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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 September 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 October 23, 1998, the number of outstanding shares of the Company's common
stock, par value $.0001, was 31,904,682.
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SEQUUS PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
--------
<S> <C>
ITEM 1. Financial Statements (unaudited)
Condensed Balance Sheets
September 30, 1998 and December 31, 1997.............................. 1
Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 1998 and 1997............... 2
Condensed Statements of Cash Flows for the
Nine Months Ended September 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 3. Quantitative and Qualitative Factors About Market Risk................ 24
ITEM 6. Exhibits and Reports on Form 8-K...................................... 24
Signatures....................................................................... 25
</TABLE>
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SEQUUS PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited) (note)
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,374 $ 6,688
Short-term investments 16,913 18,607
Trade accounts receivable, net 12,638 4,841
Inventories 4,012 4,117
Prepaid expenses and other current assets 1,425 1,145
--------- ---------
Total Current Assets 39,362 35,398
Property and equipment, net 8,289 6,569
Other assets 201 261
--------- ---------
Total Assets $ 47,852 $ 42,228
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,123 $ 3,848
Accrued liabilities 8,780 6,883
Deferred revenues 782 731
Current portion of long-term debt 1,243 370
--------- ---------
Total Current Liabilities 15,928 11,832
Long-term debt 3,457 4,630
Commitments
Stockholders' Equity:
Preferred stock -- --
Common stock 3 3
Additional paid-in capital 208,222 199,939
Accumulated deficit (179,758) (174,176)
--------- ---------
Total Stockholders' Equity 28,467 25,766
--------- ---------
Total Liabilities and Stockholders' Equity $ 47,852 $ 42,228
========= =========
</TABLE>
Note: Derived from the audited Financial Statements at that date.
See accompanying notes to condensed financial statements
1
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SEQUUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 15,755 $ 9,208 $ 41,814 $ 23,612
Royalties and fees 2,197 1,310 4,950 3,675
-------- -------- -------- --------
Total Revenues 17,952 10,518 46,764 27,287
Expenses:
Cost of goods sold 2,498 1,847 6,614 4,818
Research and development 9,349 8,100 27,475 23,945
Selling, general and administrative 6,795 5,894 18,947 19,384
-------- -------- -------- --------
Total Expenses 18,642 15,841 53,036 48,147
-------- -------- -------- --------
Loss from Operations (690) (5,323) (6,272) (20,860)
Interest income 402 293 1,097 971
Interest expense (119) (123) (378) (130)
-------- -------- -------- --------
Net Loss $ (407) $ (5,153) $ (5,553) $(20,019)
======== ======== ======== ========
Net loss per share (basic and diluted) $ (0.01) $ (0.17) $ (0.18) $ (0.66)
======== ======== ======== ========
Common shares used in calculation
of net loss per share (basic and diluted) 31,669 30,476 31,340 30,292
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed financial statements
2
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SEQUUS PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,553) $(20,019)
Adjustment to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,667 1,583
Issuance of common stock to 401(k) Plan 328 287
Changes in operating assets and liabilities:
Accounts receivable (7,797) 3,863
Inventories 105 1,640
Prepaid expenses and other current assets (280) (121)
Other assets 60 (151)
Accounts payable 1,275 (433)
Accrued liabilities 1,897 290
Deferred revenues 51 844
-------- --------
Net cash used in operating activities (8,247) (12,217)
-------- --------
Cash flows from investing activities:
Available-for-sale securities:
Purchases (38,671) (51,442)
Sales 18,423 19,165
Maturities 21,913 34,482
Capital expenditures, net (3,387) (2,357)
-------- --------
Net cash used in investing activities (1,722) (152)
-------- --------
Cash flows from financing activities:
Proceeds from (repayment of) long-term debt (300) 5,000
Issuance of common stock 7,955 4,428
-------- --------
Net cash provided by financing activities 7,655 9,428
-------- --------
Net decrease in cash and cash equivalents (2,314) (2,941)
Cash and cash equivalents at beginning of the period 6,688 9,997
-------- --------
Cash and cash equivalents at end of the period $ 4,374 $ 7,056
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 378 $ 130
======== ========
</TABLE>
See accompanying notes to condensed financial statements
3
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SEQUUS PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 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 September 30, 1998, and the results of
operations for the three and nine month periods ended September 30, 1998
and 1997, and the changes in cash flows for the nine month periods ended
September 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 September 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
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The following is a summary of available-for-sale securities (in
thousands):
<TABLE>
<CAPTION>
As of September 30, 1998 GROSS UNREALIZED
AMORTIZED ------------------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
United States government securities ... $ 5,450 $16 $(1) $ 5,465
United States corporate securities .... 8,785 13 -- 8,798
Foreign debt securities ............... 2,650 -- -- 2,650
------- --- --- -------
$16,885 $29 $(1) $16,913
======= === === =======
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 nine month periods
ended September 30, 1998 and 1997. As of September 30, 1998 the average
portfolio duration was approximately 89 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>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials ................ $ 808 $2,707
Work-in-process .............. 120 --
Finished goods ............... 3,084 1,410
------ ------
$4,012 $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
September 30, 1998 and 1997, total comprehensive loss amounted to
($379,000) and ($5,136,000), respectively. For the nine months ended
September 30, 1998 and 1997, total comprehensive loss amounted to
($5,556,000) and ($19,994,000), 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
available under the credit line was not utilized by the Company and
expired on June 30, 1998.
5
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6. STOCKHOLDERS EQUITY
During the three and nine months ended September 30, 1998, the Company
received approximately $0.7 million and $7.4 million respectively from
the exercise of warrants issued to investors in private placements and
employee stock options. Of this, for the three months ended September
30, 1998, approximately $0.6 million was due to the exercise of warrants
to purchase approximately 73,994 shares of Common Stock at $7.4328 per
share. For the nine months ended September 30, 1998, approximately $5.5
million was due to the exercise of warrants to purchase approximately
653,958 shares of Common Stock at $7.425 per share and 86,202 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.
8. SUBSEQUENT EVENTS
On October 5, 1998, ALZA Corporation and SEQUUS announced that they had
entered into a definitive merger agreement under which ALZA will acquire
all of SEQUUS' outstanding stock in a tax-free stock-for-stock
transaction. SEQUUS shareholders will receive 0.4 shares of ALZA Common
Stock for each share of SEQUUS Common Stock. Based upon ALZA's October
2, 1998 closing stock price of $42.5375 per share, the transaction has a
value of $16.975 per share for SEQUUS stockholders, and an aggregate
transaction value of approximately $580 million. The consummation of the
transaction is subject to the approval of the Company's stockholders and
other customary closing conditions.
6
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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. 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.
RECENT EVENTS
On October 5, 1998, ALZA Corporation and SEQUUS announced that they had entered
into a definitive merger agreement under which ALZA will acquire all of SEQUUS'
outstanding stock in a tax-free stock-for-stock transaction. SEQUUS shareholders
will receive 0.4 shares of ALZA Common Stock for each share of SEQUUS Common
Stock. Based upon ALZA's October 2, 1998 closing stock price of $42.5375 per
share, the transaction has a value of $16.975 per share for SEQUUS stockholders,
and an aggregate transaction value of approximately $580 million. The
consummation of the transaction is subject to the approval of the Company's
stockholders and other customary closing conditions.
Concurrent with the proposed merger with Alza, the Company established retention
bonus plans to encourage all eligible non-executive officer employees to remain
with the Company following a change in control. Bonuses of 7.5% or 10.0% of the
employee's base salary will be paid on entitlement date, the earlier of one year
from September 25, 1998 or six months following the effective date of a change
in control. The estimated expense of $1.3 million related to these bonus plans
has been accrued as of September 30, 1998.
The Company has entered into severance benefit agreements with all of its
employees. If an employee terminates employment due to involuntary termination
without cause or constructive termination (as defined) within 13 months
following a change in control, such employee will receive a defined severance
benefit payment. No expense or liability with respect to the severance
agreements have been recorded in the financial statements as of September 30,
1998.
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
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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). DOXIL is currently approved
for marketing in a total of 39 countries.
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 September 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 $4.1
million from Schering-Plough through the first nine months of 1998.
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. 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 and has captured a
significant share of the market. 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
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<PAGE> 11
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 $179.8 million in net losses through September 30,
1998, including a net loss of approximately $5.6 million in the first nine
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.
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 September 30, 1998, SEQUUS had a United States sales team of 43 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 September 30, 1998 and 1997
Revenues
Total revenues were $18.0 million, of which $15.8 million were product
sales, during the quarter ended September 30, 1998. By comparison, total
revenues were $10.5 million during the quarter ended September 30, 1997, of
which $9.2 million were product sales. DOXIL/CAELYX product sales represented
86% of total product sales in the third quarter of 1998 compared to 86% in the
third quarter of 1997. The Company increased the wholesale price of DOXIL by
8.25% effective September 1, 1998, the first price increase for DOXIL since its
commercial introduction in December, 1995. In the third quarter of 1998, the
Company recognized approximately $1.8 million under its agreement with
Schering-Plough and $0.4 under its research and development agreement with
Bayer. In the comparative third quarter of 1997, the Company recognized
approximately $1.0 million under its agreement with Schering-Plough and $0.3
under its research and development agreement with Bayer.
Operating Expenses
The Company's gross margin increased to 84% of product sales in the third
quarter of 1998 from 80% 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 $9.3 million in the third quarter of 1998, from $8.1
million in the 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 expense 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 increased to $6.8
million in the third quarter of 1998 as compared to $5.9 million in the third
quarter of 1997. The increase is due to expanded DOXIL marketing programs as
well as recognition of $0.5 million in merger related expenses in third quarter
of 1998. The company anticipates SG&A expenses will increase due to additional
expenses in the fourth quarter of 1998 related to the merger with ALZA and the
continued effort to expand the market for DOXIL and AMPHOTEC in the United
States.
Interest Income & Expense
Interest income increased slightly to $0.4 million in the third quarter of
1998 as compared to $0.3 million in the third quarter of 1997. Interest expense
remained unchanged at $0.1 million in the third quarter of both 1998 and 1997.
Net Loss
The Company's net loss decreased to $0.4 million for the three month period
ended September 30, 1998 from $5.2 million for the same period of 1997, a
decrease of $4.8 million. The net loss per share (both basic and diluted) was
$0.01 for the three month period ended September 30, 1998 compared to a net loss
of $0.17 per share in the same period of 1997. The decrease in net loss and net
loss per share for the third
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quarter of 1998 was due primarily to an increase in product sales in the United
States and revenues recognized under the Schering-Plough agreement partially
offset by an increase in clinical trial and SG&A expenses.
Nine Months Ended September 30, 1998 and 1997
Revenues
Total revenues were $46.8 million, of which $41.8 million were product
sales, during the nine months ended September 30, 1998. By comparison, total
revenues were $27.3 million during the nine months ended September 30, 1997 of
which $23.6 million were product sales. DOXIL/CAELYX product sales represented
86% of total product sales in the first nine months of 1998 compared to 85% in
the first nine months of 1997. In the first nine months of 1998, the Company
recognized approximately $0.8 million under its research and development
agreement with Bayer and $4.1 million in DOXIL/CAELYX related development
payments from its distribution partner Schering-Plough. In the comparative first
nine months of 1997, the Company recognized approximately $0.3 million under its
research and development agreement with Bayer and $3.3 million under its
agreement with Schering-Plough.
Operating Expenses
The Company's gross margin increased to 84% of product sales in the first
nine months of 1998 from 80% 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.
R&D expense increased to $27.5 million in the first nine months of 1998,
from $23.9 million in the comparable first nine 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.
SG&A expenses decreased to $18.9 million in the first nine month period of
1998 from $19.4 million in the first nine 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 offset by
the Alza merger related expenses. The Company anticipates SG&A expenses will
increase due to additional Alza merger related expenses in the fourth quarter of
1998 and the continued efforts to expand the market for DOXIL and AMPHOTEC in
the United States.
Interest Income & Expense
Interest income remained consistent at $1.1 million in the first nine month
period of 1998 as compared to $1.0 million in the first nine months of 1997.
Interest expense increased to $0.4 million in the first nine months of 1998 as a
result of the $5.0 million loan obtained in June 1997 as compared to $0.1
million in the first nine months of 1997.
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Net Loss
The Company's net loss decreased to $5.6 million for the nine month period
ended September 30, 1998 from $20.0 million for the same period of 1997, a
decrease of $14.4 million. The net loss per share (both basic and diluted) was
$0.18 for the nine month period ended September 30, 1998 compared to a net loss
of $0.66 per share in the same period of 1997. The decrease in net loss and net
loss per share for the first nine months 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 and Alza merger related costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and short-term investments at September
30, 1998 were $21.3 million, a decrease of $4.0 million from $25.3 million at
December 31, 1997. This decrease represents by $7.4 million of net cash used by
operating activities, $0.9 million used to retire debt and $3.4 million used in
capital expenditures offset by $8.0 million of cash provided by the issuance of
common stock. 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 available under the credit line was not utilized by the
Company and expired on June 30, 1998. During the nine months ended September 30,
1998, the Company received approximately $7.4 million from the exercise of
warrants issued to investors in private placements and employee stock options.
Of this, approximately $5.5 million was due to the exercise of warrants to
purchase approximately 653,958 shares of Common Stock at $7.425 per share and
86,202 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 has suspended all
plans to raise additional financing pending the announced merger with Alza. If
the Company does seek financing , there can be no assurance that adequate
financing will be available on satisfactory terms, if at all.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of some of the Company's older computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's computer programs or hardware that have
date-sensitive software or embedded chips may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in 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.
Based on recent assessments, the Company determined that it will be
required to modify or replace significant portions of its software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that with modifications or replacements of
existing software and certain hardware, the Year 2000 Issue can be mitigated.
However, if such modifications and replacements are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following
four phases: assessment, remediation, testing, and implementation. To date, the
Company has fully completed its assessment of all systems that could be
significantly affected by the Year 2000. The completed assessment indicated that
most of the Company's significant information technology systems could be
affected, particularly the general ledger, billing, and inventory systems. That
assessment also indicated that software and hardware (embedded chips) used in
Research & Development and manufacturing systems (hereafter also referred to as
operating equipment) also are at risk. Affected systems include
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analytical measuring equipment used in various aspects of the manufacturing
process. However, based on a review of its product line, the Company has
determined that most of the products it has sold and will continue to sell do
not require remediation to be Year 2000 compliant. Accordingly, the Company does
not believe that the Year 2000 presents a material exposure as it relates to the
Company's products. In addition, the Company has gathered information about the
Year 2000 compliance status of its significant suppliers and subcontractors and
continues to monitor their compliance.
For its information technology exposures, to date the Company is 75%
complete on the remediation phase and expects to complete software reprogramming
and replacement no later than March 31, 1999. Once software is reprogrammed or
replaced for a system, the Company begins testing and implementation. These
phases run concurrently for different systems. To date, the Company has
completed 50% of its testing and has implemented 30% of its remediated systems.
Completion of the testing phase for all significant systems is expected by June
30, 1999, with all remediated systems fully tested and full completion targeted
by September 30, 1999.
The remediation of operating equipment is significantly more difficult than
the remediation of the information technology systems because some of the
manufacturers of that equipment may no longer in business or producing
comparable replacement equipment. As such, the Company is only 35% complete in
the remediation phase of its operating equipment. Testing of this equipment is
also more difficult than the testing of the information technology systems; as a
result, the Company is only 20% complete with the testing of its remediated
operating equipment. Once testing is complete, the operating equipment will be
ready for immediate use. The Company expects to complete its remediation efforts
by March 31, 1999. Testing and implementation of affected equipment is expected
to be 80% complete by June 30, 1999.
The Company has queried its significant suppliers, vendors and
subcontractors that do not share information systems with the Company (external
agents). To date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of ensuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
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.
The Company will utilize both internal and external resources to reprogram,
or replace, test, and implement the software and operating equipment for Year
2000 modifications. The total cost of the Year 2000 project is estimated at $0.8
million and is being funded through operating cash flows. To date, the Company
has incurred approximately $0.1 million (for new systems and equipment), related
to all phases of the Year 2000 project. Of the total remaining project costs,
approximately $0.5 million is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining $0.2 million
relates to repair of hardware and software and will be expensed as incurred.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
that the Company does not complete any additional phases, the Company would be
unable to take customer orders, manufacture and ship products, invoice customers
or collect payments. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect the Company. The
Company could be subject to litigation for computer systems product failure, for
example, failure to meet contractual orders or properly date business records.
The amount of potential liability and lost revenue cannot be reasonably
estimated at this time
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The Company currently has no contingency plans in place in the event it
does not complete all phases of the Year 2000 program. The Company plans to
evaluate the status of completion in March 1999 and determine whether such a
plan is necessary.
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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 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.
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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 by receiving 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 43 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.
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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.
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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.
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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
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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
20
<PAGE> 23
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. In the European Patent
Office, the Company is not aware of any existing equivalent patent or pending
application. A corresponding Japanese patent is undergoing an opposition
proceeding in the Japanese Patent Office and the Company is party to such
proceedings. Adverse results in this opposition could have a material adverse
effect on the Company's potential business in Japan. The Company is also aware
of United States
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<PAGE> 24
Patent No. 5,562,925 (the "925 Patent") covering therapeutic cisplatin
compositions held by Research Corporation Technologies Inc.and 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 $179.8 million in net losses through September 30,
1998, including a net loss of approximately $5.6 million in the nine months
ended September 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 if the Company does not complete the merger with ALZA. 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.
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<PAGE> 25
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.
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<PAGE> 26
PART II - OTHER INFORMATION
ITEM 3.
Quantitative and Qualitative Factors About Market Risk
Not applicable
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 three month period ended September
30, 1998.
24
<PAGE> 27
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: November 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)
25
<PAGE> 28
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,374
<SECURITIES> 16,913
<RECEIVABLES> 12,638
<ALLOWANCES> 0
<INVENTORY> 4,012
<CURRENT-ASSETS> 39,362
<PP&E> 8,289
<DEPRECIATION> 0
<TOTAL-ASSETS> 47,852
<CURRENT-LIABILITIES> 15,928
<BONDS> 3,457
0
0
<COMMON> 3
<OTHER-SE> 208,222
<TOTAL-LIABILITY-AND-EQUITY> 47,852
<SALES> 41,814
<TOTAL-REVENUES> 46,764
<CGS> 6,614
<TOTAL-COSTS> 6,614
<OTHER-EXPENSES> 46,422
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 378
<INCOME-PRETAX> (5,553)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,553)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
