<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-15847
SEQUUS PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3031834
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
960 Hamilton Court, Menlo Park, CA 94025
--------------------------------------------------------
(Address of principal executive offices)
(415) 323-9011
--------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of April 30, 1997, the number of outstanding shares of the Company's common
stock, par value $.0001, was 30,401,120.
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SEQUUS PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C>
ITEM 1. Condensed Financial Statements (unaudited)
Condensed Balance Sheets
March 31, 1997 and December 31, 1996................................................... 1
Condensed Statements of Operations for the
Three Months Ended March 31, 1997 and 1996............................................. 2
Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996............................................. 3
Notes to Condensed Financial Statements ............................................... 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................... 6
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K........................................................ 19
Signature............................................................................................ 20
</TABLE>
i
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SEQUUS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands except par value)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 12,442 $ 9,997
Short-term marketable investments 19,056 22,949
Trade accounts receivable 4,462 8,972
Inventories 6,538 5,697
Prepaid expenses and other current assets 1,932 1,601
--------------- -----------------
Total Current Assets 44,430 49,216
Equipment and improvements, net 5,832 5,564
Other assets 319 188
=============== =================
Total Assets $ 50,581 $ 54,968
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,412 $ 4,539
Accrued compensation 2,393 3,149
Accrued clinical costs 1,309 1,014
Other accrued liabilities 1,877 1,939
--------------- -----------------
Total Current Liabilities 9,991 10,641
Commitments
Stockholders' Equity:
Common stock, par value $.0001 3 3
Additional paid-in capital 198,645 194,948
Accumulated deficit (158,058) (150,624)
--------------- -----------------
Total Stockholders' Equity 40,590 44,327
--------------- -----------------
Total Liabilities and Stockholders' Equity $ 50,581 $ 54,968
=============== =================
</TABLE>
See accompanying notes to condensed financial statements
1
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SEQUUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Product sales $ 6,488 $ 4,457
Royalties and fees 1,835 37
------------ ------------
Total Revenues 8,323 4,494
Expenses:
Cost of goods sold 1,314 531
Research and development 7,412 5,929
Selling, general and administrative 7,362 4,458
------------ ------------
Total Expenses 16,088 10,918
Interest income 297 647
Net Loss $ (7,468) $ (5,777)
============ ============
Net loss per common share $ (0.25) $ (0.21)
============ ============
Common shares used in calculation of net loss
per common share 29,998 27,911
============ ============
</TABLE>
See accompanying notes to condensed financial statements
2
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SEQUUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,468) $ (5,777)
Adjustment to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 521 533
Issuance of common stock to 401(k) Plan 287 --
Changes in operating assets and liabilities:
Trade accounts and interest receivable 4,510 (831)
Inventories (841) (877)
Prepaid expenses and other current assets (331) 420
Other assets (151) (30)
Accounts payable (127) (973)
Accrued compensation (756) (789)
Accrued clinical costs 295 90
Other accrued liabilities (62) 119
Deferred revenue -- (358)
------------ ------------
Net cash used in operating activities (4,123) (8,473)
------------ ------------
Cash flows from investing activities:
Available-for-sale securities
Purchases (8,428) (21,915)
Sales 2,933 25,217
Maturities 9,422 1,202
Capital expenditures (769) (609)
------------ ------------
Net cash provided by investing activities 3,158 (3,895)
------------ ------------
Cash flows from financing activities:
Sale of common stock 3,410 3,671
------------ ------------
Net cash provided by financing activities 3,410 3,671
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,445 (907)
Cash and cash equivalents at beginning
of the period 9,997 6,770
------------ ------------
Cash and cash equivalents at end
of the period $ 12,442 $ 5,863
============ ============
</TABLE>
See accompanying notes to condensed financial statements
3
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SEQUUS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 1997
(unaudited)
1. BASIS OF PRESENTATION
SEQUUS Pharmaceuticals, Inc. ("SEQUUS" or 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. The Company's strategic emphasis is on
injectable pharmaceutical products designed to improve the efficacy and
reduce the toxicity of selected existing and new drugs used to treat
cancer and infectious diseases.
In the opinion of management, the accompanying unaudited condensed
financial statements of SEQUUS contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the
financial position as of March 31, 1997, and the results of operations
for the three month periods ended March 31, 1997 and 1996, and the
changes in cash flows for the three month periods ended March 31, 1997
and 1996, in accordance with generally accepted accounting principles.
These condensed financial statements should be read in conjunction with
the Company's audited financial statements for the year ended December
31, 1996, which were filed with the Securities and Exchange Commission
on Form 10-K/A.
Although the nature of the business is not seasonal, the results of
operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
2. CASH AND CASH EQUIVALENTS AND MARKETABLE INVESTMENTS
The Company invests its excess cash principally in government
securities and high-grade investment paper. The Company maintains its
cash, cash equivalents and investments in several different instruments
with various banks and brokerage houses. The diversification of risk is
consistent with Company policy to maintain liquidity and ensure the
safety of principal.
Management determines the appropriate classification of debt securities
at the time of purchase and reevaluates such designation as of each
balance sheet date. At March 31, 1997, all investments are classified
as available-for-sale securities and are carried at fair value, with
the unrealized gains and losses reported as a component of accumulated
deficit. The amortized cost of debt securities in this category is
adjusted for amortization of premiums and accretion of discounts to
maturity. Such amortization is included in net interest and other
income. Realized gains and losses and declines in value judged to be
other than temporary on available-for-sale securities are included in
net interest and other income. The cost of securities sold is based on
the specific identification method.
4
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The following is a summary of available-for-sale securities (in thousands):
As of March 31, 1997
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED -------------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
United States government securities ........ $9,511 $45 ($7) $9,549
United States corporate securities ......... 5,445 -- (2) 5,443
Foreign debt securities .................... 4,064 -- -- 4,064
----------- ----------- ----------- -----------
$19,020 $45 ($9) $19,056
=========== =========== =========== ===========
</TABLE>
As of December 31, 1996
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED -------------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
United States government securities ........ $7,434 $1 ($1) $7,434
United States corporate securities ......... 7,399 1 -- 7,400
Foreign debt securities .................... 8,114 1 -- 8,115
----------- ----------- ----------- -----------
$22,947 $3 ($1) $22,949
=========== =========== =========== ===========
</TABLE>
The gross realized gains and losses on sales of available-for-sale
securities were immaterial for the quarters ended March 31, 1997 and
1996. As of March 31, 1997 the average portfolio duration was
approximately 69 days.
3. 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>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials .............................. $ 3,919 $ 2,801
Work-in-process ............................ 2,018 2,223
Finished goods ............................. 601 673
------------ ------------
$ 6,538 $ 5,697
============ ============
</TABLE>
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted
on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
basic earnings per share, the dilutive effect of stock options will be
excluded. The impact of Statement 128 on the calculation of earnings
per share is not expected to be material due to the antidilutive nature
of the Company's common stock equivalents.
5
<PAGE> 8
ITEM 2.
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. Actual
results, events or performance may differ materially from those anticipated in
these forward-looking statements as a result of a variety of factors, including
those set forth under "Factors That May Affect Future Results, Events or
Performance" below. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be needed to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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(R) liposomes with existing drugs,
or with therapeutics under development, to develop new products with improved
safety and efficacy profiles. The Company developed and is marketing DOXIL(R),
an anticancer drug, and AMPHOTEC(TM), 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, SPI-077, 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 United States Food and Drug Administration
("FDA") for DOXIL for the treatment of Kaposi's sarcoma ("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. In June 1996, the Company
was granted marketing authorization for DOXIL under the tradename CAELYX(TM) in
the 15 member states of the European Union ("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).
In September 1996, the Company 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 March 1997, Schering-Plough launched CAELYX in
Germany and the United Kingdom and is conducting 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. The Company received fees of
$7.3 million and $1.8 million from Schering-Plough in 1996 and the first quarter
of 1997, respectively.
The Company used its first-generation 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
6
<PAGE> 9
own marketing and sales organization. The Company recently elected to reduce the
contract price of AMPHOTEC in response to feedback from its hospital customers
that the relative cost of lipid-based amphotericin B therapy, compared to
generic amphotericin B therapy, limited the broad use of AMPHOTEC in managed
care environments. 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-based
amphotericin B product which targets indications similar to those targeted by
AMPHOCIL has been first to market and has captured a significant share of the
market 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 United Kingdom). 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
distribution partners and agents internationally and to its distributors in the
United States. 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 SPI-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 $158.1 million in net losses through March 31, 1997,
including a net loss of approximately $7.5 million in the quarter ended March
31, 1997. 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
7
<PAGE> 10
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 March
31, 1997, SEQUUS had a United States sales team of 41 individuals experienced in
the sale of pharmaceutical and biopharmaceutical products, with particular
emphasis on oncology and infectious disease.
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
Three Months Ended March 31, 1997 and 1996
Revenues
Total revenues were $8.3 million, of which $6.5 million were product sales,
during the quarter ended March 31, 1997 compared with $4.5 million of revenues
during the quarter ended March 31, 1996, all of which were product sales. DOXIL
product sales represented 85% of total product sales in the first quarter of
1997 compared to 91% in the first quarter of 1996. In the first quarter of 1997,
the Company recognized revenues of approximately $1.8 million under its
agreement with Schering-Plough.
Operating Expenses
The Company's gross margin decreased to 80% of product sales in the first
quarter of 1997 from 88% of product sales in the comparable quarter of the prior
year. This decrease in the gross margin is due to the increase in sales through
distribution partners and the mix of products sold in the first quarter of 1997
versus the first quarter of 1996. 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 80% of product sales in the first quarter of 1997 and were 91% of
product sales in the first quarter of 1996. The Company anticipates that its
gross margin will continue to fluctuate depending on the proportion of product
sales in the United States relative to sales to the Company's international
distribution partners and agents and the product mix. Depending on the mix of
international versus domestic sales and the product mix in the United States,
the Company anticipates that margin rates could decline.
The principal items of research and development ("R&D") expense are
personnel costs, costs of clinical trials, clinical production and supplies. R&D
expense increased to $7.4 million in the first quarter of 1997, from $5.9
million in the comparable quarter of 1996. This increase in R&D expenses was
primarily due to expanded clinical trials of DOXIL in solid tumors, clinical
trial expenses for SPI-077 and increased 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 to expanded clinical
trials of SPI-077.
Selling, general and administrative expenses increased to $7.4 million in
the first quarter of 1997 from $4.5 million in the first quarter of 1996. The
increase in selling, general and administrative expenses was primarily due to
the first full quarter of marketing AMPHOTEC in combination with expanded
marketing of DOXIL which required the hiring of 18 additional sales personnel.
The Company anticipates continued efforts to expand the market for DOXIL and
AMPHOTEC in the United States.
8
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Interest Income
Interest income decreased to $0.3 million in the first quarter of 1997 from
$0.6 million in the first quarter of 1996, due to the decrease in cash available
for investment.
Net Loss
The Company's net loss increased to $7.5 million in the first quarter of
1997 from $5.8 million in the comparable quarter of the prior year. The net loss
per share was $0.25 for 1997 compared to a net loss of $0.21 per share for 1996.
The increase in net loss per share for the first quarter of 1997 was due
primarily to an increase in marketing and sales expenses associated with the
first full quarter of AMPHOTEC sales and an increase in clinical trial expenses
partially offset by an increase in product sales and revenues recognized under
the Schering-Plough agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at March 31, 1997 were $12.4
million, an increase of $2.4 million from $10.0 million at December 31, 1996.
This increase represents $7.3 million of cash provided by financing and
marketable investments offset by $4.1 million of net cash used by operating
activities and $0.8 million in capital expenditures. During the quarter ended
March 31, 1997, the Company received approximately $3.4 million from the
exercise of warrants issued to investors in private placements and employee
stock options. Of this, approximately $2.1 million was due to the exercise of
warrants to purchase 500,000 shares of Common Stock at $4.25 per share.
The Company believes that the Company's existing cash balances, interest
income, revenues from operations will be adequate to fund its planned activities
at least through 1997. The Company may decide to raise additional financing
sooner. There can be no assurance that adequate financing will be available on
satisfactory terms, if at all.
9
<PAGE> 12
FACTORS THAT MAY AFFECT FUTURE RESULTS, EVENTS OR PERFORMANCE
SEQUUS wishes to caution readers that the following important factors, among
others, may affect the Company's future results, events or performance and could
cause actual results, events or performance to differ materially from those
expressed in any forward-looking statements made by the Company in this report
or presented elsewhere by the Company from time to time.
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 subsequently 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 of
DOXIL in the treatment of solid tumors.
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 20 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.
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 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.
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<PAGE> 13
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 obtained 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.
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 41 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 (except for the United States, Japan and certain other countries)
under the tradename CAELYX. 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 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.
11
<PAGE> 14
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. 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.
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 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.
12
<PAGE> 15
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.
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 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.
13
<PAGE> 16
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
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 SPI-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.
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
14
<PAGE> 17
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.
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
15
<PAGE> 18
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.
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
16
<PAGE> 19
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.
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING
The Company has incurred losses in each year since its inception and has
accumulated approximately $158.1 million in net losses through March 31, 1997,
including a net loss of approximately $7.5 million in the quarter ended March
31, 1997. 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.
17
<PAGE> 20
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.
HAZARDOUS MATERIALS
As with many biopharmaceutical companies, the Company's research and
development involves the controlled use of hazardous materials and chemical
compounds. There can be no assurance that the Company's safety procedures for
handling and disposing of such materials will comply with the standards
prescribed by federal, state and local regulations or that it will not be
subject to the risk of accidental contamination or injury from these materials.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could materially adversely affect the
Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICE
The market price of the 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 Company's securities. Any
large sale of securities of the Company could have a significant adverse effect
on the market price Company's securities.
18
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 6.
Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K. During the three months ended March 31, 1997, no
reports on Form 8-K were filed.
19
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEQUUS PHARMACEUTICALS, INC.
--------------------------------
(Registrant)
Date: May 14, 1997 By: /s/ Donald J. Stewart
--------------------------------
Donald J. Stewart
Vice President, Finance
(Principal Accounting Officer)
20
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,442
<SECURITIES> 19,056
<RECEIVABLES> 4,462
<ALLOWANCES> 0
<INVENTORY> 6,538
<CURRENT-ASSETS> 44,430
<PP&E> 5,832
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,581
<CURRENT-LIABILITIES> 9,991
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 198,645
<TOTAL-LIABILITY-AND-EQUITY> 50,581
<SALES> 6,488
<TOTAL-REVENUES> 8,323
<CGS> 1,314
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,774
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,468)
<EPS-PRIMARY> 0
<EPS-DILUTED> (0.25)
</TABLE>
