... 675 72,066 11,291
-------- -------- --------
Net increase in cash and cash equivalents........ 2,375 1,322 3,227
Cash and cash equivalents, beginning of the year. 3,073 5,448 6,770
-------- -------- --------
Cash and cash equivalents, end of the year....... $ 5,448 $ 6,770 $ 9,997
======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
SEQUUS Pharmaceuticals, Inc. ("SEQUUS", the "Company") is engaged in the
development, manufacture, marketing and sale of proprietary liposome and
lipid-based products primarily to treat cancer and certain fungal infections.
SEQUUS' strategic emphasis is on injectable pharmaceutical products designed
to improve the efficacy and reduce the toxicity of selected existing and new
drugs used to treat cancer and infectious diseases. SEQUUS distributes DOXIL
and AMPHOTEC in the United States through distributors and the same products
under the tradenames of CAELYX and AMPHOCIL, respectively, in various
countries outside the United States through corporate alliances, distribution
agreements and various agents. 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.
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
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 considers all highly liquid investments with maturities of three
months or less from the date of purchase to be cash equivalents. Short-term
investments consist of investments with original maturities greater than three
months, but less than one year.
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.
The Company accounts for its marketable investments under Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. During 1995 and 1996, 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-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 are
included in interest income.
F-7
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
GROSS
UNREALIZED
------------
ESTIMATED
AMORTIZED 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
======= === ==== =======
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C> <C> <C> <C>
U.S. government securities..................... $ 7,434 1 $ (1) $ 7,434
U.S. corporate securities...................... 7,399 1 -- 7,400
Foreign corporate debt securities.............. 8,114 1 -- 8,115
------- --- ---- -------
$22,947 $ 3 $ (1) $22,949
======= === ==== =======
</TABLE>
All of these securities mature within one year. The gross realized gains and
losses on sales of available-for-sale securities during the years ended
December 31, 1994, 1995 and 1996 were not significant.
Inventories
Inventories are stated at the lower of cost (principally first-in, first-
out) or market. The inventory detail is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1996
------ ------
<S> <C> <C>
Raw materials............................................... $ 898 $2,801
Work-in-process............................................. 68 2,223
Finished goods.............................................. 139 673
------ ------
$1,105 $5,697
====== ======
</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 improvements detail is
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Office and laboratory equipment......................... $ 7,805 $10,397
Leasehold improvements.................................. 4,066 5,104
------- -------
11,871 15,501
Accumulated depreciation and amortization............... (8,280) (9,937)
------- -------
$ 3,591 $ 5,564
======= =======
</TABLE>
F-8
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition and Concentration of Credit Risk
The Company recognizes product sales upon shipment to customers. The Company
defers appropriate amounts based on historical sales return experience.
Royalties are recognized as revenue based on licensed product sales. Fees
and milestone payments are recognized as earned as specified in terms set
forth in the related 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, 1994
and 1995, one customer represented $3,300,000 and $785,000 of product sales,
respectively. Another customer contributed $91,000 and $109,000 to royalties
and fees for the years ended December 31, 1994 and 1995, respectively. No
single customer accounted for 10% or more of product sales in 1996.
Clinical Costs
Clinical costs include costs associated with preclinical testing of
compounds for safety and efficacy, clinical trials and company-funded research
performed by third parties. Clinical trials costs are recognized as research
and development expense as the contractually-specified patient services are
performed.
Advertising Expenses
The Company accounts for advertising costs as an expense in the period in
which they are incurred. Advertising expenses were $109,000 and $606,000 for
the years ended December 31, 1995 and 1996, respectively. Such amounts were
immaterial in 1994.
Stock Based Compensation
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
which the Company adopted in 1996, the Company has elected to follow
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issue to
Employees" ("APB 25") and related interpretations in accounting for its
employee stock option plans. Under APB 25, if the exercise price of the
Company's employee stock options equals or exceeds the fair value of the
underlying stock on the date of grant as determined by the Company's Board of
Directors, no compensation expense is recognized. See Note 5 for pro forma
disclosures required by SFAS 123.
Financial Statement Presentation
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. COLLABORATIVE AGREEMENTS
In August 1996, the Company entered into a distribution agreement with
Schering-Plough and, in partial consideration for distribution rights,
received from Schering-Plough a one-time upfront payment of $5.3 million. The
Company recognized $7.3 million in upfront fees and payments for the
achievement of certain targets and events during 1996. Under the multi-year
agreement, Schering-Plough has obtained exclusive rights to distribute, market
and sell CAELYX worldwide, except for the United States, Japan and certain
other countries. Under the terms of the agreement, SEQUUS will receive
payments for product sales to Schering-Plough. In addition, SEQUUS and
Schering-Plough will jointly develop a worldwide clinical plan for
investigating the use of CAELYX in the treatment of solid tumors. Each party
will undertake clinical trials in specific indications, coordinated by a joint
development team. As part of the agreement, Schering-Plough will
F-9
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
conduct certain clinical trials for oncology indications, will apply for
regulatory approval in the Schering-Plough territories for all new
indications, and will assist with pharmacoeconomic studies. The agreement also
calls for potential additional payments to the Company totaling $27 million
based on the achievement of certain product development milestones and events.
In July 1996, the Company obtained an exclusive sub-license to certain
technologies held by Sheffield Medical Technologies, Inc. In return for the
sub-license the Company issued 29,798 shares of its Common Stock with a fair
market value of approximately $500,000, less issuance costs of $40,000. The
fair market value of the Common Stock was charged to research and development
expense in the accompanying statement of operations in 1996. If certain
targets are achieved, the Company may also be obligated to pay milestone
payments and royalties on future product sales, if any, which utilize the sub-
licensed technology.
In August 1993, the Company signed a distribution agreement with Zeneca
under which Zeneca was to market and sell AMPHOCIL in most European countries.
In March 1994, SEQUUS and Zeneca announced the expansion of their August 1993
agreement to cover additional markets. In July 1996, SEQUUS announced that it
had reacquired from Zeneca all international marketing and distribution rights
for AMPHOCIL except for nine European countries to which Zeneca had retained
such rights (Denmark, Finland, Iceland, Ireland, Italy, the Netherlands,
Portugal, Sweden and the U.K.). In exchange for the return to SEQUUS of
marketing and distribution rights throughout the rest of the world, SEQUUS
agreed to restructure certain future milestone payments specified in the
original agreement, adjust the pricing terms for AMPHOCIL to provide greater
competitive flexibility, and exchange certain inventory held by Zeneca.
The Company also has entered into various other distribution agreements with
international pharmaceutical companies to exclusively distribute AMPHOCIL in
specific countries.
3. COMMITMENTS
The Company leases its facility and certain equipment under operating
leases. Rent expense under these leases was $856,000, $852,000, and $1,813,000
for the years ended December 31, 1994, 1995 and 1996, 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,
1996, including a new lease signed subsequent to December 31, 1996, total
$1,781,000 in 1997, $1,853,000 in 1998, $1,844,000 in 1999, $1,670,000 in
2000, $1,613,000 in 2001 and $2,149,000 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 was 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 Convertible Reset 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
F-10
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Preferred Stock into 1,472,052 shares of Common Stock. The conversion was
completed in April 1996. During 1996, 120,682 warrants to purchase Common
Stock were exercised. As of December 31, 1996, warrants to purchase 687,638
shares of Common Stock remain outstanding and expire in April 1998.
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.
The right to negotiate has expired. During 1996, 352,460 warrants to purchase
Common Stock were exercised. As of December 31, 1996, warrants to purchase
759,385 shares of Common Stock remain outstanding and expire in May 1999.
In March 1991, the Company issued in a private placement (the "1991
Financing") 1,252,143 units (each, a "Unit," collectively, the "Units") at a
price of $7.00 per unit. Each Unit consisted of two shares of Common Stock and
a six-year warrant to purchase an additional share of Common Stock at an
exercise price of $4.25 per share. Gross proceeds to the Company were
$8,750,000. In addition to the sale of the Units, the Company paid a fee and
issued a six year warrant to purchase 125,000 shares of Common Stock to
Oppenheimer & Co., Inc. for its role as placement agent in connection with the
1991 Financing. During 1996, 705,714 warrants to purchase Common Stock were
exercised. As of December 31, 1996, warrants to purchase 525,000 shares of
Common Stock remain outstanding and expire in March 1997.
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.
As of December 31, 1996, approximately 7,000,000 shares of Common Stock were
reserved for future issuance under the Company's 401(k) Plan, stock option
plans, employee stock purchase plan and for the exercise of warrants.
5. STOCK OPTIONS PLAN AND STOCK PURCHASE PLAN
401(k) 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 138,000 shares for issuance
under the Plan. For the years ended December 31, 1994, 1995 and 1996, the
Company contributed Common Stock to the Plan valued at approximately $124,000,
$157,000 and $174,000, respectively.
Stock Compensation Plans
Under the 1987 Employee Stock Option Plan, as amended, and 1987 Consultant
Stock Plan, as amended, (the "Plans") the Company is authorized to issue
either incentive or non-qualified stock options to its employees and
consultants to purchase up to 5,000,000 shares of common stock. Generally,
options granted under the Plan become exercisable over periods of six months
to four years and for a period ranging from three to seven months after
termination of employment or consulting arrangement, and all expire ten years
from the date of grant. The stock delivered upon exercise of any option under
these Plans may be subject to 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
F-11
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
five years. The exercise price of non-qualified stock options may not be less
than 85 percent of the fair market value of the stock on the date of grant. The
Company granted options to purchase 16,000 and 30,000 shares of Common Stock
under the 1987 Consultant Sock Plan during 1995 and 1996, respectively. The
fair value of these options are immaterial.
Under the 1990 Director Stock Option Plan (the "Director Plan"), the Company
is authorized to grant non-qualified options to its non-employee directors 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 to each non-employee director plus an option to purchase an additional
2,500 shares to each such director who also serves on one or more committees of
the Board. All options under the Director Plan have an exercise price not less
than the fair market value on the date of grant. Options granted before March
8, 1996 were immediately exercisable upon the grant, and initial options
granted on or after March 8, 1996 vest ratably over four years. Each annual
grant granted on or after March 8, 1996 vest ratably one year from the date of
grant. The right to exercise generally expires upon the earlier of ten years
from the date of grant or one year after a non-employee director's termination
as a non-employee director. The Company granted options to purchase 37,500
shares of Common Stock in 1996 (none in 1995).
Activities under the above mentioned stock option plans are as follows
(amounts in thousands, except per share information):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------
OPTIONS WEIGHTED
AVAILABLE NUMBER OF PRICE AVERAGE
FOR GRANT SHARES PER SHARE EXERCISE PRICE
--------- --------- ------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31,
1993..................... 804 2,759 $ 1.12-$20.00 $9.28
Granted................... (1,599) 1,599 $ 6.50-$ 9.25 7.00
Forfeited................. 1,185 (1,185) $ 1.88-$20.00 13.58
Exercised................. -- (161) $ 1.12-$ 8.88 2.66
------ ------
Balance, December 31,
1994..................... 390 3,012 $ 1.12-$18.88 6.73
Additional authorized..... 2,150 --
Granted................... (1,427) 1,427 $ 6.25-$13.50 8.95
Forfeited................. 230 (230) $ 6.75-$12.50 7.84
Exercised................. -- (239) $ 1.12-$14.00 3.67
------ ------
Balance, December 31,
1995..................... 1,343 3,970 $ 1.12-$18.88 7.73
Granted................... (927) 927 $14.50-$21.75 16.26
Forfeited................. 210 (210) $ 6.75-$18.88 10.92
Exercised................. -- (601) $ 1.12-$13.50 6.39
------ ------
Balance, December 31,
1996..................... 626 4,086 $ 1.12-$21.75 $9.67
====== ======
</TABLE>
No shares purchased under the option plans are subject to repurchase at
December 31, 1995. All options were granted at fair market value.
F-12
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The options outstanding at December 31, 1996 have been segregated into
ranges for additional disclosure as follows (options amounts are recorded in
thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -----------------------------
WEIGHTED-
AVERAGE OPTIONS
OPTIONS REMAINING CURRENTLY
OUTSTANDING AT CONTRACTUAL WEIGHTED- EXERCISABLE AT WEIGHTED-
RANGE OF DECEMBER 31, LIFE AVERAGE DECEMBER 31, AVERAGE
EXERCISE PRICES 1996 (IN YEARS) EXERCISE PRICE 1996 EXERCISE PRICE
- --------------- -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.12-$ 2.24........... 175 3.00 $ 1.82 175 $ 1.82
$ 5.25-$ 7.75........... 1,622 6.73 $ 6.78 1,182 $ 6.72
$ 8.00-$11.75........... 1,102 7.74 $ 8.76 564 $ 8.62
$12.25-$18.13........... 1,007 9.26 $14.73 93 $14.58
$18.63-$21.75........... 180 8.75 $21.01 38 $18.63
----- -----
4,086 7.55 $ 9.67 2,052 $ 7.37
===== =====
</TABLE>
Employee Stock Purchase Plan
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, 1996, approximately 212,000 shares of Common Stock had
been issued under this plan.
Pro Forma Information
As of December 31, 1996, the Company has four stock-based compensation
plans, which are described above. The Company has elected to follow APB 25 and
related interpretations in accounting for its employee stock options because,
as discussed below, the alternative fair value accounting provided for under
SFAS 123 requires use of option valuation models that were not developed for
use in valuing employee stock options and employee stock purchase plans. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employer stock purchase plan and employee stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model for the multiple option approach with the following weighted-
average assumptions for 1995 and 1996, respectively: risk-free interest rate
of between 5.5% and 5.8% and between 5.6% and 6.3%; volatility factor of the
expected market price of the Company's Common Stock of .74 for both years; a
weighted-average expected life of the option of between .5 and 2.5 years for
both years and a dividend yield of zero.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options and employee stock purchase plan
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially
F-13
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
affect the fair value estimate, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the fair value of the
Company's employee stock options and the employee stock purchase plan.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net loss over the options' vesting period.
The Company's historical and pro forma information follows (in thousands,
except for net loss per share information):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Net loss
Historical............................................ $33,596 $17,177
Pro Forma............................................. $35,849 $22,121
Net loss per share
Historical............................................ $ (1.54) $ (0.59)
Pro Forma............................................. $ (1.64) $ (0.76)
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully realized until 1997.
6. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
As of December 31, 1996, the Company has Federal and California net
operating loss carryforwards ("NOLs") of approximately $99.0 million and $10.0
million, respectively. The Company also has Federal and California research
and development tax credit carryforwards of approximately $4.9 million and
$3.4 million, respectively. The Federal NOLs expire as follows (in thousands):
<TABLE>
<CAPTION>
YEAR(S) ENDING FEDERAL NOL
DECEMBER 31 EXPIRING
-------------- -----------
<S> <C>
1997-2000................................................... $ 2,500
2001-2011................................................... 96,500
-------
$99,000
=======
</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.
F-14
<PAGE>
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's current deferred tax assets for
federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Net operating loss carryforwards......................... $ 31,370 $ 33,200
Capitalized research and development..................... 15,090 19,800
Research credits......................................... 5,840 7,200
Other, net............................................... 2,770 2,400
Valuation allowance...................................... (55,070) (62,600)
-------- --------
Total................................................ $ -- $ --
======== ========
</TABLE>
The valuation allowance increased by approximately $12,750,000 in 1994,
$15,250,000 in 1995 and $7,530,000 in 1996. Approximately $3,000,000 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.
7. SUBSEQUENT EVENTS (UNAUDITED)
On February 3, 1997, the Company's Board of Directors authorized the filing
of a registration statement with the Securities and Exchange Commission
permitting the Company to sell approximately 1,150,000 shares of Convertible
Exchangeable Preferred Stock to the public.
F-15
<PAGE>
[LOGO OF SEQUUS PHARMACEUTICALS, INC.]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts are estimated except the
SEC Registration Fee, NASD Filing Fee and NASDAQ Listing Fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Fee.......................... $ 17,425
NASD Filing Fee................................................. 6,250
NASDAQ Listing Fee.............................................. 6,750
Transfer Agent Fee.............................................. 12,100
Trustee Fee..................................................... 6,000
Printing and Engraving.......................................... 100,000
Legal Fees and Expenses......................................... 125,000
Accounting Fees................................................. 75,000
Blue Sky Fees and Expenses...................................... 3,000
Miscellaneous................................................... 23,475
--------
TOTAL......................................................... $375,000
========
</TABLE>
- --------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICER
Section 145 of the Delaware General Corporation Law, under which the
Registrant is incorporated, permits indemnifications of directors, officers,
employees and agents of a corporation under certain conditions and subject to
certain limitations.
Articles NINTH and TENTH of the Registrant's Restated Certificate of
Incorporation provides as follows:
"NINTH: A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which
the director derived any improper personal benefit. If the Delaware General
Corporation Law is amended hereafter to authorize corporate action further
eliminating or limiting the personal liability of directors, then the
liability of a director of the corporation shall be eliminated or limited
to the fullest extent permitted by the Delaware General Corporation Law, as
so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the corporation shall not adversely affect any right or protection of a
director of the corporation existing at the time of such repeal or
modification.
TENTH:
A. RIGHT TO INDEMNIFICATION
Each person who was or is made a party or is threatened to be made a
party to or is involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative ("proceeding"), by reason of the
fact that he or she or a person of whom he or she is the legal
representative, is or was a director or officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director or officer, employee or agent of another corporation, or of a
partnership, joint
II-1
<PAGE>
venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged
action in an official capacity as a director, officer, employee or agent or
in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by the corporation to the
fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended, (but, in the case of any such
amendment, only to the extent that such amendment permits the corporation
to provide broader indemnification rights than said Law permitted the
corporation to provide prior to such amendment) against all expenses,
liability and loss including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement
reasonably incurred or suffered by such person in connection therewith and
such indemnification shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of his
or her heirs, executors and administrators; provided, however, that the
corporation shall indemnify any such person seeking indemnity in connection
with an action, suit or proceeding (or part thereof) initiated by such
person only if such action, suit or proceeding (or part thereof) was
authorized by the board of directors of the corporation. Such right shall
be a contract right and shall include the right to be paid by the
corporation expenses incurred in defending any such proceeding in advance
of its final disposition; provided, however, that the payment of such
expenses incurred by a director or officer of the corporation in his or her
capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer,
including, without limitation, service to an employee benefit plan) in
advance of the final disposition of such proceeding, shall be made only
upon delivery to the corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it should be
determined ultimately that such director or officer is not entitled to be
indemnified under this Section or otherwise.
B. RIGHT OF CLAIMANT TO BRING SUIT
If a claim under Paragraph A of Article TENTH is not paid in full by the
corporation within ninety (90) days after a written claim has been received
by the corporation, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid
also the expenses of prosecuting such claim. It shall be a defense to any
such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition
where the required undertaking, if any, has been tendered to this
corporation) that the claimant has not met the standards of conduct which
make it permissible under the Delaware General Corporation Law for the
corporation to indemnify the claimant for the amount claimed, and the
burden of proving that such standards were met shall be on the claimant.
Neither the failure of the corporation (including its board of directors,
independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification
of the claimant is proper in the circumstances because he or she has met
the applicable standard of conduct set forth in the Delaware General
Corporation Law, nor an actual determination by the corporation (including
its board of directors, independent legal counsel, or its stockholders)
that the claimant has not met such applicable standard of conduct, shall be
a defense to the action or create a presumption that claimant has not met
the applicable standard of conduct.
C. NON-EXCLUSIVITY OF RIGHTS
The rights conferred on any person by Paragraphs A and B of Article TENTH
shall not be exclusive of any other right which such persons may have or
hereafter acquire under any statute, provision of the Restated Certificate
of Incorporation, by-law, agreement, vote of stockholders or disinterested
directors or otherwise.
D. INSURANCE
The corporation may maintain insurance, at its expense, to protect itself
and any such director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the corporation
would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Company, as amended*
3.2 Form of Certificate of Designation of Preferred Stock*
3.3 Form of Stock Certificate for Preferred Stock of the Company*
3.4 Bylaws of the Company, as amended (1)
4.1 Form of Indenture between the Company and Chemical Trust Company of
California, as Trustee*
4.2 Form of Debenture (included in Exhibit 4.1)*
5.1 Opinion of Heller Ehrman White & McAuliffe*
8.1 Tax Opinion of Heller Ehrman White & McAuliffe*
12.1 Statement Regarding Computation of Ratios*
Consent of Heller Ehrman White & McAuliffe (contained in opinion
23.1 filed as Exhibit 5.1)*
23.2 Consent of Ernst & Young LLP, Independent Accountants*
23.3 Consent of Dehlinger & Associates
24.1 Power of Attorney*
25.1 Statement of Eligibility of Trustee*
27.1 Financial Data Schedule*
</TABLE>
- --------
* Previously filed as an exhibit to this Registration Statement.
(1) Incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 33-13332).
ITEM 17. UNDERTAKINGS
A. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 and (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
B. Insofar as indemnifications for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the provisions described in Item 15 of Form S-3, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, such Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
C. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of Prospectus filed by the Registrants pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3, and has duly caused this Amendment No. 2
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Menlo Park, State of California on
March 12, 1997.
SEQUUS PHARMACEUTICALS, INC.
By /s/ L. SCOTT MINICK
___________________________________
L. Scott Minick,
President, Chief Operating Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by each of the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board and March 12, 1997
_________________________________ Chief Executive Officer
I. Craig Henderson (Principal
Executive Officer)
/s/ L. Scott Minick President, Chief March 12, 1997
_________________________________ Operating Officer and
L. Scott Minick Director
* Vice President, Finance March 12, 1997
_________________________________ and Treasurer
Donald J. Stewart (Principal Financial
and Accounting Officer)
* Director March 12, 1997
_________________________________
Robert G. Faris
* Director March 12, 1997
_________________________________
E. Donnall Thomas
* Director March 12, 1997
_________________________________
Richard C.E. Morgan
</TABLE>
*By: /s/ L. Scott Minick
- -----------------------------
L. Scott Minick
Attorney-in-fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Company, as amended*
3.2 Form of Certificate of Designation of Preferred Stock*
3.3 Form of Stock Certificate for Preferred Stock of the Company*
3.4 Bylaws of the Company, as amended (1)
4.1 Form of Indenture between the Company and Chemical Trust Company of
California, as Trustee*
4.2 Form of Debenture (included in Exhibit 4.1)*
5.1 Opinion of Heller Ehrman White & McAuliffe*
8.1 Tax Opinion of Heller Ehrman White & McAuliffe*
12.1 Statement Regarding Computation of Ratios*
23.1 Consent of Heller Ehrman White & McAuliffe (contained in opinion
filed as Exhibit 5.1)*
23.2 Consent of Ernst & Young LLP, Independent Accountants*
23.3 Consent of Dehlinger & Associates
24.1 Power of Attorney*
25.1 Statement of Eligibility of Trustee*
27.1 Financial Data Schedule*
</TABLE>
- --------
* Previously filed as an exhibit to this Registration Statement.
(1) Incorporated herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 33-13332).
<PAGE>
EXHIBIT 23.3
CONSENT OF PATENT COUNSEL
As special patent counsel, I hereby consent to the reference to Dehlinger &
Associates under the caption "Experts" in the Registration Statement on Form S-
3 of SEQUUS Pharmaceuticals, Inc.
<TABLE>
<S> <C>
3-12-97 /s/ Peter J. Dehlinger
------------- ----------------------------
Date Peter J. Dehlinger
</TABLE>
