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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION
960 HAMILTON COURT, MENLO PARK, CA 94025
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (650) 323-9011
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section229.405 of this chapter) is not contained herein,
and will nOT be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the Common Stock on the Nasdaq
National Market on February 27, 1998, was $ 298,962,515. Solely for the purposes
of this calculation, each officer and director of the registrant is deemed to be
an affiliate.
The number of shares of Common Stock outstanding as of February 27, 1998 was
30,662,882.
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DOCUMENTS INCORPORATED BY REFERENCE
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Document Form 10-K Part
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Portions of registrant's definitive Proxy Statement to be
filed with the Securities and Exchange Commission on or
prior to April 27, 1998 and to be used in connection with
the Annual Meeting of Stockholders. III
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TABLE OF CONTENTS
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Item 1. BUSINESS................................................................. 1
Item 2. PROPERTIES............................................................... 25
Item 3. LEGAL PROCEEDINGS........................................................ 25
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................... 25
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................................... 29
Item 6. SELECTED FINANCIAL DATA.................................................. 29
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................ 29
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................. 29
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................................... 29
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................... 30
Item 11. EXECUTIVE COMPENSATION................................................... 30
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................................... 30
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 30
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.............................................................. 31
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The statements in this Annual Report on Form 10-K and other statements made
by the Company from time to time 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 any forward-looking statements as a result of a variety of
factors, including those set forth under "Risk Factors" and elsewhere in this
Annual Report on Form 10-K. 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 made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
PART I
ITEM 1. BUSINESS
OVERVIEW
SEQUUS Pharmaceuticals, Inc. ("SEQUUS" or the "Company") is an integrated
pharmaceutical company engaged in the development of therapies for cancer and
other diseases utilizing advanced drug delivery technologies. The Company
focuses on utilizing its proprietary STEALTH liposomes to create new drug
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 Phase III
clinical trials of DOXIL in patients with ovarian cancer. A Phase II clinical
trial of DOXIL is also underway in patients with breast cancer as are numerous
Phase I/II trials of DOXIL in the treatment of patients with other solid tumors.
In addition, SEQUUS is currently conducting Phase I and Phase II trials of its
STEALTH cisplatin formulation, SPI-077, 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 of
doxorubicin, a leading anticancer drug. 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 ("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 and $27.0 million in 1997.
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 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
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The following trademarks of SEQUUS are used throughout this Annual Report on
Form 10-K: STEALTH(R), AMPHOTEC(TM), AMPHOCIL(TM), DOXIL(R), CAELYX(TM) and
SEQUUS(TM). Tradenames and trademarks appearing in this Annual Report on Form
10-K are the property of their respective holders.
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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 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.
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 who have failed prior amphotericin B therapy . In December 1996, the
Company launched AMPHOTEC in the United States. AMPHOTEC has also received
marketing clearance and is available in over 20 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.
The Company is developing SPI-077, a proprietary STEALTH liposome
formulation of cisplatin, a widely used anticancer drug. The utility of
conventional 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
conventional 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 recently initiated a Phase II clinical
trial of SPI-077 in patients with lung cancer.
The Company's research and development efforts focus on developing new
products based on STEALTH liposome technology and expanding the STEALTH
technology 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 (ciprofloxacin) 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 oligeonucleotides, small molecules,
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, STEALTH liposomes are large enough
that they typically do not escape out of the bloodstream 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
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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.
The Company uses additional lipid-based drug delivery 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 pharmaceutical company
engaged in the development of therapies for cancer and other diseases utilizing
advanced drug delivery technologies. The Company is focusing its near-term
efforts on: (i) commercializing DOXIL and AMPHOTEC in the United States through
its own sales team and in selected international markets through marketing
partners; (ii) developing additional uses and markets for DOXIL and AMPHOTEC by
establishing clinical efficacy in a range of additional indications; (iii)
characterizing the clinical benefit of SPI-077 through an aggressive clinical
development program; (iv) developing new products in the SEQUUS pipeline
utilizing STEALTH liposomes and other proprietary drug delivery technology; (v)
increasing the Company's manufacturing capacity and expanding into additional
production facilities; and (vi) leveraging the STEALTH platform, either alone or
through strategic alliances, to create additional proprietary products and drug
delivery technologies.
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The current status of the Company's principal products, potential products
under development and research projects is discussed below.
DOXIL
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/m2.
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, and 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/m2 to
greater than 800 mg/m2 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.
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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 and $ 27.0 million in 1997. 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. This trial is currently
underway. Under FDA accelerated approval regulations, the FDA may withdraw
approval following product launch if the Company fails to show due diligence in
conducting post-marketing studies or if these studies fail to demonstrate
clinical benefit to the FDA's satisfaction.
In 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 entered into a distribution
agreement with Schering-Plough under which Schering-Plough has the right to
market and sell CAELYX worldwide, except for the United States, Japan and
certain other countries. Schering-Plough has launched CAELYX in certain European
Union Nations.
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 combinations that 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.
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. In 1997, the Company
reported on 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 conducted confirmatory Phase II
trials in the United States and Europe and has initiated randomized Phase
III trials in patients with ovarian cancer.
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- 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/m2 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 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
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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.
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 then 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 (59oF to 86oF) for approximately two years. The
Company believes that AMPHOTEC has certain 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 over 20
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. 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 the United States
and in international markets. The Company and its distribution partners are
working with certain 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
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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."
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%.
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 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. In April 1997, the FDA's Antiviral Drugs
Advisory Committee concluded that SEQUUS had submitted adequate evidence of
reduced renal toxicity; however, at the same time, the Committee also concluded
that the evidence submitted was insufficient to conclude that AMPHOTEC and
amphotericin B were equally efficacious in the empiric treatment of neutropenic
patients with fever due to possible fungal infection (commonly referred to as
"fever of unknown origin").
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 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 developed a STEALTH liposome formulation of cisplatin, SPI-077,
andconducted multiple studies in in vivo laboratory models. The Company believes
that results of these studies show: (i) as with DOXIL, SPI-077 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 initiated a Phase I
safety study of SPI-077 in cancer patients in
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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. Recently, the
Company initiated Phase II clinical trials in patients with lung cancer. 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:
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 - Ciprofloxacin (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. The Company is collaborating with Bayer
on these studies.
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Radiosensitizers (SPI-40). Studies in cancer patients have shown that
STEALTH liposomes concentrate in tumor tissue. When concentrated in tumors,
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 focusing on liposomal delivery, specifically on 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 1997, 1996 and 1995 were
$32.5 million, $27.7 million and $22.7 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, 1998, SEQUUS employed a sales and sales management team of
39 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 second full year of operations in the United
States, the sales team sold approximately $27.0 million of DOXIL and also sold
$3.3 million of AMPHOTEC after its launch in December 1996. 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.
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 "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Overview."
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MANUFACTURING AND PRODUCTION
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 of
injectable drug products, 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. 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. The Company has
recently retained a second manufacturing site, Gensia Sicor, Inc. for its
products. 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 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 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, 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
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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 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; Bayer in Canada; CritiCare Laboratories Pvt.
Ltd. in India, Bangladesh, Nepal and Sri Lanka.; and Lemery, S.A. de C.V. of
Mexico City, a wholly owned subsidiary of Gensia Sicor Inc. (Nasdaq:GNSA), for
Mexico and Central America..
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
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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 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 Pharmaceuticals, Inc. ("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 United States Patent No.
5,077,056 (the "056 Patent") of The Liposome Company ("TLC") 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
Squibb Company ("Bristol-Myers"). The Company's patent counsel has rendered an
opinion that its STEALTH cisplatin formulation would not infringe any
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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 court from selling
such product 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 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 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
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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.
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.
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<PAGE> 17
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.
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.
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<PAGE> 18
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
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, 1997, SEQUUS had 260 full-time employees, of whom 29 hold
Ph.D. or M.D. degrees, 173 are engaged in research, development, clinical and
regulatory affairs and pilot manufacturing, 59 are engaged in sales and
marketing and 28 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.
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RISK FACTORS
The statements in this Annual Report on Form 10-K and other statements made
by the Company from time to time 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 any forward-looking statements as a result of a variety of
factors, including those set forth below and elsewhere in this Annual Report on
Form 10-K. The following risk factors should be considered carefully in
evaluating the Company and its business by the Company's stockholders and by
prospective investors in the Company.
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 in the United States and in international markets. In
addition, the Company faces intense competition and price pressure in the United
States and in many international 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. 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 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> 20
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 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 39 people. 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 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 "Business -- Marketing and Sales", "-- Strategic
Alliances" and "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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<PAGE> 21
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 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 has
recently retained a second manufacturing site, Gensia Sicor, Inc. 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, which expires in 1999, to supply the Company
with doxorubicin for DOXIL. The Company also has a sole-source supply agreement
with A.L. Labs, which expires in 1999, to supply the Company with amphotericin B
for AMPHOTEC. There can be no assurance that these suppliers will not terminate
their supply agreements at the end of the initial term or 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 termination of existing supply
arrangements, 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 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
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<PAGE> 22
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
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.
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<PAGE> 23
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. In addition, the Company expects operating expenses
to increase in 1998, and there can be no assurance that the Company's revenues
will not decline or that the Company will ever achieve profitability. See "Item
7-- 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
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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."
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.
22
<PAGE> 25
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 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.
23
<PAGE> 26
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."
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING
The Company has incurred losses in each year since its inception and has
accumulated approximately $174.2 million in net losses through December 31,
1997, including a net loss of $23.6 million in the fiscal year ended December
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 will 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 "Item 7
- -- Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT TRANSITION
The Company's success depends largely upon its ability to attract and retain
qualified scientific, 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".
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."
24
<PAGE> 27
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. See
"Item 5 -- Market for Registrant's Equity and Related Stockholder Matters."
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. The Company has determined it has no
exposure to contingencies related to the Year 2000 issue for the products it
sells.
In 1997, the Company initiated a project to modify or replace portions of its
systems so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. The Company expects this project to be
substantially complete by the third quarter of 1999 and does not expect to incur
material costs on this project. The Company will begin to initiate formal
communications with all of its significant suppliers and large customers to
determine the extent to which the Company may be vulnerable to those third
parties failure to remediate their own Year 2000 issues.
Despite these efforts, there can be no assurance that the Company will not
encounter unforeseen problems in its own computer systems, or that the systems
of other companies on which the Company's operations rely will be upgraded or
replaced in a timely manner. Such unforeseen problems in the Company's systems,
or failures to address this issue by other companies could have an adverse
effect on the Company's operations.
ITEM 2. PROPERTIES
As of December 31, 1997, the Company leased approximately 158,544 square feet of
laboratory, office and warehouse space in Menlo Park, California under leases
that expire in April 2003 and approximately 4,080 square feet of office space in
London under a lease that expires in December 2003. Rent expense for 1997 was
approximately $1,856,000
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any legal proceedings. See "Item 1 -- Business
- -- Patents and Trade Secrets."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
25
<PAGE> 28
SUPPLEMENTAL ITEM. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to the executive officers and directors of the
Company as of March 1, 1998 is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
I. Craig Henderson, M.D. ................ 56 Chairman of the Board and Chief Executive Officer
Joseph J. Vallner, Ph.D. ................ 51 Executive Vice President, Chairman of Operating
Committee
Kenneth D. Cunningham, M.D. ............. 49 Vice President of Clinical Development and Medical
Director
Peter K. Working, Ph.D. ................. 49 Vice President for Research & Development
Edward L. Jacobs......................... 51 Senior Vice President of Commercial Operations
Aron F. Stein ........................... 39 Vice President for Regulatory Affairs
Anthony A. Huang, Ph.D. ................. 45 Vice President for Product Development
Francis J. Martin, Ph.D. ................ 49 Vice President and Chief Scientific Officer
Sally A. Davenport....................... 62 Corporate Secretary
Anthony T. Hendrickson................... 44 Corporate Controller and Principal Accounting Officer
Robin D. Campbell ....................... 43 Director
Robert G. Faris(1)(2).................... 59 Director
Richard C.E. Morgan(1)(2)................ 53 Director
E. Donnall Thomas, M.D.(1)(2)............ 77 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.
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.
26
<PAGE> 29
Kenneth D. Cunningham, M.D. has been Vice President of Clinical
Development and Medical Director since June 1997. From 1996 to 1997, Dr.
Cunningham served as European Medical Director for International Operations in
the SEQUUS European office, worked with the DOXIL development group in the U.S.,
and participated in the SEQUUS-Schering-Plough Joint Development Team. Prior to
joining SEQUUS in 1996, Dr. Cunningham was with Glaxo Wellcome where he held
several clinical positions including Director of Infectious Diseases, Worldwide
Medical Affairs; Head of Infection & Oncology, International Medical Affairs;
and Senior Research Physician, Infection and Oncology, Clinical Research. Dr.
Cunningham also worked at Warner Lambert as a Pharmaceutical Physician and a
Clinical Assistant in Oncology and has several years of experience working in a
hospital setting. Dr. Cunningham received his medical degree from St. Mary's
Hospital Medical School, Paddington, London, United Kingdom. His specialty
training was in Pediatric Oncology.
Edward L. Jacobs joined SEQUUS in November 1997 as Senior Vice President
of Commercial Operations. Mr. Jacobs has a long career in oncology marketing
both in major pharmaceutical companies and, more recently, in smaller companies
closer to the size of SEQUUS. He was at Adria Laboratories (now merged into
Pharmacia Upjohn) from 1978 to 1986 as Business Director of the Oncology
Products Division. More recently he has served as President and CEO of Trilex
Pharmaceuticals, Inc. from 1995 to 1997, and General Manager of oncology
services for Syncor International from 1990 to 1993 and Vice President Marketing
and Commercial Development at NeoRx Corporation from 1986 to 1990.
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, including Senior Director, Formulations
from 1993 to 1995 and Director, Formulations from 1986 to 1993. 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 to July 1994
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.
Aron F. Stein, Ph.D. joined SEQUUS in April 1997. Previously he was with
Pfizer Central Research, where he held several management positions, most
recently as Director of Drug Regulatory Affairs Liaison, with responsibility for
the operations, management and administration of worldwide regulatory strategies
for developmental drug candidate programs, regulatory submissions, and
interactions with the U.S. Food and Drug Administration. Prior to joining Pfizer
in 1991, Dr. Stein served as manager for drug regulatory affairs at Du Pont
Merck Pharmaceuticals. Dr. Stein received his Ph.D. degree in toxicology from
Texas A&M University and subsequently served as an NIH Fellow in toxicology at
the University of Kansas Medical Center in Kansas City, Kansas.
Peter K. Working, Ph.D., D.A.B.T., has been Vice President for Research
and Development since August 1997. He previously served as Vice President of
Preclinical Research 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
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.
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,
including human relations, investor and public relations, and SEC reporting. Ms.
Davenport received a B.S. degree in Technical Journalism from Iowa State
University.
Anthony T. Hendrickson has served as Corporate Controller and Chief
Accounting Officer since April 1997. Mr. Hendrickson joined SEQUUS from Lanier
Worldwide where he served as director of finance and administration of a U.S.
27
<PAGE> 30
operating division since 1995. Previously he was a senior manager at KPMG-Peat
Marwick from 1993 to 1995. From 1980 to 1993, Mr. Hendrickson held several
managerial positions in the accounting, tax and finance departments of Syntex
Corporation, a multi-national pharmaceutical company headquartered in Palo Alto,
California. Mr. Hendrickson received an MBA in Finance and Management from Ohio
State University in Columbus, Ohio.
Robin D. Campbell, Ph.D. was appointed director of the Company in
February 1998. Dr. Campbell currently is Vice President of Asia-Pacific/Latin
America Operations at Amgen, Inc. where he is responsible for Amgen's marketing,
development and finance operations in Australia, Canada, China and Japan. Dr.
Campbell leads an initiative to open new markets in Mexico and Latin America in
the near future. Dr. Campbell is also responsible for managing the contracts and
relationships with corporate partners in the Asia-Pacific/Latin America region.
He has worked for Amgen since 1989, beginning as a Product Manager with Neupogen
Marketing and subsequently serving as Associate Director of International
Marketing, and Associate Director, Director and Senior Director of Product
Development. Prior to his tenure at Amgen, Dr. Campbell served in several
positions at Ciba-Geigy Corporation, most notably as Product Manager of
Cardiovascular Products.
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.
28
<PAGE> 31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol SEQU. The table below sets forth the high and low sales prices for the
Company's Common Stock as reported on the Nasdaq National Market for each
calendar quarter within 1997 and 1996. These over-the-counter quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commissions, and may
not necessarily represent the sales prices in actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997:
Fourth Quarter...................... $ 9 5/8 $ 6 5/8
Third Quarter....................... 8 31/32 5 1/2
Second Quarter...................... 8 5/16 5 3/8
First Quarter....................... 16 3/8 7 1/8
1996:
Fourth Quarter...................... $17 $12 1/4
Third Quarter....................... 20 1/8 11 1/2
Second Quarter...................... 22 1/2 13 3/4
First Quarter....................... 19 1/2 12 3/8
</TABLE>
(b) HOLDERS
As of December 31, 1997, there were approximately 438 holders of record of
the Company's Common Stock.
(c) DIVIDENDS
The Company has not paid any cash dividends on its Common Stock since
its inception and does not anticipate paying any dividends on the Common Stock
in the foreseeable future. The Company's future dividend policy will be
determined by its Board of Directors based on many factors, including results of
operations, capital requirements and general business conditions.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data are shown in Exhibit 13 to this Annual Report on
Form 10-K/A.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion analysis of financial condition and results of
operation appears in Exhibit 13 to this Annual Report on Form 10-K/A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements appear in Exhibit 13 to this Annual Report on
Form 10-K/A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
29
<PAGE> 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company incorporates by reference the information set forth under
the captions "Election of Directors" and "Compliance with Section 16(a)
of the Securities Exchange Act of 1934" in the Company's Proxy
Statement to be filed with the Securities and Exchange Commission not
later than April 30, 1998, and to be mailed to stockholders in
connection with the Company's Annual Meeting of Stockholders (the
"Proxy Statement"). Certain information relating to executive officers
of the Company appears on pages 26 through 28 of this Annual Report on
Form 10-K/A.
ITEM 11. EXECUTIVE COMPENSATION
The Company incorporates by reference the information set forth under
the caption "Executive Compensation" of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates by reference the information set forth under
the caption "Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates by reference the information set forth under
the caption "Certain Relationships and Related Transactions " of the
Proxy Statement.
30
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. AND 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following documents appear in Exhibit 13 to this Annual Report on Form
10-K/A and are filed as part hereof.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................................... 41
Balance Sheets at December 31, 1997 and 1996........................................ 42
Statements of Operations for the years ended December 31, 1997, 1996 and 1995....... 43
Statement of Stockholders' Equity for the three years ended December 31, 1997....... 44
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995....... 45
Notes to Financial Statements....................................................... 46
Schedule II--Valuation and Qualifying Accounts...................................... 58
</TABLE>
All other schedules are omitted because they are not required or the
required information is included in the financial statements or notes thereto.
3. EXHIBITS:
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of the Company, as amended(1)
3.2 By-Laws(2)
10.1* 1982 Employee Stock Option Plan (As Amended)(3)
10.1.1* 1987 Employee Stock Option Plan(4)
10.1.2* 1987 Consultant Stock Option Plan(4)
10.1.4* Employee Stock Purchase Plan(4)
10.1.5* 401(k) Plan and Adoption Agreement for 401(k) Plan(3)
10.1.6* LTI Flex Elect Section 125 Cafeteria Plan(3)
10.1.7* 1990 Director Stock Option Plan(4)
10.2.1 Lease Agreement between Lincoln Menlo IV & V Associates Limited and
the Company dated February 13, 1996 for 960 and 978 Hamilton Court,
Menlo Park, California.(5)
10.2.2 Lease Agreement between Lincoln Menlo IV & V Associates Limited and
the Company dated February 13, 1996 for 1050, 1080 and 1098 Hamilton
Court, Menlo Park, California.(5)
10.2.3 Lease Agreement between Lincoln Menlo III Associates Limited and the
Company dated May 1, 1995 for 1180 Hamilton Court, Menlo Park,
California.(5)
10.2.4 Lease Agreement between Lincoln Menlo VI and the Company dated
February 1, 1996 for 1360 Willow Road, Menlo Park, California.(5)
10.4* Employment Agreement dated as of June 30, 1983, between the Company
and Sally A. Davenport(2)
10.5 Forms of Confidentiality Agreements entered into by Employees,
Consultants and Advisors of the Company(2)
10.12 Common Stock and Warrant Purchase agreement between the Company and
David Blech dated as of January 25, 1990(6)
10.14** Agreement between Zeneca Limited and the Company relating to
"Amphocil" dated August 12, 1993, as amended as of March 1, 1994 and
July 12, 1994(7)
10.15** Manufacturing and Supply Agreement between Ben Venue Laboratories,
Inc. ("Ben Venue") and the Company relating to DOXIL dated January 1,
1993(7)
10.16** Manufacturing and Supply Agreement between Ben Venue and the Company
relating to AMPHOCIL dated January 1, 1993(7)
</TABLE>
31
<PAGE> 34
<TABLE>
<S> <C>
10.17** Supply Agreement between Meiji Seika Pharma International LTD and the
Company relating to Doxorubicin Hydrochloride, USP dated September
27, 1994(7)
10.18** Supply Agreement between A.L. Laboratories and the Company relating
to Amphotericin B, USP dated February 15, 1994(7)
10.20 Employment Agreement between the Company and I. Craig Henderson dated
June 26, 1995(8)
10.21 Employment Agreement between the Company and L. Scott Minick dated
June 26, 1995(8)
10.22** Distribution Agreement between Schering-Plough Ltd. and the Company
dated August 29, 1996(9)
13 1997 Annual Report to Security Holders
23.1 Consent of Independent Auditors - See page 59
24 Power of Attorney - See page 60
27 Financial Data Schedule - See page 61
</TABLE>
* Management or Compensatory plan or arrangement.
** Confidential treatment requested.
(1) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Registration Statement on Form S-3 filed on February 6, 1997 (File No.
333-21235) and incorporated herein by reference.
(2) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Registration Statement on Form S-1 (File No. 33-13332) and incorporated
herein by reference.
(3) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1988 and
incorporated herein by reference.
(4) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Annual Report on Form 10-K for the fiscal years ended December 31, 1995 and
incorporated herein by reference.
(5) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996
and incorporated herein by reference.
(6) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1990 and
incorporated herein by reference.
(7) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Annual Report on Form 10-K, as amended, for the fiscal year ended December
31, 1994 and incorporated herein by reference.
(8) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995 and
incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q, as
amended, for the fiscal quarter ended September 30, 1996 and incorporated
herein by reference.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
32
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Form 10-K/A to be
signed on its behalf by the undersigned, thereunto duly authorized.
SEQUUS Pharmaceuticals, Inc.
Date: April 9, 1998
By: /s/ I. Craig Henderson, M.D.
-----------------------------------------
I. Craig Henderson, M.D.
Chairman and Chief Executive Officer
33
<PAGE> 36
EXHIBIT INDEX
<TABLE>
Exhibit
No. Document
- ------- --------
<S> <C>
3.1 Certificate of Incorporation of the Company, as amended(1)
3.2 By-Laws(2)
10.1* 1982 Employee Stock Option Plan (As Amended)(3)
10.1.1* 1987 Employee Stock Option Plan(4)
10.1.2* 1987 Consultant Stock Option Plan(4)
10.1.4* Employee Stock Purchase Plan(4)
10.1.5* 401(k) Plan and Adoption Agreement for 401(k) Plan(3)
10.1.6* LTI Flex Elect Section 125 Cafeteria Plan(3)
10.1.7* 1990 Director Stock Option Plan(4)
10.2.1 Lease Agreement between Lincoln Menlo IV & V Associates Limited and
the Company dated February 13, 1996 for 960 and 978 Hamilton Court,
Menlo Park, California.(5)
10.2.2 Lease Agreement between Lincoln Menlo IV & V Associates Limited and
the Company dated February 13, 1996 for 1050, 1080 and 1098 Hamilton
Court, Menlo Park, California.(5)
10.2.3 Lease Agreement between Lincoln Menlo III Associates Limited and the
Company dated May 1, 1995 for 1180 Hamilton Court, Menlo Park,
California.(5)
10.2.4 Lease Agreement between Lincoln Menlo VI and the Company dated
February 1, 1996 for 1360 Willow Road, Menlo Park, California.(5)
10.4* Employment Agreement dated as of June 30, 1983, between the Company
and Sally A. Davenport(2)
10.5 Forms of Confidentiality Agreements entered into by Employees,
Consultants and Advisors of the Company(2)
10.12 Common Stock and Warrant Purchase agreement between the Company and
David Blech dated as of January 25, 1990(6)
10.14** Agreement between Zeneca Limited and the Company relating to
"Amphocil" dated August 12, 1993, as amended as of March 1, 1994 and
July 12, 1994(7)
10.15** Manufacturing and Supply Agreement between Ben Venue Laboratories,
Inc. ("Ben Venue") and the Company relating to DOXIL dated January 1,
1993(7)
10.16** Manufacturing and Supply Agreement between Ben Venue and the Company
relating to AMPHOCIL dated January 1, 1993(7)
</TABLE>
<PAGE> 37
<TABLE>
<S> <C>
10.17** Supply Agreement between Meiji Seika Pharma International LTD and the
Company relating to Doxorubicin Hydrochloride, USP dated September
27, 1994(7)
10.18** Supply Agreement between A.L. Laboratories and the Company relating
to Amphotericin B, USP dated February 15, 1994(7)
10.20 Employment Agreement between the Company and I. Craig Henderson dated
June 26, 1995(8)
10.21 Employment Agreement between the Company and L. Scott Minick dated
June 26, 1995(8)
10.22** Distribution Agreement between Schering-Plough Ltd. and the Company
dated August 29, 1996(9)
13 1997 Annual Report to Security Holders
23.1 Consent of Independent Auditors - See page 59
24 Power of Attorney - See page 60
27 Financial Data Schedule - See page 61
</TABLE>
* Management or Compensatory plan or arrangement.
** Confidential treatment requested.
(1) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Registration Statement on Form S-3 filed on February 6, 1997 (File No.
333-21235) and incorporated herein by reference.
(2) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Registration Statement on Form S-1 (File No. 33-13332) and incorporated
herein by reference.
(3) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 1988 and
incorporated herein by reference.
(4) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Annual Report on Form 10-K for the fiscal years ended December 31, 1995 and
incorporated herein by reference.
(5) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996
and incorporated herein by reference.
(6) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1990 and
incorporated herein by reference.
(7) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Annual Report on Form 10-K, as amended, for the fiscal year ended December
31, 1994 and incorporated herein by reference.
(8) Filed as an Exhibit with corresponding Exhibit Number to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1995 and
incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q, as
amended, for the fiscal quarter ended September 30, 1996 and incorporated
herein by reference.
<PAGE> 1
SEQUUS PHARMACEUTICALS, INC.
EXHIBIT 13
1997 ANNUAL REPORT TO SECURITY HOLDERS
34
<PAGE> 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 "Item 1 -- Risk Factors" and
elsewhere in this Annual Report on Form 10-K. 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 an integrated pharmaceutical company engaged in the
development of therapies for cancer and other diseases utilizing advanced drug
delivery technologies. The Company focuses on utilizing its proprietary STEALTH
liposomes to create new drug 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 Phase III clinical trials of DOXIL in patients with ovarian
cancer. A Phase II clinical trial of DOXIL is also underway in patients with
breast cancer as are numerous Phase I/II trials of DOXIL in the treatment of
patients with other solid tumors. In addition, SEQUUS is currently conducting
Phase I and II trials 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 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 and $27.0 million
in 1997. 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. The Company received fees of $7.3 million (including a one-time
distribution rights payment of $5.3 million) in 1996 and $4.3 million in 1997
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
35
<PAGE> 3
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. A
liposome-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.
The Company recognizes product sales upon shipment of product to its
marketing partners internationally and to its customers 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 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 1998, 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 $174.2 million in net losses through December 31,
1997, including a net loss of approximately $23.6 million in the fiscal year
ended December 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 many other countries abroad, 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, 1997, SEQUUS had a United States sales team of 39 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. See "Item 1 -- Risk Factors"
36
<PAGE> 4
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
Revenues
Total revenues were $40.0 million, of which $35.0 million were product
sales, during the year ended December 31, 1997 compared with total revenues of
$32.9 million during the year ended December 31, 1996. DOXIL product sales
represented 84% of total product sales in 1997 compared to 89% in 1996. For
1997, 16% of the Company's product sales represented sales of AMPHOTEC as
compared to 3% in 1996. In 1997, the Company received approximately $5.0 million
in royalyies and fees as compared $7.5 million in 1996, which included a
one-time distribution rights payment of $5.3 million from Schering-Plough in the
third quarter of 1996.
Operating Expenses
The Company's gross margin decreased to 80% of product sales in 1997 from
84% of product sales in 1996. This decrease in the gross margin is due to the
increase in sales through distribution partners and the mix of product sold
versus 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 87% of product sales
in 1997 and were 89% of product sales in 1996. 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 $32.5 million in 1997, from $27.7 million in
1996. This increase in expenses resulted from higher spending in 1997 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 $25.2 million in
1997 from $20.3 million in 1996. The increase in selling, general and
administrative expenses was primarily due to the expanded marketing of DOXIL and
the first full year of marketing AMPHOTEC after the products' launch in December
1996.
Interest Income & Expense
Interest income decreased to $1.5 million in 1997 from $1.8 million in 1996,
due to the decrease in cash available for investment. Interest expense increased
to $0.2 million in 1997 relating to a $5.0 million loan obtained in June 1997.
Net Loss
The Company's net loss increased to $23.6 million in 1997 from $17.2 million
in 1996. The net loss per share (both basic and diluted) was $0.78 for 1997
compared to $0.59 per share for 1996. The increase in the loss was due primarily
to an increase in product marketing and sales costs for DOXIL and the first full
year of marketing AMPHOTEC after the product's launch in December 1996, an
increase in clinical and preclinical costs for additional trials, and the
absence of a similar 1996 one-time upfront payment under the Schering-Plough
distribution agreement.
37
<PAGE> 5
Years Ended December 31, 1996 and 1995
Revenues
Total revenues, of which the majority were product sales, were $32.9
million, during the year ended December 31, 1996 compared with $2.0 million
recorded 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 AMPHOCIL to Zeneca
as compared to 41% for 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
R&D expenses 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.
Selling, general and administrative expenses increased to $20.3 million in
1996 from $13.9 million in 1995, principally reflecting an increase in marketing
and sale expenses in preparation of the December 1996 AMPHOTEC launch and the
first full year of marketing DOXIL. The Company hired 17 additional sales
individuals to support the launch of AMPHOTEC.
Interest Income & Expense
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 from
approximately $45.6 million received by the Company from a public offering of
Common Stock in the fourth quarter of 1995. Interest expense in both 1996 and
1995 was insignificant.
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 (both basic and diluted) was $0.59 for 1996
compared to $1.54 in 1995. The decrease in the loss was due primarily to an
increase in product sales and receipt of a one-time upfront distribution rights
payment under the Schering-Plough distribution agreement, partially offset by an
increase in marketing and sales costs in anticipation of the December 1996
AMPHOTEC launch, the first full year of marketing of DOXIL and an increase in
clinical and preclinical costs for additional trials.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments at December
31, 1997 were $25.3 million, a decrease of $7.6 million from $32.9 million at
December 31, 1996. This decrease represents $14.4 million of net cash used by
operating activities and capital expenditures of $3.0 million partially offset
by $14.1 million of cash provided by financing activities and other investing
activities. In June 1997, the Company received loan proceeds of $5.0 million
from a working capital loan of $10.0 million from a bank. Payment terms for the
$5.0 million are interest only for 12 months and principal and interest over the
following 44 months. The remaining $5.0 million under the working capital loan
represents a revolving line of credit that expires June 1998. During 1997, the
Company received approximately $4.7 million from the issuance of common stock,
the exercise of warrants, and the exercise of employee stock options.
38
<PAGE> 6
The Company believes its existing cash balances, interest income and
revenues from operations will be adequate to fund its planned activities at
least through 1998. 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.
The Company's strategy is to fund from its own cash resources 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.
As of December 31, 1997, the Company had Federal and California net
operating loss carryforwards of approximately $119.5 million and $7.3 million,
respectively. The Company also has Federal and California research and
development tax credit carryforwards of approximately $6.1 million and $4.3
million, respectively. Utilization of the net operating losses and credits may
be subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986 and similar California
provisions. The annual limitation may result in the expiration of net operating
losses and credits before utilization.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. The Company has determined it has no
exposure to contingencies related to the Year 2000 issue for the products it
sells.
In 1997, the Company initiated a project to modify or replace portions of its
systems so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. The Company expects this project to be
substantially complete by the third quarter of 1999 and does not expect to incur
material costs on this project. The Company will begin to initiate formal
communications with all of its significant suppliers and large customers to
determine the extent to which the Company may be vulnerable to those third
parties failure to remediate their own Year 2000 issues.
Despite these efforts, there can be no assurance that the Company will not
encounter unforeseen problems in its own computer systems, or that the systems
of other companies on which the Company's operations rely will be upgraded or
replaced in a timely manner. Such unforeseen problems in the Company's systems,
or failures to address this issue by other companies could have an adverse
effect on the Company's operations.
39
<PAGE> 7
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales .................................. $ 34,998 $ 25,462 $ 1,907 $ 3,664 $ 1,299
Royalties and fees(1) .......................... 4,954 7,461 109 91 5,458
-------- -------- -------- -------- --------
Total revenues ..................................... 39,952 32,923 2,016 3,755 6,757
Operating expenses:
Cost of goods sold ............................. 7,119 3,990 511 916 232
Research and development ....................... 32,474 27,652 22,651 25,378 21,128
Selling, general and administrative ............ 25,181 20,302 13,856 7,622 6,653
-------- -------- -------- -------- --------
Total operating expenses ........................... 64,774 51,944 37,018 33,916 28,013
-------- -------- -------- -------- --------
Loss from operations ............................... (24,822) (19,021) (35,002) (30,161) (21,256)
Interest income .................................... 1,477 1,844 1,406 976 1,602
Interest expense ................................... (236) -- -- -- --
-------- -------- -------- -------- --------
Net loss ........................................... $(23,581) $(17,177) $(33,596) $(29,185) $(19,654)
======== ======== ======== ======== ========
Net loss per share (basic and diluted)(2) .......... $ (0.78) $ (0.59) $ (1.54) $ (1.54) $ (1.05)
======== ======== ======== ======== ========
Shares used in the calculation of net loss per share
(basic and diluted)(2) ............................. 30,369 28,937 21,831 18,978 18,789
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996 1995 1994 1993
--------- --------- --------- -------- --------
BALANCE SHEET DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term
investments...................................... $ 25,295 $ 32,946 $ 50,276 $ 11,757 $ 34,658
Long-term investments............................... -- -- -- 500 2,520
Total assets........................................ 42,228 54,968 57,808 18,198 45,179
Long-term debt...................................... 4,630 -- -- -- --
Accumulated deficit................................. (174,176) (150,624) (133,427) (99,865) (70,668)
Total stockholders' equity.......................... 25,766 44,327 49,599 10,938 39,318
</TABLE>
- ----------
(1) Includes a signing fee and regulatory milestone fee totaling $5.3 million
from Zeneca Limited in 1993 , a distribution rights fee of $5.3 million from
Schering-Plough in 1996 and performance payments of $4.3 million from
Schering-Plough in 1997.
(2) Per share and share amounts for all periods reflect the adoption of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share".
40
<PAGE> 8
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, 1997 and 1996, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Palo Alto, California
January 28, 1998
41
<PAGE> 9
SEQUUS PHARMACEUTICALS, INC.
BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
DECEMBER 31
-----------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 6,688 $ 9,997
Short-term investments ....................................... 18,607 22,949
Trade accounts receivable, net of allowance for bad debts of
$1,501 in 1997 and $504 in 1996 ............................ 4,841 8,972
Inventories .................................................. 4,117 5,697
Prepaid expenses and other current assets .................... 1,145 1,601
--------- ---------
Total current assets ............................................. 35,398 49,216
Equipment and improvements, net .................................. 6,569 5,564
Other assets ..................................................... 261 188
--------- ---------
Total assets ..................................................... $ 42,228 $ 54,968
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 3,848 $ 4,539
Accrued liabilities .......................................... 6,883 6,102
Deferred revenue ............................................. 731 --
Current portion of long-term debt ............................ 370 --
--------- ---------
Total current liabilities ........................................ 11,832 10,641
Long-term debt ................................................... 4,630 --
Commitments
Stockholders' equity:
Preferred stock, par value $0.01; 450,000 shares authorized,
issuable in series; no shares issued and outstanding
in 1997 and 1996 ........................................... -- --
Common stock, par value $0.0001; 45,000,000 shares authorized,
shares issued and outstanding were 30,601,355 in 1997
and 29,660,319 shares in 1996 .............................. 3 3
Additional paid-in capital ..................................... 199,939 194,948
Accumulated deficit ............................................ (174,176) (150,624)
--------- ---------
Total stockholders' equity ....................................... 25,766 44,327
--------- ---------
Total liabilities and stockholders' equity ....................... $ 42,228 $ 54,968
========= =========
</TABLE>
See accompanying notes.
42
<PAGE> 10
SEQUUS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Product sales ................................... $ 34,998 $ 25,462 $ 1,907
Royalties and fees .............................. 4,954 7,461 109
-------- -------- --------
Total revenues ...................................... 39,952 32,923 2,016
Expenses:
Cost of goods sold .............................. 7,119 3,990 511
Research and development ........................ 32,474 27,652 22,651
Selling, general and administrative ............. 25,181 20,302 13,856
-------- -------- --------
Total expenses ...................................... 64,774 51,944 37,018
-------- -------- --------
Loss from operations ................................ (24,822) (19,021) (35,002)
Interest income ..................................... 1,477 1,844 1,406
Interest expense .................................... (236) -- --
-------- -------- --------
Net loss ............................................ $(23,581) $(17,177) $(33,596)
======== ======== ========
Net loss per share (basic and diluted) .............. $ (0.78) $ (0.59) $ (1.54)
======== ======== ========
Common shares used in the calculation of net loss per
share (basic diluted) ........................... 30,369 28,937 21,831
======== ======== ========
</TABLE>
See accompanying notes.
43
<PAGE> 11
SEQUUS PHARMACEUTICALS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
----------------- ----------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 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 unrealized gains, net on
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 and development license . -- -- 30 -- 460 -- 460
Conversion of Preferred Stock ...... (437) (4) 1,472 -- 4 -- --
Change in unrealized gains, net on
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
Shares issued for contribution to
401(k) Plan ...................... -- -- 18 -- 287 -- 287
Shares issued under the Employee
Stock Purchase Plan .............. -- -- 133 -- 867 -- 867
Exercise of warrants ............... -- -- 507 -- 2,073 -- 2,073
Exercise of stock options .......... -- -- 283 -- 1,764 -- 1,764
Change in unrealized gains, net on
available-for-sale securities .... -- -- -- -- -- 29 29
Net loss ........................... -- -- -- -- -- (23,581) (23,581)
---- --- ------ --- --------- --------- ---------
Balance at December 31, 1997 ....... -- $-- 30,601 $ 3 $ 199,939 $(174,176) $ 25,766
==== === ====== === ========= ========= =========
</TABLE>
See accompanying notes.
44
<PAGE> 12
SEQUUS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................ $ (23,581) $ (17,177) $ (33,596)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ....................... 1,982 1,767 1,957
Issuance of common stock to 401(k) plan ............. 287 174 157
Issuance of common stock in exchange for research and
development technology license .................... -- 460 --
Changes in operating assets and liabilities:
Trade accounts receivable ....................... 4,131 (7,330) (1,578)
Inventories ..................................... 1,580 (4,592) (547)
Prepaid expenses and other current assets ....... 456 (652) 194
Other assets .................................... (73) (44) (7)
Accounts payable ................................ (691) 1,766 1,187
Accrued liabilities ............................. 781 1,382 (954)
Deferred revenue ................................ 731 (716) 716
--------- --------- ---------
Net cash used in operating activities ............... (14,397) (24,962) (32,471)
Cash flows from investing activities:
Available-for-sale securities:
Purchases ....................................... (64,589) (90,207) (106,013)
Sales ........................................... 26,557 45,127 30,843
Maturities ...................................... 42,403 65,617 38,507
Capital expenditures, net ........................... (2,987) (3,639) (1,610)
--------- --------- ---------
Net cash provided by (used in) investing activities . 1,384 16,898 (38,273)
Cash flows from financing activities:
Issuance of common stock ............................ 4,704 11,291 61,052
Issuance of preferred stock ......................... -- -- 11,014
Proceeds from long-term debt ........................ 5,000 -- --
--------- --------- ---------
Net cash provided by financing activities ........... 9,704 11,291 72,066
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .... (3,309) 3,227 1,322
Cash and cash equivalents, beginning of the year ........ 9,997 6,770 5,448
--------- --------- ---------
Cash and cash equivalents, end of the year .............. $ 6,688 $ 9,997 $ 6,770
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest .............. $ 236 $ -- $ --
========= ========= =========
</TABLE>
See accompanying notes.
45
<PAGE> 13
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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.
Cash, Cash Equivalents and Short-Term 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 short-term 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 1997 and 1996, all investments
were classified as available-for-sale securities and are carried at fair value,
which is determined based on the quoted market prices of the securities, 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.
46
<PAGE> 14
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, 1997 COST GAINS LOSSES VALUE
----------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. government securities ...... $ 6,581 $ 6 $ -- $ 6,587
U.S. corporate securities ....... 8,052 21 -- 8,073
Foreign corporate debt securities 3,943 4 -- 3,947
-------- -------- -------- --------
$ 18,576 $ 31 $ -- $ 18,607
======== ======== ======== ========
DECEMBER 31, 1996
-----------------
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, 1997, 1996 and 1995 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,
------------
1997 1996
------ ------
<S> <C> <C>
Raw materials................................. $2,707 $2,801
Work-in-process............................... -- 2,223
Finished goods................................ 1,410 673
------ ------
$4,117 $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,
------------
1997 1996
-------- -------
<S> <C> <C>
Office and laboratory equipment................. $ 12,904 $10,397
Leasehold improvements.......................... 5,584 5,104
-------- -------
18,488 15,501
Accumulated depreciation and amortization....... (11,919) (9,937)
-------- -------
$ 6,569 $ 5,564
======== =======
</TABLE>
47
<PAGE> 15
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Accrued compensation............................ $ 2,282 $ 3,149
Accrued clinical costs.......................... 1,708 1,014
Other accrued liabilities....................... 2,893 1,939
------- -------
$ 6,883 $ 6,102
======= =======
</TABLE>
Revenue Recognition and Concentration of Credit Risk
The Company recognizes product sales upon shipment to customers. The Company
defers amounts based on historical sales return experience.
Royalties are recognized as revenue based on licensed product sales as
reported by the Company's partners. 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 year ended December 31, 1997, two
customers each represented 19% of product sales and a third customer represented
18% of product sales. No single customer accounted for 10% or more of product
sales in 1996. For the year ended December 31, 1995, one customer represented
41% of product sales.
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 $2,095,000, $606,000 and
$109,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
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.
48
<PAGE> 16
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Per Share Data
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128, "Earnings Per Share", according to which the calculations of primary
and fully diluted earnings per share were replaced with calculations of basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Per share amounts for all
periods have been presented to conform to Statement 128 requirements.
The following table sets forth the computation of basic and diluted per share
data for the years ended December 31 as follows (in thousands except per share
data):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Numerator used for basic and diluted loss per share- net loss $(23,581) $(17,177) $(33,596)
Denominator for basic and diluted loss per share- weighted
average shares 30,369 28,937 21,831
Net loss per share (basic and diluted) $ (0.78) $ (0.59) $ (1.54)
======== ======== ========
</TABLE>
During 1997, 1996, and 1995, options, warrants and preferred stock to purchase
3,156,472 shares, 2,219,376 shares, and 4,812,209 shares, respectively, of
common stock were outstanding but were not included in the computation of
diluted earnings per share as their effect would be antidilutive.
New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 established new rules for the reporting and display of
comprehensive income and its components. Adoption is required in 1998 and will
not have an impact on the Company's net income or stockholders' equity. SFAS 130
requires unrealized gains and losses on the companies available-for-sale
securities, which currently are reported in stockholders' equity, to be included
in other comprehensive income and the disclosure of total comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standarts
for the way that public business enterprises report informaton about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic area, and major customers.
The adoption of SFAS 131 is required in 1998 and will have no impact on the
Company's consolidated results of operations, financial position or cash flows.
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
49
<PAGE> 17
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 also calls for
potential additional payments to the Company totaling $27 million based on the
achievement of certain product development milestones and events. In 1997, the
Company recognize $4.3 million in additional payments based on the achievement
of certain product development milestones and events during the year.
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.
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
reacquisition of international marketing and distribution rights for AMPHOCIL is
continuing.
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 $2,461,000, $1,813,000, and $852,000
for the years ended December 31, 1997, 1996 and 1995, respectively. Rent expense
is being recognized on a straight-line basis over the lease term of the facility
lease which has scheduled rental payment increases.
Minimum annual rental commitments under all operating leases at December 31,
1997 total $1,780,000 in 1998, $1,650,000 in 1999, $1,637,000 in 2000,
$1,614,000 in 2001, $1,611,000 in 2002 and $537,000 thereafter.
During June 1997, the Company entered into a loan agreement which provides
for a revolving line of credit up to $5.0 million and a term loan facility up to
$5.0 million (the "Loan Agreement"). This Loan Agreement has various covenants
including a requirement to maintain certain financial ratios as defined.
Long-term debt of $5.0 million at December 31, 1997 represents loan proceeds
received under the term loan facility. This loan matures in December 2001 and
bears interest at a rate equal to 1% above the Prime Rate (9.5% at December 31,
1997). Payment terms are interest only for 12 months and principal and interest
over the remaining term. The revolving line of credit expires June 1998 and $5.0
million is available at December 31, 1997, subject to the terms and conditions
of the Loan Agreement. Aggregate principal maturities of long-term debt as of
December 31, 1997 are: $.04 million in 1998, $1.2 million in 1999, $1.6 million
in 2000, and $1.8 million in 2001.
50
<PAGE> 18
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The fair market value of the Company's long-term debt approximates the
carrying value as of December 31, 1997. Fair value was estimated using
discounted cash flow analyses, based on the Company's incremental borrowing
rates for similar types of borrowing arrangements.
As of December 31, 1997, the Company had pledged as collateral for its Loan
Agreement all of its assets pursuant to a lien as well as all forms of
obligations owing to the Company arising out of the sale of goods and the
licensing of technology.
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-month requirement as provided to the
vendors. The Company has agreed to indemnify these vendors for certain
liabilities.
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 Preferred Stock into 1,472,052
shares of Common Stock. The conversion was completed in April 1996. During 1996,
warrants to purchase 120,682 shares of Common Stock were exercised. As of
December 31, 1997, 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 1997 and 1996, warrants to purchase 7,399 and
352,460 shares, respectively, of Common Stock were exercised. As of December 31,
1997, warrants to purchase 751,986 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, warrants to purchase 705,714 shares of Common Stock were exercised. During
March 1997, the remaining warrants to purchase shares of Common Stock under the
1991 Financing were exercised.
As of December 31, 1997, approximately 9,900,000 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.
During April 1997, the Board of Directors adopted a Stockholder Rights Plan
(the "Rights Plan") to protect the Company and its shareholders against coercive
takeover tactics. Under the Rights Plan, a dividend of one Share Purchase Right
("Right") was declared for each share of Common Stock outstanding on April 28,
1997. The Rights generally will not be exercisable until ten business days after
a person or group acquires 15% or more of the Company's Common Stock
51
<PAGE> 19
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
in a transaction that is not approved in advance by the Board of Directors or
announces a tender offer, which could result in a person or group owning 15% or
more of the Common Stock. In the event a person or group were to acquire more
than 15% of the Company's Common Stock without the prior approval of the Board
of Directors, each Right will entitle the holder, other than the acquirer, to
buy Common Stock equal to a market value of twice the Right's then current
exercise price. In addition, if the Company were to be acquired in a merger,
stockholders with unexercised Rights could purchase common stock of the acquirer
with a value of twice the then current exercise price of the Rights. The
Company's Board of Directors may redeem the Rights for a nominal amount at any
time prior to the tenth business day following the event that causes the Rights
to become exercisable. The Rights will expire on April 17, 2007.
Preferred shares may be issued from time to time in one or more series. The
Board of Directors is authorized to provide for the rights, privileges and
restrictions of the shares of such series.
5. STOCK OPTION PLANS 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, 1997, 1996 and 1995, the
Company contributed Common Stock to the 401(k) Plan valued at approximately
$287,000, $174,000 and $157,000, respectively.
Stock Compensation Plans
Under the 1987 Employee Stock Option Plan, as amended, and 1987 Consultant
Stock Plan, as amended, (the "Plans"), both of which expired in December 1997,
the Company was 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 Plans 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 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 12,000, 30,000 and 16,000
shares of Common Stock under the 1987 Consultant Stock Plan during 1997, 1996
and 1995, respectively. The fair value of these options is 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 22,500 and 37,500
shares of Common Stock under the Director Stock Option Plan in 1997 and 1996,
respectively. No shares were granted puruant to this plan in 1995.
52
<PAGE> 20
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, the stockholders approved an Equity Incentive Plan (the
"Incentive Plan"), under which the Company is authorized to issue a total of
2,000,000 shares of Common Stock. The Incentive Plan provides for the
discretionary award of options, restricted stock, stock purchase rights,
performance shares,or any combination of these (collectively, the "awards") to
eligible employees, including executive officers, directors and consultants. The
Incentive Plan may be administered by the Board of Directors or the Board of
Directors may delegate its authority to a committee (in either case, the
"Committee"). As of December 31, 1997, the Board of Directors had made awards of
stock options under the Incentive Plan. Stock options under the Incentive Plan
may be incentive stock options ("ISOs") or non-qualified stock options ("NQOs").
The exercise price of the ISOs may not be less than the fair market value of the
shares subject to option on the date of grant. The exercise price of NQOs must
be at least 85 percent of the fair market value of the shares subject to the
option on the date of grant. The term on any ISO granted under the plan may not
exceed ten years and the term of any NQO may not exceed fifteen years. As of
December 31, 1997, the Board of Directors had granted to certain employees of
the Company ISOs to purchase a total of 252,325 shares of Common Stock. These
options have a ten-year term and generally become exercisable over the period of
one to four years from the date of grant.
53
<PAGE> 21
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Activities under the above mentioned stock option plans are as follows
(amounts in thousands, except per share information):
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------- ---------------------------
OPTIONS WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED
AVAILABLE NUMBER OF EXERCISE PRICE NUMBER EXERCISE PRICE AVERAGE
FOR GRANT SHARES PER SHARE OF SHARES PER SHARE FAIR VALUE
--------- ------ --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994. 390 3,012 $6.73 1,124 $ 5.86
Additional authorized...... 2,150 -- --
Granted.................... (1,427) 1,427 $8.95 $5.08
Forfeited and cancelled.... 230 (230) $7.84
Exercised.................. -- (239) $3.67
------ ------
Balance, December 31, 1995. 1,343 3,970 $7.73 1,971 $ 6.98
Granted.................... (927) 927 $16.26 $9.15
Forfeited and cancelled.... 210 (210) $10.92
Exercised.................. -- (601) $6.39
------ ------
Balance, December 31, 1996. 626 4,086 $9.67 2,052 $ 7.36
Additional authorized...... 2,000 -- --
Plan shares expired........ (377) -- --
Granted.................... (1,272) 1,272 $7.37 $4.16
Forfeited and cancelled.... 1,008 (1,008) $11.05
Exercised.................. -- (283) $5.81
------ ------
Balance, December 31, 1997. 1,985 4,067 $ 8.87 2,172 $ 8.24
====== ======
</TABLE>
No shares purchased under the option plans are subject to repurchase at December
31, 1997. All options were granted at fair market value.
54
<PAGE> 22
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The options outstanding at December 31, 1997 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 1997 (IN YEARS) EXERCISE PRICE 1997 EXERCISE PRICE
--------------- ---- ---------- -------------- ---- --------------
<S> <C> <C> <C> <C> <C>
$ 1.13 - $ 6.63 .................. 954 7.79 $ 5.44 233 $ 2.75
$ 6.75 - $ 7.38 .................. 898 6.31 $ 6.84 763 $ 6.78
$ 7.44 - $ 8.56 .................. 1,090 7.41 $ 8.12 754 $ 8.19
$ 8.75 - $15.63 .................. 815 8.05 $12.57 290 $12.08
$15.75 - $21.75 .................. 311 7.90 $18.22 133 $18.22
----- -----
4,067 7.42 $ 8.87 2,172 $ 8.24
===== =====
</TABLE>
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan is administered by the Board of
Directors, subject to shareholder approval, and the Company has reserved for
sale under the plan 778,000 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, 1997, approximately 345,000
shares of Common Stock had been issued under this plan.
Pro Forma Information
Relating to the Company's stock-based compensation plans 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 with a multiple option approach and the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average risk-free interest rate 6.2% 6.2% 5.9%
Volatility .79 .74 .74
Weighted average expected life (in years) 3.3 3.7 3.7
Dividend yield 0% 0% 0%
</TABLE>
55
<PAGE> 23
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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,
------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net loss
Historical......................... $23,581 $17,177 $33,596
Pro Forma.......................... $26,119 $22,121 $35,849
Net loss per share
Historical......................... $ (0.78) $ (0.59) $ (1.54)
Pro Forma.......................... $ (0.86) $ (0.76) $ (1.64)
</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 1998.
56
<PAGE> 24
SEQUUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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, 1997, the Company has Federal and California net
operating loss carryforwards ("NOLs") of approximately $119.5 million and $7.3
million, respectively. The Company also has Federal and California research and
development tax credit carryforwards of approximately $6.1 million and $4.3
million, respectively. The Federal NOLs expire as follows (in thousands):
<TABLE>
YEAR(S) ENDING FEDERAL NOL
DECEMBER 31 EXPIRING
----------- --------
<S> <C>
1998-2000...................................... $ 2,300
2001-2012...................................... 117,200
--------
$119,500
========
</TABLE>
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar California provisions. The
annual limitation may result in the expiration of net operating losses and
credits before utilization.
The Federal net operating loss carryforward differs from the accumulated
deficit principally due to timing differences in the recognition of certain
revenue and expense items for financial and federal tax reporting purposes,
consisting primarily of capitalized research and development costs and stock
option deductions. Significant components of the Company's current deferred tax
assets for federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Net operating loss carryforwards................ $ 41,100 $ 33,200
Capitalized research and development............ 22,100 19,800
Research credits................................ 9,000 7,200
Other, net...................................... 2,800 2,400
Valuation allowance............................. (75,000) (62,600)
-------- --------
Total................................... $ -- $ --
======== ========
</TABLE>
The valuation allowance increased by approximately $12,400,000 in 1997,
$7,530,000 in 1996, and $15,250,000 in 1995. Approximately $4,100,000 of the
valuation allowance for deferred tax assets relates to benefits of stock option
deductions which, when recognized, will be allocated directly to contributed
capital.
57
<PAGE> 25
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SEQUUS PHARMACEUTICALS, INC.
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
ADDITIONS
---------
CHARGED CHARGED
BALANCE AT TO COSTS TO OTHER
BEGINNING AND ACCOUNTS- DEDUCTIONS- BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
----------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible
accounts..................... $258,000 $266,000 $-- $346,000(1) $178,000
YEAR ENDED DECEMBER 31, 1996:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible
accounts..................... $178,000 $656,000 $-- $330,000(1) $504,000
YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible
accounts..................... $504,000 $1,218,000 $-- $221,000(1) $1,501,000
</TABLE>
- ----------
(1) Uncollectible accounts written off, net of recoveries.
58
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-45697) pertaining to the Equity Incentive Plan and the Employee
Stock Purchase Plan, the Registration Statement (Form S-8 and Form S-3 Nos.
33-20301 and 33-35198, respectively) pertaining to the 1982 and 1987 Employee
Stock Option Plans, the Registration Statement (Form S-8 No. 33-30578)
pertaining to the 401(k) Plan, the Registration Statement (Form S-8 No.
33-37094) pertaining to the Employee Stock Purchase Plan, the Registration
Statement (Form S-3 No. 33-35129) pertaining to the 1990 Director Stock Option
Plan, the Registration Statement (Form S-3 No. 33-41880) pertaining to the March
1991 private placement of 1,250,000 units and the Registration Statement (Form
S-3) for the registration of 1,150,000 shares of convertible exchangeable
preferred stock, of our report dated January 28, 1998, with respect to the
financial statements of SEQUUS Pharmaceuticals, Inc. included in this Annual
Report (Form 10-K/A) for the year ended December 31,1997.
Our audits also included the financial statement schedule listed in Item 14(a)
of this Annual Report. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Palo Alto, California
April 9, 1998
59
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY TO SIGN AMENDMENTS
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below does hereby constitute and appoint I. Craig Henderson and Sally A.
Davenport, and each of them, with full power of substitution and full power to
act without the other, his true and lawful attorney-in-fact and agent to act for
him in his name, place and stead, in any and all capacities, to sign any or all
amendments to this Annual Report on Form 10-K/A, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises
in order to effectuate the same as fully, to all intents and purposes, as they
or he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, may lawfully do or cause do be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ I. CRAIG HENDERSON Chairman of the Board, Chief April 9, 1998
----------------------- Executive Officer (Principal
I. Craig Henderson, M.D. Executive and Financial Officer)
/S/ ANTHONY T. HENDRICKSON Corporate Controller (Principal April 9, 1998
-------------------------- Accounting Officer)
Anthony T. Hendrickson
/S/ ROBERT G. FARIS Director April 9, 1998
-------------------
Robert G. Faris
/S/ RICHARD C.E. MORGAN Director April 9, 1998
-----------------------
Richard C.E. Morgan
/S/ E. DONNALL THOMAS Director April 9, 1998
-----------------------
E. Donnall Thomas, M.D.
/S/ ROBIN D. CAMPBELL Director April 9, 1998
-----------------------
Robin D. Campbell, Ph.D
</TABLE>
60
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,688
<SECURITIES> 18,607
<RECEIVABLES> 6,342
<ALLOWANCES> 1,501
<INVENTORY> 4,117
<CURRENT-ASSETS> 35,398
<PP&E> 6,569
<DEPRECIATION> 0
<TOTAL-ASSETS> 42,228
<CURRENT-LIABILITIES> 11,832
<BONDS> 4,630
0
0
<COMMON> 3
<OTHER-SE> 25,763
<TOTAL-LIABILITY-AND-EQUITY> 42,228
<SALES> 34,998
<TOTAL-REVENUES> 39,952
<CGS> 7,119
<TOTAL-COSTS> 64,774
<OTHER-EXPENSES> 32,474
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 236
<INCOME-PRETAX> (23,581)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,581)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,581)
<EPS-PRIMARY> (.78)
<EPS-DILUTED> (.78)
</TABLE>
