<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 0-15847
SEQUUS PHARMACEUTICALS, INC.
----------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3031834
- ------------------------------- -----------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
960 Hamilton Court, Menlo Park, CA 94025
----------------------------------------
(Address of principle executive offices)
(650) 323-9011
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of July 22, 1998, the number of outstanding shares of the Company's common
stock, par value $.0001, was 31,628,704.
<PAGE> 2
SEQUUS PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C>
ITEM 1. Financial Statements (unaudited)
Condensed Balance Sheets
June 30, 1998 and December 31, 1997...................... 1
Condensed Statements of Operations for the
Three and Six Months Ended June 30, 1998 and 1997........ 2
Condensed Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997.................. 3
Notes to Condensed Financial Statements ................. 4
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 7
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K......................... 22
Signatures............................................................ 23
</TABLE>
i
<PAGE> 3
SEQUUS PHARMACEUTICALS, INC.
CONDENSED BALANCE
SHEETS (in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(unaudited) (note)
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,296 $ 6,688
Short-term investments 19,543 18,607
Trade accounts receivable, net 7,772 4,841
Inventories 3,560 4,117
Prepaid expenses and other current assets 1,505 1,145
--------- ---------
Total Current Assets 38,676 35,398
Property and equipment, net 7,391 6,569
Other assets 201 261
--------- ---------
Total Assets $ 46,268 $ 42,228
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,711 $ 3,848
Accrued liabilities 8,132 6,883
Deferred revenues 431 731
Current portion of long-term debt 757 370
--------- ---------
Total Current Liabilities 14,031 11,832
Long-term debt 4,243 4,630
Commitments
Stockholders' Equity:
Preferred stock -- --
Common stock 3 3
Additional paid-in capital 207,342 199,939
Accumulated deficit (179,351) (174,176)
--------- ---------
Total Stockholders' Equity 27,994 25,776
--------- ---------
Total Liabilities and Stockholders' Equity $ 46,268 $ 42,228
========= =========
</TABLE>
Note: Derived from the audited Financial Statements at that date.
See accompanying notes to condensed financial statements
1
<PAGE> 4
SEQUUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 13,739 $ 7,916 $ 26,059 $ 14,404
Royalties and fees 2,276 530 2,753 2,365
-------- -------- -------- --------
Total Revenues 16,015 8,446 28,812 16,769
Expenses:
Cost of goods sold 2,210 1,657 4,116 2,971
Research and development 9,874 8,433 18,126 15,845
Selling, general and administrative 6,237 6,128 12,152 13,490
-------- -------- -------- --------
Total Expenses 18,321 16,218 34,394 32,306
-------- -------- -------- --------
Loss from Operations (2,306) (7,772) (5,582) (15,537)
Interest income 318 374 695 671
Interest expense (140) -- (259) --
-------- -------- -------- --------
Net Loss $ (2,128) $ (7,398) $ (5,146) $(14,866)
======== ======== ======== ========
Net loss per share (basic and diluted) $ (0.07) $ (0.24) $ (0.17) $ (0.49)
======== ======== ======== ========
Common shares used in calculation of net
loss per share (basic and diluted) 31,594 30,360 31,173 30,180
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements
2
<PAGE> 5
SEQUUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,146) $(14,866)
Adjustment to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,108 1,039
Issuance of common stock to 401(k) Plan 328 287
Changes in operating assets and liabilities:
Accounts receivable (2,931) 4,259
Inventories 557 203
Prepaid expenses and other current assets (360) (104)
Other assets 60 (151)
Accounts payable 863 (956)
Accrued liabilities 1,636 (404)
Deferred revenues (300) --
-------- --------
Net cash used in operating activities (4,185) (10,693)
-------- --------
Cash flows from investing activities:
Available-for-sale securities:
Purchases (24,835) (36,144)
Sales 7,918 13,319
Maturities 15,952 23,179
Capital expenditures, net (1,930) (1,534)
-------- --------
Net cash provided by investing activities 2,895 1,180
-------- --------
Cash flows from financing activities:
Proceeds from(repayment of) long-term debt (387) 5,000
Issuance of common stock 7,075 3,870
-------- --------
Net cash provided by financing activities 6,688 8,870
-------- --------
Net increase (decrease) in cash and cash equivalents (392) 3,003
Cash and cash equivalents at beginning of the period 6,688 9,977
-------- --------
Cash and cash equivalents at end of the period $ 6,296 $ 6,994
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 259 $ --
======== ========
</TABLE>
See accompanying notes to condensed financial statements
3
<PAGE> 6
SEQUUS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 1998
(unaudited)
1. BASIS OF PRESENTATION
SEQUUS Pharmaceuticals, Inc. ("SEQUUS" or the "Company") is engaged
in the development, manufacture, marketing and sale of proprietary
liposome and lipid-based products primarily to treat cancer and
certain fungal infections. The Company's strategic emphasis is on
injectable pharmaceutical products designed to improve the efficacy
and reduce the toxicity of selected existing and new drugs used to
treat cancer and infectious diseases.
In the opinion of management, the accompanying unaudited condensed
financial statements of SEQUUS contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly
the financial position as of June 30, 1998, and the results of
operations for the three and six month periods ended June 30, 1998
and 1997, and the changes in cash flows for the six month periods
ended June 30, 1998 and 1997, in accordance with generally accepted
accounting principles.
These condensed financial statements should be read in conjunction
with the Company's audited financial statements for the year ended
December 31, 1997, which were filed with the Securities and Exchange
Commission on Form 10-K/A.
Although the nature of the business is not seasonal, the results of
operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full year.
2. CASH AND CASH EQUIVALENTS AND 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 government
securities 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.
Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation
as of each balance sheet date. At June 30, 1998, all investments are
classified as available-for-sale securities and are carried at fair
value, with the unrealized gains and losses reported as a component
of accumulated deficit. The amortized cost of debt securities in
this category is adjusted for amortization of premiums and accretion
of discounts to maturity. Such amortization is included in interest
income and interest expense. Realized gains and losses and declines
in value judged to be other than temporary on available-for-sale
securities are included in interest income and interest expense. The
cost of securities sold is based on the specific identification
method.
4
<PAGE> 7
The following is a summary of available-for-sale securities (in
thousands):
<TABLE>
<CAPTION>
As of June 30, 1998 GROSS UNREALIZED
AMORTIZED --------------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ----- ------ ----------
<S> <C> <C> <C> <C>
United States government securities $ 3,776 $ 1 $ -- $ 3,777
United States corporate securities 9,711 -- (1) 9,710
Foreign debt securities 6,056 1 (1) 6,056
-------- -------- -------- --------
$ 19,543 $ 2 $ (2) $ 19,543
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997 GROSS UNREALIZED
AMORTIZED --------------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ----- ------ ----------
<S> <C> <C> <C> <C>
United States government securities $ 6,581 $ 6 $ -- $ 6,587
United States corporate securities 8,052 21 -- 8,073
Foreign debt securities 3,943 4 -- 3,947
-------- -------- -------- --------
$ 18,576 $ 31 $ -- $ 18,607
======== ======== ======== ========
</TABLE>
The gross realized gains and losses on sales of available-for-sale
securities were immaterial for the three month and six month periods
ended June 30, 1998 and 1997. As of June 30, 1998 the average
portfolio duration was approximately 94 days.
3. INVENTORIES
Inventories are stated at the lower of cost (principally first-in,
first-out) or market. The inventory detail is as follows (in
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
Raw materials.............. $ 734 $ 2,707
Work-in-process............ 259 -
Finished goods............. 2,567 1,410
--------- ---------
$ 3,560 $ 4,117
========= =========
</TABLE>
4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income." Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity. Statement 130 requires
unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in
stockholders' equity to be included in other comprehensive income.
During the quarter ended June 30, 1998 and 1997, total comprehensive
loss amounted to ($2,121,000) and ($7,424,000), respectively. For
the six months ended June 30, 1998 and 1997, total comprehensive
loss amounted to ($5,177,000) and ($14,858,000), respectively.
5. LONG-TERM DEBT
In June 1997 the Company obtained $5.0 million from a total $10
million working capital loan from a bank. Payment terms for the $5.0
million obtained in June, 1997 are interest only for 12 months and
principal and interest over the remaining 44 months. The remaining
$5.0 million credit line against eligible accounts receivable was
not utilized by the Company and expired on June 30, 1998.
5
<PAGE> 8
6. STOCKHOLDERS EQUITY
During the three and six months ended June 30, 1998, the Company
received approximately $4.0 million and $6.7 million respectively
from the exercise of warrants issued to investors in private
placements and employee stock options. Of this, for the three months
ended June 30, 1998, approximately $3.2 million was due to the
exercise of warrants to purchase approximately 432,923 shares of
Common Stock at $7.425 per share and 1,849 shares of Common Stock at
$7.4328 per share. For the six months ended June 30, 1998,
approximately $4.9 million was due to the exercise of warrants to
purchase approximately 653,958 shares of Common Stock at $7.425 per
share and 12,208 shares of Common Stock at $7.4328 per share.
7. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
During the first quarter of 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the
way that public business enterprises report information about
operating segments in annual financial statements and requires that
those enterprises report selected information about operating
segments in interim financial reports issued in 1998. It also
establishes standards for related disclosures about products and
services, geographic area, and major customers. The adoption of SFAS
131 has no impact on the Company's consolidated results of
operations, financial position or cash flows.
6
<PAGE> 9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that relate to future plans, events or
performance are forward-looking statements which involve risks and
uncertainties. Actual results, events or performance may differ materially from
those anticipated in these forward-looking statements as a result of a variety
of factors, including those set forth under "Factors That May Affect Future
Results, Events or Performance" below and elsewhere in this discussion. 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 update these forward-looking statements to reflect events or
circumstances that occur after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
The Company is a leader in developing and commercializing lipid-based
biopharmaceutical products primarily to treat cancer and infectious diseases.
The Company formulates its proprietary STEALTH(R) liposomes with existing drugs,
or with therapeutics under development, to develop new products with improved
safety and efficacy profiles. The Company developed and is marketing DOXIL(R),
an anticancer drug, and AMPHOTEC(R), an antifungal drug, in the United States
through its direct sales organization and internationally through its marketing
partners. The Company is currently conducting additional clinical trials for the
use of DOXIL in the treatment of certain solid tumors, including a Phase III
clinical trial in refractory ovarian cancer and a number of breast cancer
trials. In addition, SEQUUS is currently conducting Phase I and Phase 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 United States Food and Drug Administration
("FDA") for DOXIL for the treatment of Kaposi's sarcoma ("KS") in people with
AIDS whose KS has progressed on prior chemotherapy or in patients who are
intolerant to such therapy. In December 1995, the Company launched DOXIL in the
United States, using its own marketing and sales team. In June 1996, the Company
was granted marketing authorization for DOXIL under the trade name CAELYX(TM) in
the 15 member states of the European Union ("EU") for the treatment of
first-line and refractory KS in patients with low CD4 counts and extensive
mucocutaneous or visceral disease. The drug may be used as first-line systemic
chemotherapy, or as second-line chemotherapy, in KS patients with disease that
has progressed with, or in patients who are intolerant to, prior combination
chemotherapy comprising at least two of the following agents: a Vinca alkaloid,
bleomycin, and doxorubicin (or other anthracycline). In June 1997, the Company
was granted marketing authorization for DOXIL in Australia and New Zealand.
In September 1996, the Company entered into a distribution agreement with
Schering-Plough Corporation ("Schering-Plough") under which Schering-Plough has
rights to market and sell CAELYX worldwide, except for the United States, Japan
and certain other countries. As of June 30, 1998, Schering-Plough has launched
CAELYX in Germany, France, Ireland, Italy, Israel, Greece, Spain, Portugal,
United Kingdom, Norway, Sweden, Austria, Luxembourg, Denmark, Finland and the
Netherlands. Pricing discussions are underway 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 recognized 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 recognized $2.3 million
from Schering-Plough through the first six months of 1998.
7
<PAGE> 10
The Company used its first-generation lipid-based delivery technology to
develop AMPHOTEC, a proprietary formulation of a leading antifungal drug,
amphotericin B. In November 1996, SEQUUS received marketing clearance from the
FDA for AMPHOTEC for the treatment of invasive aspergillosis, a life-threatening
fungal infection, in patients where renal impairment or unacceptable toxicity
precludes the use of conventional amphotericin B therapy in effective doses and
in patients where prior amphotericin B therapy has failed. In December 1996, the
Company launched AMPHOTEC in the United States, using its own marketing and
sales organization. In April 1997, the Company elected to reduce the contract
price of AMPHOTEC in response to feedback from its hospital customers that the
relative cost of lipid-based amphotericin B therapy, compared to generic
amphotericin B therapy, limited the broad use of AMPHOTEC in managed care
environments. AMPHOTEC has also received marketing clearance in a number of
other countries for the treatment of systemic fungal infections in patients for
whom conventional amphotericin B is contraindicated due to toxicity or renal
failure or for whom previous antifungal therapy was unsuccessful. The Company's
strategy is to commercialize AMPHOTEC in international markets, under the trade
name AMPHOCIL, through distribution partners. The Company has entered into a
number of distribution agreements, including agreements with Zeneca Limited
("Zeneca") and Bayer, Inc. ("Bayer") in selected countries. A liposome-based
amphotericin B product which targets indications similar to those targeted by
AMPHOCIL has been first to market and has captured a significant share of the
market in many foreign markets. This liposome-based amphotericin B product was
also launched in September 1997 in the United States joining a second competitor
who launched 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
distribution partners and agents internationally and to its distributors in the
United States. The Company's quarterly operating results depend upon a variety
of factors, including the price, volume and timing of sales of the Company's
approved products; variations in payments under collaborative agreements,
including royalties, fees and other contract revenues; the availability of
third-party reimbursement; and the regulatory approvals of new products, or
expanded labeling of existing products. The Company's quarterly operating
results may also fluctuate significantly depending on other factors, including
the timing of the expansion of clinical trials for DOXIL and the level of
clinical trials for SPI-077; changes in the Company's level of research and
development; changes in manufacturing capabilities; and variations in gross
margins of the Company's products which may be caused by cost increases from
third-party manufacturers, availability and cost of raw materials, competitive
pricing pressures and the mix between product sales in the United States and
sales to the Company's international marketing partners. In addition, sales of a
product in any given period, including the quarter in which a new product is
initially introduced to the market, may include a significant amount of orders
for inventory by distributors and wholesalers and may not necessarily be
indicative of actual demand for that product by physicians and patients. There
can be no assurance that distributors or wholesalers will be able to forecast
demand for product accurately. Fluctuations in operating results will occur to
the extent that demand by physicians and patients does not meet distributors' or
wholesalers' expectations. The Company expects quarter to quarter fluctuations
to continue in the future. In addition, the Company expects operating expenses
to increase in 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 $179.4 million in net losses through June 30, 1998,
including a net loss of approximately $5.1 million in the first six months of
1998. Although the Company and its marketing partners have commenced marketing
DOXIL in the United States and 19 international markets and AMPHOTEC in the
United States and 24 international countries, there can be no assurance that
revenues from product sales or other sources will be sufficient to fund
operations or that the Company will achieve profitability or positive cash flow.
8
<PAGE> 11
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
expanded 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 June 30, 1998, SEQUUS had a United States sales team of 40 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.
9
<PAGE> 12
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997
Revenues
Total revenues were $16.0 million, of which $13.7 million were product
sales, during the quarter ended June 30, 1998. By comparison, total revenues
were $8.4 million during the quarter ended June 30, 1997, of which $7.9 million
were product sales. DOXIL/CAELYX product sales represented 86% of total product
sales in the second quarter of 1998 compared to 85% in the second quarter of
1997. The Company recognized $2.3 million in DOXIL/CAELYX related development
payments in the second quarter of 1998 from its distribution partner
Schering-Plough as compared $0.5 million in the second quarter of 1997.
Operating Expenses
The Company's gross margin increased to 84% of product sales in the
second quarter of 1998 from 79% of product sales in the comparable quarter of
the prior year. This increase in the gross margin is due to increased
efficiencies in product manufacturing and the mix of products sold. 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. The Company anticipates that its gross margin will continue to fluctuate
and may decline depending on the proportion of product sales in the United
States relative to sales to the Company's international distribution partners
and agents and the product mix.
The principal items of research and development ("R&D") expense are
personnel costs, costs of clinical trials, clinical production and supplies. R&D
expense increased to $9.9 million in the second quarter of 1998, from $8.4
million in the comparable quarter of 1997. This increase in R&D expenses was
primarily due to expanded clinical trials of DOXIL in solid tumors, clinical
trial expenses for SPI-077 and increased spending on R&D projects. The Company
anticipates that future clinical trial expenses will increase due to expanded
clinical trials of DOXIL in a variety of solid tumors and expanded clinical
trials of SPI-077.
Selling, general and administrative ("SG&A") expenses remained relatively
unchanged at $6.2 million in the second quarter of 1998 as compared to $6.1
million in the second quarter of 1997. The Company anticipates SG&A expenses
will increase as efforts continue to expand the market for DOXIL and AMPHOTEC in
the United States.
Interest Income & Expense
Interest income declined slightly to $0.3 million in the second quarter
of 1998 as compared to $0.4 million in the second quarter of 1997. Interest
expense increased to $0.1 million in the second quarter of 1998 as a result of a
$5.0 million loan obtained in June 1997.
Net Loss
The Company's net loss decreased to $2.1 million for the three month
period ended June 30, 1998 from $7.4 million for the same period of 1997, a
decrease of $5.3 million. The net loss per share (both basic and diluted) was
$0.07 for the three month period ended June 30, 1998 compared to a net loss of
$0.24 per share in the same period of 1997. The decrease in net loss and net
loss per share for the second quarter of 1998 was due primarily to an increase
in product sales in the United States, reduced AMPHOTEC marketing costs and
revenues recognized under the Schering-Plough agreement partially offset by an
increase in clinical trial expenses.
10
<PAGE> 13
Six Months Ended June 30, 1998 and 1997
Revenues
Total revenues were $28.8 million, of which $26.0 million were product
sales, during the six months ended June 30, 1998. By comparison, total revenues
were $16.8 million during the six months ended June 30, 1997 of which $14.4
million were product sales. DOXIL/CAELYX product sales represented 86% of total
product sales in the first six months of 1998 compared to 85% in the first six
months of 1997. In the first six months of 1998, the Company recognized $0.3
million under its research and development agreement with Bayer and $2.3 million
in DOXIL/CAELYX related development payments from its distribution partner
Schering-Plough. In the comparative first six months of 1997, the Company
recognized revenues under its agreement with Schering-Plough of approximately
$2.3 million.
Operating Expenses
The Company's gross margin increased to 84% of product sales in the first
six months of 1998 from 79% of product sales in the comparable period of the
prior year. This increase in the gross margin is due to increased efficiencies
in product manufacturing and the mix of products sold. 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.
The Company anticipates that its gross margin will continue to be subject to
variations which can 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.
The principal items of research and development ("R&D") expense are
personnel costs, costs of clinical trials, clinical production and supplies. R&D
expense increased to $18.1 million in the first six months of 1998, from $15.8
million in the comparable first six months of 1997. This increase in R&D
expenses was primarily due to expanded clinical trials of DOXIL in solid tumors,
clinical trial expenses for SPI-077 and increased spending on R&D projects. The
Company anticipates that future clinical trial expenses will increase due to
expanded clinical trials of DOXIL in a variety of solid tumors and to expanded
clinical trials of SPI-077.
Selling, general and administrative ("SG&A") expenses decreased to $12.2
million in the first six month period of 1998 from $13.5 million in the first
six months of 1997. The decrease in SG&A expenses was primarily due to more
rigorous expense control and the absence in the first half of 1998 of the
one-time marketing costs associated with launching the AMPHOTEC product that was
incurred in the first quarter of 1997. The Company anticipates SG&A expenses
will increase as efforts continue to expand the market for DOXIL and AMPHOTEC in
the United States.
Interest Income & Expense
Interest income remained consistent at $0.7 million in the first six
month period of 1998 as compared to $0.7 million in the first six months of
1997. Interest expense increased to $0.2 million in the first half of 1998 as a
result of the $5.0 million loan obtained in June 1997.
Net Loss
The Company's net loss decreased to $5.1 million for the six month period
ended June 30, 1998 from $14.9 million for the same period of 1997, a decrease
of $9.8 million. The net loss per share (both basic and diluted) was $0.17 for
the six month period ended June 30, 1998 compared to a net loss of $0.49 per
share in the same period of 1997. The decrease in net loss and net loss per
share for the first half of 1998 was due primarily to an increase in product
sales in the United States, reduced AMPHOTEC marketing costs and revenues
recognized under the Schering-Plough agreement partially offset by an increase
in clinical trial expenses.
11
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at June 30, 1998 were $25.8
million, an increase of $0.5 million from $25.3 million at December 31, 1997.
This increase represents by $4.2 million of net cash used by operating
activities, $0.4 million used to retire debt and $1.9 million used in capital
expenditures offset by $6.1 million of cash provided by short-term investments
and equity financing. In June 1997, the Company obtained $5.0 million from a
total $10 million working capital loan with Silicon Valley Bank of Santa Clara,
California. Payment terms for the $5 million obtained in June 1997 are interest
only for 12 months and principal and interest over the remaining 44 months. The
remaining $5 million credit line against eligible accounts receivable was not
utilized by the Company and expired on June 30, 1998. During the six months
ended June 30, 1998, the Company received approximately $6.7 million from the
exercise of warrants issued to investors in private placements and employee
stock options. Of this, approximately $4.9 million was due to the exercise of
warrants to purchase approximately 653,958 shares of Common Stock at $7.425 per
share and 12,208 shares of Common Stock at $7.4328 per share.
The Company believes that the Company's existing cash balances, interest
income, and revenues from operations will be adequate to fund its planned
activities at least through the next 12 months. 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.
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.
Beginning 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 has
initiated 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.
12
<PAGE> 15
ITEM 3.
FACTORS THAT MAY AFFECT FUTURE RESULTS, EVENTS OR PERFORMANCE
SEQUUS wishes to caution readers that the following important
factors, among others, may affect the Company's future results, events or
performance and could cause actual results, events or performance to differ
materially from those expressed in any forward-looking statements made by the
Company in this report or presented elsewhere by the Company from time to time.
UNCERTAINTY OF MARKET ACCEPTANCE
The Company's future financial performance depends on revenues from and
market acceptance of DOXIL in the United States and international markets. To
date, DOXIL can only be promoted for KS and cannot be promoted for the treatment
of solid tumors. In order for the Company to promote DOXIL for any solid tumor
indications, it must establish the clinical benefit of DOXIL in clinical trials
for each tumor type and gain regulatory clearance to market for such use. The
Company does not expect sales of DOXIL to grow significantly, if at all, for KS
in the United States because the population of persons with KS is relatively
small and may decline, particularly if recent developments in the treatment of
AIDS are successful, and subsequently decrease the incidence of KS. In the
United States, the Company is prohibited from marketing DOXIL for indications
other than refractory KS. Physicians and patients are often limited in their use
of pharmaceutical products for indications that have not been cleared by the
FDA, as reimbursement by third-party payors for off-label use may be
unavailable. There can be no assurance that clinical trials will demonstrate
that DOXIL is safe and efficacious for the treatment of solid tumors, that the
Company will receive regulatory approval for any solid tumor indications or that
the Company will be able to achieve reimbursement for or market acceptance of
DOXIL in the treatment of solid tumors.
The Company is also dependent on market acceptance of AMPHOTEC in the
United States and in international markets. To date, the Company has had very
limited sales of AMPHOTEC in the United States and internationally. The Company
faces intense competition and price pressure in marketing and selling AMPHOTEC
and elected in April 1997 to cut prices of AMPHOTEC in the United States. A
number of factors may limit the market acceptance of DOXIL and AMPHOTEC and any
other products developed by the Company, including the timing of regulatory
approval and market entry relative to competitive products, the availability of
alternate therapies, the price of the Company's products relative to alternative
therapies, the availability of third-party reimbursement and the extent of
marketing efforts by third-party distributors or agents retained by the Company,
as well as the success of the marketing efforts by the Company's sales team
which was organized in August 1996. In addition, therapeutic products based on
liposome or lipid-based technology have become commercially available only in
the last few years. As a result, unanticipated side effects or unfavorable
publicity concerning any product incorporating liposome or lipid-based
technologies could have an adverse effect on the Company's ability to obtain
physician, patient or third-party payor acceptance and to sell the Company's
products. There can be no assurance that physicians, patients or third-party
payors will accept liposome products or any of the Company's products as readily
as traditional forms of medication or at all.
INTENSE COMPETITION; UNCERTAINTY OF TECHNOLOGICAL CHANGE
The Company's current and potential products compete with existing and
new drugs offered by or under development by pharmaceutical, biopharmaceutical
and biotechnology companies. Many of these companies, both in the United States
and international markets, are developing products based on improved drug
delivery technologies as well as novel therapeutics for the treatment of cancer,
infectious diseases and other indications targeted by the Company. Some of these
companies are active in liposome and lipid-based research and product
development, and many have financial and technical resources and production and
marketing capabilities substantially greater than those of the Company. In
addition, many of these companies have significantly greater experience than the
Company in preclinical and clinical development activities, in obtaining
regulatory approval, and in manufacturing and marketing biopharmaceutical
products.
13
<PAGE> 16
A number of large pharmaceutical companies, including Bristol-Myers
Squibb Company ("Bristol-Myers") and Pfizer Inc., have established strong market
positions for oncology and infectious diseases. For example, AMPHOTEC competes
with traditional amphotericin B therapy, which is currently produced and
marketed by Bristol-Myers and others. The Company also faces competition from
two companies specializing in liposome drug delivery, NeXstar Pharmaceuticals,
Inc. ("NeXstar") and The Liposome Company ("TLC"), both of which have received
regulatory approvals in the United States and internationally for products
competitive with the Company's products. In some cases, the competing liposomal
products have obtained significant market share in certain territories by being
the first to market, have been introduced at lower prices than the Company's
competing products, or have received marketing clearance covering a broader
range of indications than the Company's competing products. For example, TLC has
received FDA clearance to market its amphotericin B lipid formulation for
treating a broader range of indications than the indications for which AMPHOTEC
has received marketing clearance.
SEQUUS believes that competition in pharmaceutical products and in drug
delivery will continue to be intense as new products enter the market and
advanced technologies become available for drug discovery and development.
Existing products or new products developed by the Company's competitors may be
more effective, or be more effectively marketed and sold, than any that have
been or may be developed by the Company. Competitive products may render the
Company's technology and products obsolete or noncompetitive prior to the
Company's recovery of research, development or commercialization expenses
incurred with respect to any such products, which could have a material adverse
effect on the Company's business, financial condition or results of operations.
LIMITED MARKETING AND SALES EXPERIENCE; DEPENDENCE ON THIRD-PARTY DISTRIBUTORS
AND AGENTS
The Company has limited experience marketing and selling its products.
The Company currently markets and sells its products in the United States with a
sales team of 40 persons. The Company's ability to generate future revenue in
the United States is dependent on the success of its direct sales team in
marketing DOXIL and AMPHOTEC. Future development of its marketing and sales
organization may require significant additional expenditures, management
resources and time. In addition, the loss of certain key sales personnel could
adversely affect the sales effort and have a material adverse effect on the
Company's business, financial condition and results of operations. Several
biotechnology and pharmaceutical companies have recently expanded their sales
forces, particularly in the field of oncology, which has increased competition
for experienced personnel. Furthermore, if the Company enters into marketing
partnerships with other companies to augment its own sales organization, the
Company's margins on these products would be significantly reduced.
In September 1996, the Company announced an exclusive arrangement with
Schering-Plough under which Schering-Plough has rights to market and sell DOXIL
worldwide (except for the United States, Japan and certain other countries)
under the tradename CAELYX. The Company has also entered into distribution
agreements with a number of corporate partners covering the marketing and
distribution of AMPHOCIL in various international markets. The Company's future
sales of CAELYX and AMPHOCIL outside of the United States will depend upon the
success of marketing efforts by Schering-Plough and other distribution partners,
the continuation of existing distribution arrangements, market acceptance of the
products, availability of third-party reimbursement, as well as the timing of
additional approvals, including pricing approvals, in other countries, if any.
Schering-Plough has the right to terminate the agreement with the Company at any
time if certain clinical results relating to CAELYX are not achieved, if certain
adverse events occur regarding patent matters and in certain other
circumstances. If Schering-Plough or any other distributor were to terminate its
agreement with the Company or be unsuccessful in meeting its sales objectives,
the Company's business, financial condition and results of operations could be
materially adversely affected. There can be no assurance that the Company will
be able to successfully market its products through its sales team, partners,
agents or at all.
14
<PAGE> 17
DEPENDENCE ON THIRD-PARTY MANUFACTURING AND SOLE-SOURCE SUPPLIERS; MANUFACTURING
RISKS
The Company's internal manufacturing capabilities are limited to
producing products for preclinical development. The Company is dependent on Ben
Venue Laboratories, Inc. ("Ben Venue") 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 approval were granted at all. The Company
has recently retained a second manufacturing site for its products. The Company
has in the past experienced batch failures in the manufacturing process for
AMPHOTEC and DOXIL. Any batch failures in the future could result in a material
increase in cost of goods sold or in the Company's inability to deliver products
on a timely basis. In addition, the Company may be unable to obtain sufficient
contract manufacturing capacity due to competing demands on the contract
manufacturer's capacity or other reasons. In the event of any interruption of
supply from the contract manufacturer due to regulatory reasons, significant
batch failures, capacity constraints or other causes, there can be no assurance
that the Company could make alternative manufacturing arrangements on a timely
basis, if at all. Such an interruption would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company relies on certain suppliers of key raw materials to provide
an adequate supply of such materials for production of finished products.
Certain materials are purchased from single sources. In particular, amphotericin
B and doxorubicin are currently each supplied to the Company by single sources,
and the number of alternative sources is limited. The Company has a sole-source
supply agreement with Meiji Seika Pharma International, Ltd., which expires in
1999, to supply the Company with doxorubicin for DOXIL. The Company also has a
sole-source supply agreement with A.L. Laboratories, Inc. which expires in 1999,
to supply the Company with amphotericin B for AMPHOTEC. There can be no
assurance that the doxorubicin or the amphotericin B supplied under these
agreements will continue to meet FDA requirements applicable to DOXIL or
AMPHOTEC, which could delay or prevent future sales of DOXIL or AMPHOTEC, if
any, by the Company. The number of alternative qualified suppliers of key raw
materials required for the manufacture of DOXIL and AMPHOTEC is also limited.
The disqualification or loss of a sole-source supplier could have a material
adverse effect on the Company because of a delay or inability in obtaining and
qualifying an alternate supplier and the costs associated with such delay and in
finding and qualifying an alternate supplier. Regulatory requirements applicable
to pharmaceutical products tend to make the substitution of suppliers costly and
time consuming. The unavailability of adequate commercial quantities, the loss
of a supplier's regulatory approval, the inability to develop alternative
sources, a reduction or interruption in supply or a significant increase in the
price of materials could impair the Company's ability to manufacture and market
its products which would have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY OF PRODUCT DEVELOPMENT
The development of new pharmaceutical products is subject to a number of
significant risks. Potential products that appear to be promising at various
stages of development may not receive regulatory approval, reach the market or
achieve widespread use for a number of reasons. For example, DOXIL is being
clinically tested in various types of solid tumors. The Company's clinical data
in treatment of solid tumors are derived from a limited number of patients and
are not necessarily predictive of future results obtained in subsequent clinical
trials. Moreover, even when a drug does demonstrate activity, it may not be
sufficiently efficacious to replace existing therapies. There can be no
assurance that the Company's research and development efforts will be
successful, that any given product will be approved by appropriate regulatory
authorities or that any product candidate under development will be safe,
effective or capable of being manufactured in commercial quantities at an
economical cost, will not infringe the proprietary rights of others or will
achieve market acceptance.
15
<PAGE> 18
There are a number of challenges the Company must address successfully to
develop commercial products in each of its development programs. The Company's
potential products will require significant additional research and development
efforts, including process development and significant additional clinical
testing, prior to any commercial use. There can be no assurance that the Company
will have sufficient resources or will successfully address any of these
technological challenges, or others that may arise in the course of development.
NO ASSURANCE OF REGULATORY APPROVALS; UNCERTAINTY OF GOVERNMENT REGULATION
The production and marketing of the Company's products are subject to
rigorous manufacturing requirements, preclinical testing and clinical trials and
approval by the FDA, by comparable agencies in other countries and by state
regulatory authorities prior to marketing. The process of conducting clinical
trials and obtaining regulatory approval for a product typically takes a number
of years and involves substantial expenditures. In addition, product approvals
may be withdrawn or limited for noncompliance with regulatory standards or the
occurrence of unforeseen problems following initial marketing. The Company has
received regulatory clearance in the United States for the commercial sale of
only two of its products, DOXIL and AMPHOTEC, and such clearance is only for
limited indications. The Company may encounter significant delays or excessive
costs in its efforts to secure and maintain necessary approvals or licenses.
Future federal, state, local or foreign legislative or administrative acts could
also prevent or delay regulatory approval of the Company's products. There can
be no assurance that the Company will be able to obtain or maintain the
necessary approvals for manufacturing or marketing the Company's products for
current or expanded indications or that the data it obtains in clinical trials
will be sufficient to establish the safety and efficacy of its products. Even if
the Company obtains regulatory approval for any particular product, there can be
no assurance that it will be economically feasible for the Company to
commercialize its products. In addition, identification of certain side effects
after a drug is on the market or the occurrence of manufacturing problems could
cause subsequent withdrawal of approval, reformulation of the drug, additional
preclinical testing or clinical trials, and changes in labeling of the product.
Failure to obtain or maintain requisite governmental approvals, failure to
obtain approvals of the clinically intended uses or the identification of side
effects could delay or preclude the Company from further developing particular
products or from marketing its products, or could limit the commercial use of
its products, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's regulatory clearances to market DOXIL in the United States
for refractory KS and in certain European countries and in Australia and New
Zealand 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.
16
<PAGE> 19
The Company is also subject to regulation under numerous federal, state
and local laws regarding, among other things, occupational safety, laboratory
practices, the use and handling of radioisotopes and hazardous chemicals,
prevention of illness and injury, environmental protection and hazardous
substance control. Failure to comply with such regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining regulatory approvals for the commercial sale of any of
its products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
each target indication. The results from preclinical studies and early clinical
trials may not be predictive of results that will be obtained in large-scale
testing, and there can be no assurance that the Company's clinical trials will
demonstrate the safety and efficacy of any products or will result in marketable
products. For example, the Company has only conducted clinical trials for the
use of DOXIL in certain solid tumors on a limited number of patients. The
Company must conduct additional clinical testing in larger patient populations
to expand the indications for DOXIL. Many pharmaceutical and drug delivery
companies have suffered significant setbacks in advanced clinical trials, even
after obtaining promising results in earlier trials.
The rate of completion of the Company's clinical trials is dependent
upon, among other factors, the rate of patient enrollment. The Company is
dependent on third parties including hospitals and physicians to conduct the
clinical trials. In addition, the Company is reliant on Schering-Plough to
conduct certain clinical trials for the use of DOXIL in treatment of solid
tumors. There is substantial competition to enroll patients in clinical trials
for oncology products. Delays in planned patient enrollment can result in
increased costs and delays. If the Company is unable to successfully complete
its clinical trials, its business, financial condition and results of operations
could be materially adversely affected.
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 SPI-077; changes in
the Company's level of research and development; changes in manufacturing
capabilities; and variations in gross margins of the Company's products which
may be caused by cost increases from third-party manufacturers, availability and
cost of raw materials, competitive pricing pressures and the mix between product
sales in the United States and sales to the Company's international marketing
partners. In addition, sales of a product in any given period, including the
quarter in which a new product is initially introduced to the market, may
include a significant amount of orders for inventory by distributors and
wholesalers and may not necessarily be indicative of actual demand for that
product by physicians and patients. There can be no assurance that distributors
or wholesalers will be able to forecast demand for product accurately.
Fluctuations in operating results will occur to the extent that demand by
physicians and patients does not meet distributors' or wholesalers'
expectations. The Company expects quarter to quarter fluctuations to continue in
the future. In addition, the Company expects operating expenses to increase in
1998, and there can be no assurance that the Company's revenues will not decline
or that the Company will ever achieve profitability.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
There are significant challenges and risks to the Company associated with
selling products and conducting business in international markets, including,
but not limited to, varying government regulation of pharmaceutical products,
varying third-party and government reimbursement policies, uncertain
intellectual
17
<PAGE> 20
property protections, delays in establishing international distribution channels
and difficulties in collecting international accounts receivable. The Company
does not have extensive experience in international sales and is relying on
third parties to address these markets. The Company's international business and
financial performance could also be adversely affected by matters such as
currency controls, tariff regulations, foreign duties and taxes, pricing
controls and regulations and difficulties in obtaining export licenses. In
addition, the Company's products are priced in the currency of the country in
which such products are sold. Accordingly, the prices of such products in
dollars will vary as the value of the dollar fluctuates against such local
currencies. Increases in the value of the dollar against such currencies,
therefore, will reduce the dollars realized by the Company on the sale of its
products. The Company does not presently engage in any hedging or other
transactions intended to manage the risks relating to foreign currency exchange
rates or interest rate fluctuations. However, the Company may in the future
undertake such transactions if it determines that it is advisable to offset such
risks, although no assurance can be given that these efforts will be successful.
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT
The Company's business may be materially adversely affected by the
continuing efforts of worldwide governmental and third-party payors to contain
or reduce the costs of health care in general and drugs in particular. For
example, in most international markets, including markets the Company is seeking
to enter, pricing of prescription pharmaceuticals is subject to government price
controls. In these markets, once marketing approval is received, pricing
negotiation could take another six to 12 months or longer. In the United States
there have been, and there may continue to be, federal and state proposals to
implement similar government price controls. In addition, an increasing emphasis
on managed care and consolidation of hospital purchasing in the United States
has and will continue to put pressure on pharmaceutical pricing. Such proposals,
if adopted, and such initiatives could decrease the price that the Company
receives for any current or future products and thereby have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, to the extent that such proposals or initiatives have a material
adverse effect on pharmaceutical companies that are collaborators or prospective
collaborators for certain of the Company's products, the Company's ability to
commercialize its products may be materially adversely affected. In addition,
price competition may result from competing product sales, attempts to gain
market share or introductory pricing programs, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company's ability to commercialize DOXIL, AMPHOTEC and other products
may depend in part on the extent to which reimbursement for such products and
related treatments will be available from government health administration
authorities, private health insurers and other third-party payors. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and third-party payors are increasingly challenging the prices charged
for medical products and services. There can be no assurance that any
third-party insurance coverage will be available to patients for any of the
Company's products. Government and other third-party payors are increasingly
attempting to contain health care costs by limiting the level of reimbursement
for new therapeutic products, and by refusing, in some cases, to provide
coverage or reimbursement for indications for which the FDA has not granted
marketing clearance. Moreover, reimbursement may be denied even for FDA-approved
indications. If adequate coverage and reimbursement levels are not provided by
the government and third-party payors for the Company's products, the Company's
business, financial condition and results of operations would be materially
adversely affected.
PRODUCT LIABILITY
Testing, manufacturing, marketing and use of the Company's products will
entail substantial risk of product liability. The Company currently maintains
product liability insurance in an amount of $15 million per occurrence and $15
million in the aggregate. A single product liability claim could exceed the $15
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
18
<PAGE> 21
the amount of such insurance can be renewed at acceptable cost or at all, or
that the amount and scope of any coverage obtained will be adequate to protect
the Company in the event of a successful product liability claim. The Company's
business, financial condition and results of operations could be materially
adversely affected by one or more successful product liability claims.
In addition, with respect to the sale of products in the United States,
the Company believes it has significantly greater risk in connection with
product liability claims due to the greater frequency of lawsuits and higher
claims paid in courts in the United States as opposed to most other countries.
The Company is required by government regulations to test its products even
after they have been sold and used by patients. As a result of such tests, the
Company may be required to, or may determine that it should, recall products
when such products have already been sold. Such testing and any product recalls
could increase the Company's potential exposure to product liability claims and
may have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAINTIES REGARDING PATENTS AND TRADE SECRETS
There has been increasing litigation in the biomedical, biotechnology and
pharmaceutical industries with respect to the manufacture, use and sale of new
therapeutic products that are the subject of conflicting patent rights. A
substantial number of patents relating to liposomes have been issued to, or are
controlled by, other public and private entities, including academic
institutions. In addition, others, including competitors of SEQUUS, have filed
applications for, or have been issued patents or may obtain additional patents
and proprietary rights relating to products or processes competitive with those
of SEQUUS. The patent positions of pharmaceutical, biopharmaceutical,
biotechnology and drug delivery companies, including SEQUUS, are uncertain and
involve complex legal and factual issues. Additionally, the coverage claimed in
a patent application can be significantly reduced before the patent is issued.
As a consequence, the Company does not know whether any of its patent
applications will result in the issuance of patents or whether any of the
Company's existing patents will provide significant proprietary protection or
will be circumvented or invalidated. Since patent applications in the United
States are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific or patent literature often lag behind actual
discoveries, the Company cannot be certain that it was the first inventor of
inventions covered by its pending patent applications or that it was the first
to file patent applications for such inventions. Moreover, the Company may have
to participate in interference proceedings to determine priority of invention,
which could result in substantial cost to the Company, even if the eventual
outcome is favorable to the Company. There can be no assurance that any patents
owned or controlled by the Company will protect SEQUUS against infringement
litigation or afford commercially significant protection of the Company's
technology. Almost none of the Company's patents has been tested in court to
determine their validity and scope. Moreover, the patent laws of foreign
countries differ from those of the United States and the degree of protection,
if any, afforded by foreign patents may therefore be different.
The Company has in the past been a party to litigation regarding
intellectual property rights. In prior litigation in the Patents County Court in
the U.K., a suit brought by NeXstar alleging that the Company's anticancer drug,
DOXIL, infringes NeXstar's EPO Patent No. 0,179,444 was settled by the parties
dropping their respective claims against one another. The U.K. Patent Court
dismissed all claims in the case with prejudice.
The Company has a practice of monitoring patents and other developments
in the liposome field. To the extent that the Company becomes aware of patents
of other parties which the Company's processes or products might infringe, it is
the Company's practice to seek review of such patents by the Company's patent
counsel. With respect to DOXIL, SEQUUS is aware of TLC's United States Patent
No. 5,077,056 (the "056 Patent") relating to the loading of therapeutic drugs
into liposomes. The Company's patent counsel has rendered an opinion that DOXIL
would not infringe any valid claim of this patent. International equivalent
patents to the 056 Patent issued to TLC are now undergoing opposition
proceedings in the European and Japanese patent offices and the Company is party
to such proceedings. Adverse results in such opposition proceedings could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company is also aware of recently issued United
States Patent
19
<PAGE> 22
No. 5,562,925 (the "925 Patent") covering therapeutic cisplatin compositions
held by Research Corporation Technologies Inc., which the Company believes has
been licensed exclusively to Bristol-Myers. The Company's patent counsel has
rendered an opinion that its STEALTH cisplatin formulation would not infringe
any valid claims of the 925 Patent. The Company is also aware of TLC's United
States Patent No. 5,008,050 relating to reducing liposome size by extrusion, and
NeXstar's United States Patent No. 5,435,989 relating to targeting of liposomes
to solid tumors. The Company's patent counsel has rendered an opinion that DOXIL
would not infringe any valid claim of either of these patents. The Company is
also aware of United States Patent Nos. 4,426,330 and 4,534,899 assigned to
Lipid Specialties, Inc., relating to conjugates of phospholipids and
polyethyleneglycol. The Company's patent counsel has rendered an opinion that
DOXIL would not infringe any valid claims of these patents.
In November 1991, the Company received a letter from TLC bringing to the
Company's attention TLC's United States Patent No. 5,059,591 for "Reduced
Toxicity" (the "591 Patent") containing claims directed to amphotericin B/sterol
compositions and their method of use. Subsequently, the Company's patent counsel
delivered an opinion to the Company that, among other things, AMPHOTEC does not
infringe any valid claim of the 591 Patent. The Company has not received any
further written correspondence with respect to this issue. However, no assurance
can be given that TLC will not make a claim against SEQUUS with respect to the
591 Patent, which could have a material adverse effect on the Company's ability
to commercialize AMPHOTEC.
Even if the Company's patent counsel renders advice that the Company's
products do not infringe any valid claim under such patents, there can be no
assurance that any third party will not commence litigation to enforce such
patents. The Company has been required to defend itself in patent litigation in
the past and uncertainties inherent in any other lawsuit that may be commenced
in the future with respect to any alleged patent infringement by the Company
make the outcome of any such litigation difficult to predict. If another company
were to successfully bring legal actions against the Company claiming patent or
other intellectual property right infringements, in addition to any liability
for damages, the Company could be enjoined by a court from selling such products
or processes or might be required to obtain a license to manufacture or sell the
affected product or process. There can be no assurance that the Company would
prevail in any such action or that the Company could obtain any license required
under any such patent on acceptable terms, if at all. Any litigation, whether or
not resolved in favor of the Company, could be expensive and time-consuming,
could consume substantial management resources, could have a material adverse
effect on the Company's product distribution arrangements and could otherwise
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company relies on unpatented trade secrets and proprietary know-how
to protect certain aspects of its production and other technologies. Although
SEQUUS has entered into confidentiality agreements with its employees,
consultants, representatives and other business associates, there can be no
assurance that trade secrets and know-how will remain undisclosed or that
similar trade secrets or know-how will not be independently developed by others.
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING
The Company has incurred losses in each year since its inception and has
accumulated approximately $179.3 million in net losses through June 30, 1998,
including a net loss of approximately $5.1 million in the six months ended June
30, 1998. There can be no assurance that revenues from product sales or other
sources will be sufficient to fund operations or that the Company will achieve
profitability or positive cash flow. Additional financing may be required to
fund the Company's continuing operations and product and business development
activities in the form of debt or equity securities or bank financing. There can
be no assurance that such financing will be available on acceptable terms, if at
all. The unavailability of such financing could delay or prevent the
development, testing, regulatory approval, manufacturing or marketing of some or
all of the Company's products and could have a material adverse effect on the
Company's business, financial conditions or results of operations.
20
<PAGE> 23
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT TRANSITION
The Company's success depends largely upon its ability to attract and
retain qualified scientific, medical, engineering, manufacturing, sales and
marketing and management personnel. The Company faces competition for such
personnel from other companies, academic institutions, government entities and
other organizations. There can be no assurance that the Company will be
successful in hiring or retaining such personnel. Three of the key executive
officers of the Company have joined the management team in the past two years.
The new management team will face significant challenges in transitioning the
Company from research and development to manufacturing and marketing of the
Company's products that have received regulatory approval. There can be no
assurance that the management team can successfully manage the transition of the
Company's business.
HAZARDOUS MATERIALS
As with many biopharmaceutical companies, the Company's research and
development involves the controlled use of hazardous materials and chemical
compounds. There can be no assurance that the Company's safety procedures for
handling and disposing of such materials will comply with the standards
prescribed by federal, state and local regulations or that it will not be
subject to the risk of accidental contamination or injury from these materials.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could materially adversely affect the
Company's business, financial condition and results of operations.
VOLATILITY OF STOCK PRICE
The market price of the Company's securities, like the stock prices of
many publicly traded biopharmaceutical companies, has been and may continue to
be highly volatile. A variety of events, both concerning and unrelated to the
Company and the biopharmaceutical industry, such as the level of sales of the
Company's products, problems with clinical development of the Company's
potential products, announcements of technological innovations, regulatory
developments or new commercial products by the Company or its competitors,
government regulation, delays or other developments relating to regulatory
approvals, developments or disputes relating to patent or proprietary rights,
comments and reports by securities analysts, product liability claims, as well
as period-to-period fluctuations in the Company's financial results, may have a
significant negative impact on the market price of the Company's securities. Any
large sale of securities of the Company could have a significant adverse effect
on the market price Company's securities.
21
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 6.
Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the six month period ended June 30,
1998.
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEQUUS PHARMACEUTICALS, INC.
(Registrant)
Date: August 12, 1998
By: /s/ I Craig Henderson, M.D.
-------------------------------------
I. Craig Henderson, M.D.
Chairman and Chief Executive Officer
By: /s/ Anthony T. Hendrickson
-------------------------------------
Anthony T. Hendrickson
Corporate Controller
(Principal Accounting Officer)
23
<PAGE> 26
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,296
<SECURITIES> 19,543
<RECEIVABLES> 7,772
<ALLOWANCES> 0
<INVENTORY> 3,560
<CURRENT-ASSETS> 38,676
<PP&E> 7,391
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,268
<CURRENT-LIABILITIES> 14,031
<BONDS> 4,243
0
0
<COMMON> 3
<OTHER-SE> 207,342
<TOTAL-LIABILITY-AND-EQUITY> 46,268
<SALES> 26,059
<TOTAL-REVENUES> 28,812
<CGS> 4,116
<TOTAL-COSTS> 4,116
<OTHER-EXPENSES> 30,278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 259
<INCOME-PRETAX> (5,146)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,146)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,146)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
