<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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: 0-19825
SCICLONE PHARMACEUTICALS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-3116852
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
901 MARINER'S ISLAND BLVD., SUITE 205, SAN MATEO, CALIFORNIA 94404
- ------------------------------------------------------------ ----------
(Address of principal executive offices) (Zip code)
(650) 358-3456
(Registrant's telephone number, including area code)
NOT APPLICABLE
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
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 May 5, 1999, 20,537,426 shares of the registrant's Common Stock,
no par value, were issued and outstanding.
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SCICLONE PHARMACEUTICALS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations
Three months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
(unaudited) (Note 1)
Current assets:
Cash and cash equivalents $ 2,327,000 $ 3,490,000
Short-term investments 12,000 1,513,000
Accounts receivable, net 1,744,000 1,301,000
Inventory 1,189,000 1,353,000
Prepaid expenses and other current assets 497,000 639,000
------------- -------------
Total current assets 5,769,000 8,296,000
Property and equipment, net 369,000 391,000
Long-term investments 252,000 407,000
Notes receivable from officer 234,000 235,000
Other assets 2,281,000 2,398,000
------------- -------------
Total assets $ 8,905,000 $ 11,727,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 641,000 $ 430,000
Accrued compensation and benefits 660,000 731,000
Accrued clinical trials expense 2,109,000 2,402,000
Accrued professional fees 784,000 731,000
Other accrued expenses 156,000 157,000
------------- -------------
Total current liabilities 4,350,000 4,451,000
Redeemable preferred stock, Series C no par value; 10,000,000 shares
authorized; 0 and 58,356 shares issued and outstanding -- 848,000
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized; issuable in
series (0 and 58,356 redeemable preferred shares classified as
outstanding - see above) -- --
Common stock, no par value; 75,000,000 shares authorized; 20,067,028 and
21,534,056 shares issued and outstanding 116,726,000 115,981,000
Net unrealized gain on available-for-sale securities 14,000 9,000
Accumulated deficit (112,185,000) (109,562,000)
------------- -------------
Total shareholders' equity 4,555,000 6,428,000
------------- -------------
Total liabilities and shareholders' equity $ 8,905,000 $ 11,727,000
============= =============
</TABLE>
See notes to consolidated financial statements
3
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SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
------------ ------------
<S> <C> <C>
Product revenue $ 1,577,000 $ 554,000
Contract revenue 200,000 100,000
------------ ------------
Total revenue 1,777,000 654,000
Cost of product sales 359,000 225,000
------------ ------------
Gross profit 1,418,000 429,000
Operating expenses:
Research and development 1,912,000 2,170,000
Marketing 1,272,000 1,248,000
General and administrative 909,000 893,000
------------ ------------
Total operating expenses 4,093,000 4,311,000
------------ ------------
Loss from operations (2,675,000) (3,882,000)
Interest and investment income, net 52,000 197,000
------------ ------------
Net loss $ (2,623,000) $ (3,685,000)
============ ============
Basic and diluted net loss per share $ (0.13) $ (0.24)
============ ============
Shares used in computing basic and
diluted net loss per share 20,029,333 15,463,972
============ ============
</TABLE>
See notes to consolidated financial statements
4
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SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,623,000) $(3,685,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 25,000 59,000
Changes in operating assets and liabilities:
Prepaid expenses and other assets 253,000 107,000
Accounts receivable (443,000) (218,000)
Inventory 164,000 121,000
Accounts payable and other accrued expenses 210,000 (132,000)
Accrued compensation and benefits (71,000) (202,000)
Accrued clinical trials expense (293,000) 202,000
Accrued professional fees 53,000 (59,000)
----------- -----------
Net cash used in operating activities (2,725,000) (3,807,000)
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (3,000) (13,000)
Sale of marketable securities, net 1,661,000 2,458,000
----------- -----------
Net cash provided by investing activities 1,658,000 2,445,000
----------- -----------
FINANCING ACTIVITIES:
Proceeds (costs) from issuance of common stock & financing cost, net (97,000) 13,000
Payment on notes receivable from officer 1,000 754,000
----------- -----------
Net cash provided by (used in) financing activities (96,000) 767,000
----------- -----------
Net decrease in cash and cash equivalents (1,163,000) (595,000)
Cash and cash equivalents, beginning of period 3,490,000 3,619,000
----------- -----------
Cash and cash equivalents, end of period $ 2,327,000 $ 3,024,000
=========== ===========
</TABLE>
See notes to consolidated financial statements
5
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SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles
consistent with those applied in, and should be read in conjunction
with, the audited financial statements for the year ended December 31,
1998. The interim financial information reflects all normal recurring
adjustments which are, in the opinion of management, necessary for a
fair presentation of the results for the interim periods presented. The
balance sheet data at December 31, 1998 is derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The interim results are
not necessarily indicative of results for subsequent interim periods or
for the full year.
2. In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), which is required to be adopted for the year ending
December 31, 2000. Management does not anticipate that the adoption of
SFAS 133 will have a significant impact on results of operations or the
financial position of the Company.
3. For the three-month periods ended March 31, 1999 and 1998, total
comprehensive loss amounted to $(2,618,000) and $(3,653,000),
respectively.
4. The following is a summary of available-for sale securities at March 31,
1999:
<TABLE>
<CAPTION>
Available-for-Sale Securities
----------------------------------------------------------------
Gross Gross Estimated
Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government &
Agency obligations $ 250,000 $ 2,000 $ -- $ 252,000
Corporate obligations -- 12,000 -- 12,000
---------- ---------- ---------- ----------
$ 250,000 $ 14,000 $ -- $ 264,000
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated fair value of available-for-sale
securities at March 31, 1999 by contractual maturity are shown below.
<TABLE>
<CAPTION>
Estimated
Fair
Cost Value
---------- ----------
<S> <C> <C>
Due after one year through three years $ 250,000 $ 252,000
Corporate securities -- 12,000
---------- ----------
$ 250,000 $ 264,000
========== ==========
</TABLE>
6
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5. The following is a summary of inventories at March 31, 1999:
<TABLE>
<S> <C>
Raw materials $1,125,000
Finished goods 64,000
----------
$1,189,000
==========
</TABLE>
6. The following is a summary of other assets at March 31, 1999:
<TABLE>
<S> <C>
Intangible product rights - net $2,217,000
Other 64,000
----------
$2,281,000
==========
</TABLE>
Product rights acquired are being amortized over 6 years beginning in
September 1998.
7. In April 1999, the Company received $234,000 from its chief executive
officer in payment of the remaining balance of a loan. As of April 30,
1999, the balance in "Notes receivable from officer" was $0.
8. In April 1998, the Company sold 661,157 shares of Series C preferred
stock at $6.05 per share and received $3,931,000 in net proceeds from
the sale. As of December 31, 1998 all but 58,356 shares of preferred
stock were converted into shares of common stock. In January 1999,
46,922 of the remaining 58,356 shares of preferred stock were converted
into 299,483 shares of common stock and 11,434 of such remaining shares
of preferred stock were redeemed at a conversion price of approximately
$0.95 per common share. As a result, there are no outstanding shares of
Series C preferred stock. In conjunction with the sale, the Company
granted to the investors warrants to purchase 100,000 shares of common
stock. These warrants are exercisable during the five-year period ending
March 2003 at an exercise price of $5.67 per share.
9. In June 1998, the Company entered into an agreement with an
institutional investor for an equity line which allows the Company to
access up to $32 million through sales of its common stock over a
two-year period, subject to certain limitations. The two-year period
commences with the first draw of funds under the line. Such first draw
has not been made as of the quarter ended March 31, 1999. The decision
to draw any funds and the timing for any such draw is solely at the
Company's discretion. The Company is not obligated to draw any minimum
amount under the equity line. The agreement provides that the Company,
at its option, can obtain up to $4,000,000 per quarter for two years
through sales of its common stock. Should the Company elect to draw upon
the equity line, any shares sold will be at a 3% discount to the average
low sale price of the Company's common stock over a specified period of
time prior to the date of each sale. As a commitment fee to the
investor, the Company issued a five-year warrant to purchase 200,000
shares of its common stock at an exercise price of $5.53 per share. Up
to 300,000 additional warrants to purchase common stock at no less than
$5.53 per share will be issued to the investor based upon the number of
shares of common stock purchased by the investor each calendar year
during the term of the financing. Draws under the equity line are
subject to the satisfaction of certain conditions, including
registration of the investor's resale of the shares, a minimum trading
price per share, volume limitations, limitations on the number of shares
that can be issued without shareholder approval and limitations on the
number of shares of the Company's common stock the investor may hold at
any point in time. Unless the Company and the investor agree otherwise,
the facility is not available
7
<PAGE> 8
when the Company's stock is trading at less than $1.50 per share, which
price has been decreased to $1.00 pursuant to an oral agreement between
the parties. Further the amount available under the line is subject to a
formula and the amount available in any quarter could be minimal. No
assurances can be given that the Company will be able to obtain
necessary funds under the equity line when and if it desires to do so.
10. In April 1999, Italy-based Sigma-Tau Group, one of the leading
pharmaceutical companies in Southern Europe, paid $1,000,000 for 445,000
shares of the Company's unregistered common stock. The Sigma-Tau Group
may not sell the shares until April 12, 2001. In addition, the Sigma-Tau
Group was not granted any registration rights covering resale of the
shares.
11. In April 1999, the Company was awarded a $517,000 grant from the Cystic
Fibrosis Foundation for its ongoing Phase 2 study of CPX, a potential
"protein repair" therapy for cystic fibrosis. The grant will be paid in
three installments over approximately the next 6 months.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following material contains forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. Such forward-looking statements include those which management has
identified with an asterisk (*). Such forward-looking statements are subject to
risks and uncertainties, including those identified in Factors That May Affect
Future Operating Results elsewhere herein and in the Company's Annual Report on
Securities and Exchange Commission Form 10-K for the year ended December 31,
1998. These risks and uncertainties include (i) the Company's current reliance
on a single product, ZADAXIN(R) thymosin alpha 1, for its revenues; (ii) the
absence of regulatory approval for ZADAXIN in the U.S., Europe or Japan; (iii)
risks associated with the manufacture and supply of ZADAXIN; (iv) the
unavailability of immediate and adequate financing; (v) the Company's ability to
complete successfully preclinical and clinical development and obtain timely
regulatory approval and patent and other proprietary rights protection for its
products; (vi) decisions and timing of decisions made by U.S. Food and Drug
Administration and comparable foreign agencies regarding the indications for
which the Company's products may be approved; (vii) market acceptance of the
Company's products; (viii) the Company's ability to obtain reimbursement for its
products from third party payers, where appropriate; (ix) the accuracy of the
Company's information concerning the products and resources of competitors and
potential competitors; as well as other risks and uncertainties described herein
and in the Company's other reports filed with the Securities and Exchange
Commission.
The Company is a global biopharmaceutical company that acquires,
develops and commercializes specialist-oriented drugs for treating chronic and
life-threatening diseases such as hepatitis B, hepatitis C, cancer, immune
system disorders and cystic fibrosis. Currently, the Company has two drugs in
clinical development, ZADAXIN for hepatitis B, hepatitis C, cancer and immune
system disorders, and CPX for cystic fibrosis. The Company also has other drug
candidates in preclinical development. To date, the Company's principal focus
has been the development and commercialization of ZADAXIN for hepatitis B and
hepatitis C and the development of CPX for cystic fibrosis.
From commencement of operations through March 31, 1999, the Company
incurred a cumulative net loss of approximately $112.2 million. The Company
expects its operating expenses to increase over the next several years as it
expands its research and development, clinical testing and marketing
capabilities.* The Company's ability to expand its operations or achieve
profitability is dependent in large part on obtaining additional financing in
the near term to support its operations and its long-term product development
and commercialization efforts, successful expansion of the market for ZADAXIN in
Asia, Latin America and the Middle East, obtaining additional regulatory
approvals for ZADAXIN and/or future products, entering into a corporate
partnering arrangement for development in the U.S. and Europe of a combination
therapy for hepatitis C including ZADAXIN plus interferon, entering into other
agreements for product development and commercialization, where appropriate, and
continuing to expand from development into successful marketing. In addition,
the Company has recently undertaken a program to reduce its cash expenses in an
effort to maximize its cash resources and minimize the anticipated expenditures
needed to achieve a profitable level of operation. Such program includes
reduction in cash compensation to employees. At the Board's discretion, the
Company may issue stock to employees to make up a whole or part of such salary
reduction. The Company intends to continue to review and implement expense
reduction efforts, with such efforts dependent upon the timing and amount of
additional financing, if any, and changes in the Company's capital requirements
for product development and commercialization.* There can be no assurance that
the Company will ever achieve a profitable level of operations.
9
<PAGE> 10
The Company's operating results may fluctuate from period to period as a
result of, among other things, market acceptance of ZADAXIN, the timing and
costs associated with preclinical and clinical development of the Company's
products, the regulatory approval process, and the acquisition of additional
product rights. Setbacks in the launch, sale or distribution of ZADAXIN,
preclinical and clinical development of the Company's products, particularly
CPX, the regulatory approval process or relationships with collaborative
partners, and any shortfalls in revenue or earnings from levels expected by
securities analysts, among other developments, have in the past had and could in
the future have an immediate and significant adverse effect on the trading price
of the Company's common stock in any given period.
RESULTS OF OPERATIONS
Total revenue was approximately $1,777,000 for the three-month period
ended March 31, 1999, as compared to approximately $654,000 for the
corresponding period in 1998. For the three months ended March 31, 1999,
$1,577,000 of total revenue was derived from ZADAXIN product sales and $200,000
from a research grant for CPX from the U.S. Food and Drug Administration.
ZADAXIN has been approved for marketing in Argentina, Cambodia, Italy, Kuwait,
Mexico, Myanmar, The People's Republic of China, Pakistan, Peru, the
Philippines, Singapore, Venezuela, and Vietnam. For the three months ended March
31, 1999, four distributors in The People's Republic of China accounted for 80%
of the Company's product sales. The People's Republic of China, like Japan and
certain other Asian markets, uses a tiered method to import and distribute
products. The distributors make the sales in the country, but the product is
imported for them by licensed importers. The Company currently works with two
importing agents who have been reselling to four distributors within The
People's Republic of China. The Company has filed for approval to market ZADAXIN
in several additional countries and anticipates additional filings in other
countries.* As a result, the Company expects product revenue to continue to
increase in 1999 and beyond, upon the commencement of the commercial launch of
ZADAXIN in additional markets once regulatory approvals are secured.* The level
of such product revenue in newly approved markets and increase, if any, is
dependent upon obtaining additional financing in the near term to support the
Company's operations and its long-term product development and commercialization
efforts, increased ZADAXIN market penetration in the Company's existing approved
markets, additional ZADAXIN marketing approvals and the successful launch of
ZADAXIN in new markets. Although the Company remains optimistic regarding the
prospects of ZADAXIN, there can be no assurance that the Company will ever
achieve significant levels of product revenue, or that the Company will receive
additional ZADAXIN market approvals.
Cost of sales was approximately $359,000 for the three-month period
ended March 31, 1999, as compared to approximately $225,000 for the
corresponding period in 1998. The increase was attributable to increased product
sales. The Company expects cost of sales to vary from quarter to quarter,
dependent upon the level of product revenue, the absorption of fixed
product-related costs, and any charges associated with excess or expiring
finished product.
Research and development expenses were approximately $1,912,000 for the
three-month period ended March 31, 1999, as compared to approximately $2,170,000
for the corresponding period in 1998. The decrease in the comparable three-month
period was primarily attributable to decreased license fees associated with the
Company's acquisition of worldwide rights to thymosin alpha 1 and decreased
consulting fees partially offset by increased clinical trial expenses for the
clinical development of CPX. The Company started its CPX Phase 2 clinical trial
in the U.S. in September 1998 and has also started various pilot clinical
studies to expand
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the use of ZADAXIN in overseas markets. The initiation and continuation of these
programs by the Company had and will continue to have a significant effect on
the Company's research and development expenses in the future and will require
the Company to seek additional capital resources.* In general, the Company
expects product research and development expenses to vary quarter to quarter as
the Company pursues its strategy of initiating additional clinical trials and
testing, entering into one or more corporate partnering arrangements, acquiring
product rights, and expanding regulatory activities.*
Marketing expenses were approximately $1,272,000 for the three-month
period ended March 31, 1999, as compared to approximately $1,248,000 for the
corresponding period in 1998. The increase relates to increased payroll expenses
and expenses for promotional materials associated with the expansion in the
Company's existing markets offset by decreased travel expenses. The Company
expects marketing expenses to vary in the next several quarters and years as it
pursues its commercialization and marketing efforts and other strategic
relationships.*
General and administrative expenses were approximately $909,000 for the
three-month period ended March 31, 1999, as compared to approximately $893,000
for the corresponding period in 1998. The increase was attributable to increased
fees for professional services and travel expenses offset by decreased payroll
costs. In the near term, the Company expects general and administrative expenses
to vary quarter to quarter as the Company takes steps to conserve cash resources
while continuing to support expenditures on clinical trials and testing, and
regulatory, pre-commercialization and marketing activities.*
Net interest and investment income was approximately $52,000 for the
three-month period ended March 31, 1999, as compared to approximately $197,000
for the corresponding period in 1998. The decrease primarily resulted from
decreased interest and investment income due to lower average invested cash
balances.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had approximately $2,591,000 in cash,
cash equivalents and liquid short and long-term investments.
Net cash used by the Company in operating activities amounted to
approximately $2,725,000 for the three-month period ended March 31, 1999. Net
cash used in operating activities in the 1999 period was greater than the
Company's net loss for such period due to increases in accounts receivable and
decreases in amounts owed to third parties for clinical trials and to employees
for compensation and benefits. These uses of cash were offset by non-cash
charges associated with depreciation and amortization; decreases in prepayments
of certain future expenses and inventory and increases in accounts payable and
other accrued expenses. Net cash used by the Company in operating activities
amounted to approximately $3,807,000 for the three-month period ended March 31,
1998. Net cash used in operating activities in the comparable 1998 period was
greater than the Company's net loss for such period due to increases in accounts
receivable and payments to third parties for goods and services and to employees
for compensation and benefits. These uses of cash were offset by non-cash
charges associated with depreciation and amortization, decreases in inventory
and prepayments of certain future expenses and increases in amounts owed to
third parties for clinical trials.
Net cash provided by investing activities amounted to approximately
$1,658,000 for the three-month period ended March 31, 1999 related to the net
sale of approximately $1,661,000 of
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<PAGE> 12
marketable securities offset by the purchase of approximately $3,000 in
equipment and furniture. Net cash provided by investing activities amounted to
approximately $2,445,000 for the three-month period ended March 31, 1998 related
to the net sale of approximately $2,458,000 of marketable securities offset by
the purchase of $13,000 in equipment and furniture.
Net cash used in financing activities for the three-month period ending
March 31, 1999 amounted to approximately $96,000 primarily consisting of various
costs related to the Company's 1998 financing activities offset by net proceeds
from issuances of common stock under the Company's employee stock purchase plan.
Net cash provided by financing activities for the three-month period ending
March 31, 1998 amounted to approximately $767,000, consisting of a partial
repayment of $754,000 on a note receivable from the Company's chief executive
officer and $13,000 in proceeds received from the issuance of common stock under
the Company's employee stock purchase plan.
The report of the Company's independent auditors on the Company's
financial statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 contains an explanatory paragraph indicating that the
Company's historical operating losses raises substantial doubt about the
Company's ability to continue as a going concern. Without additional financing,
significant reduction in operating expenses or sales growth beyond management's
expectations, or a combination thereof, management believes its existing
capital resources and interest on funds available are adequate to maintain its
current and planned operations only through August 1999. To support such
operations beyond August 1999, the Company will need to raise additional
financing in the near term. The Company is evaluating financing alternatives
including a private placement of common stock and common stock warrants, use of
its Equity Line and bank debt financing to increase its capital resources.* The
Company plans to conclude one or more of such financings over the next two
months, although no assurance can be given that such financing will occur in
the time frame expected by the Company, on terms favorable to the Company, or
at all. The Company's capital requirements may change depending upon numerous
factors, including the level of ZADAXIN product sales, the availability of
complementary products, technologies and businesses, the initiation of
preclinical and clinical trials and testing, the timing of regulatory
approvals, developments in relationships with existing or future collaborative
partners and the status of competitive products. The unavailability or timing
of financing could prevent or delay the Company's long-term product development
and commercialization programs and would require the Company to curtail or
cease operations. The Company has recently undertaken a program to reduce its
cash expenses in an effort to maximize its cash resources and minimize the
anticipated expenditures needed to achieve a profitable level of operation.
Such program includes reduction in cash compensation to employees. At the
Board's discretion, the Company may issue stock to employees to make up a whole
or part of such salary reduction. The Company intends to continue to review and
implement expense reduction efforts, with such efforts dependent upon the
timing and amount of additional financing, if any, and changes in the Company's
capital requirements for product development and commercialization.*
YEAR 2000 READINESS
The Company uses and relies on a wide variety of information
technologies and computer systems containing computer-related components. Some
of the Company's older computer software programs and equipment use two digit
fields rather than four digit fields to define the applicable year (i.e., "98"
in the computer code refers to the year "1998"). As a result, time-sensitive
functions of those software programs and equipment may misinterpret dates after
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January 1, 2000, to refer to the twentieth century rather than the twenty-first
century (i.e., "02" could be interpreted as "1902" rather than "2002"). This
could cause system or equipment shutdowns, failures or miscalculations resulting
in inaccuracies in computer output or disruptions of operations, including,
among other things, inaccurate processing of financial information and/or
temporary inability to process transactions or engage in other normal business
activities.
The Company has developed a strategy to address the potential exposures
related to the impact on its computer systems for the Year 2000 and beyond. An
inventory of key financial, informational and operational systems has been
completed. Plans testing of any necessary modifications to these key computer
systems and equipment to ensure they are Year 2000 compliant have been developed
and have been fully implemented. The Company believes that with these plans and
completed modifications, the Year 2000 issue will not pose significant
operational problems for its computer systems and equipment. However, even if
these modifications are made in a timely fashion, they still may not prevent a
material adverse effect on the Company's business, financial condition or
results of operations. If such a material adverse effect were to occur, the
magnitude of it cannot be known at this time. The Company currently has no
contingency plans to deal with major Year 2000 failures, though such plans, if
deemed necessary, will be developed over the coming months.
In addition to risks associated with the Company's own computer systems
and equipment, the Company has relationships with, and is to varying degrees
dependent upon, a large number of third parties that provide information, goods
and services to the Company. These include financial institutions, suppliers,
vendors, research partners and governmental entities. If a significant number of
these third parties experience failures in their computer systems or equipment
due to Year 2000 non-compliance, it could affect the Company's ability to
process transactions, develop, manufacture and distribute products, or engage in
similar normal business activities. While some of these risks are outside the
control of the Company, the Company has instituted programs, including internal
records review and use of external questionnaires, to identify key third
parties, assess their level of Year 2000 compliance, update contracts and
address any non-compliance issues. The Company expects to complete its review
and assessment by June 30, 1999 and complete any remedial efforts as required by
December 31, 1999.
The total cost of the Year 2000 systems assessments and conversions is
funded through operating cash flows, and the Company is expensing these costs.
The financial impact of making the required systems changes and ensuring that
key third-parties are Year 2000 compliant is not known precisely at this time,
but it is currently expected to be less than $50,000. The amount of the cost
incurred to date is less than $10,000. The actual financial impact could,
however, exceed this estimate. These costs are not expected to be material to
the Company's financial position, results of operations or cash flows.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Dependence on ZADAXIN and CPX. The Company's principal drug development
efforts are currently focused primarily on ZADAXIN and CPX. Clinical trials of
ZADAXIN sponsored by the Company and/or other parties are currently in progress
or planned and favorable results from such trials will be necessary to gain
regulatory approval in major pharmaceutical markets. Sales of ZADAXIN commenced
in 1997. While ZADAXIN has been approved for commercial sale in 13 countries, no
assurance can be given that ZADAXIN approvals will be obtained in additional
countries or for treatment of additional indications, such as cancer, in a
timely fashion or at all. The Company's launch of ZADAXIN in the People's
Republic of China, the Philippines
13
<PAGE> 14
and Singapore was the first commercial introduction of ZADAXIN by the Company,
and no assurance can be given that continued commercialization of ZADAXIN will
prove successful. The Company has not yet launched ZADAXIN in Argentina,
Cambodia, Italy, Kuwait, Mexico, Myanmar, Pakistan, Peru or Vietnam and no
assurance can be given that future launches of ZADAXIN will prove successful in
these countries or in any additional countries. Future sales of ZADAXIN will
depend on market acceptance and successful distribution. In particular, although
the People's Republic of China has the highest hepatitis B prevalence rate in
the world, the low average income and poorly developed distribution
infrastructure present ongoing challenges to successful commercialization of
ZADAXIN in that market. Because the Company currently relies on ZADAXIN as its
sole source of revenue, the failure to demonstrate the drug's efficacy in future
clinical trials, obtain additional marketing approvals or commercialize the drug
successfully would have a material adverse effect on the Company.
The Company may experience delays and encounter difficulties in clinical
trials of CPX, its drug in phase 2 clinical development for treatment of cystic
fibrosis ("CF"). In addition, there can be no assurance that any clinical trial
will provide statistically significant evidence of the efficacy of CPX in
treating CF. A failure to demonstrate the safety and efficacy of CPX in a CF
clinical trial, obtain regulatory approval of CPX for CF or successfully
commercialize CPX could have a material adverse effect on the Company.
No History of Significant Revenues; Continuing Operating Losses. The
Company has only recently generated revenues from the commercialization of its
lead product, ZADAXIN, and there is substantial uncertainty regarding the timing
and amount of any future revenues and whether such future revenues will be
material. The Company cannot predict when or if marketing approvals for CPX will
be obtained or additional marketing approvals for ZADAXIN will be obtained. Even
if such approvals are obtained, there can be no assurance that ZADAXIN and CPX
will be commercialized successfully. The Company has experienced significant
operating losses since its inception and has a substantial accumulated deficit.
The Company expects its operating expenses to increase over the next several
years as it expands its development, clinical testing and marketing
capabilities.* The Company's ability to expand its operations or achieve
profitability is dependent in large part on obtaining additional financing in
the near term to support its operations and its long-term product development
and commercialization efforts, successful expansion of the market for ZADAXIN in
Asia, Latin America and the Middle East, obtaining additional regulatory
approvals for ZADAXIN and/or future products, entering into a corporate
partnering arrangement for development in the U.S. and Europe of a combination
therapy for hepatitis C including ZADAXIN plus interferon, entering into other
agreements for product development and commercialization, where appropriate, and
continuing to expand from development into successful marketing. In addition,
the Company has recently undertaken a program to reduce its cash expenses in an
effort to maximize its cash resources and minimize the anticipated expenditures
needed to achieve a profitable level of operation. Such program includes
reduction in cash compensation to employees. At the Board's discretion, the
Company may issue stock to employees to make up a whole or part of such salary
reduction. The Company intends to continue to review and implement expense
reduction efforts, with such efforts dependent upon the timing and amount of
additional financing, if any, and changes in the Company's capital requirements
for product development and commercialization.* There can be no assurance that
the Company will ever achieve a profitable level of operations.
Future Capital Needs; Uncertainty of Additional Financing. Since
inception, the Company has financed its operations primarily through sales of
equity securities. However, the Company will need to obtain substantial
additional financing to support its operations and its
14
<PAGE> 15
long-term product development and commercialization programs beyond August.
Without additional financing, management believes its existing capital resources
and interest on funds available are adequate to maintain its current and planned
operations only through August 1999. The Company is evaluating financing
alternatives including a private placement of common stock and common stock
warrants, use of its Equity Line and bank debt financing to increase its capital
resources.* However, the Company's future capital requirements will depend on
many factors, including the level of ZADAXIN product sales, the availability of
complementary products, technologies and businesses, the initiation of
preclinical and clinical development expenses and opportunities, the timing and
cost of regulatory approvals, patent costs, competing technological and market
developments, the nature of existing and future collaborative relationships, the
ability to use the Equity Line and the Company's ability to establish
development, sales, manufacturing and marketing arrangements. There can be no
assurance that such financing will be available on acceptable terms or a timely
basis, if at all. Other than the Equity Line the Company has limited commitments
or arrangements for additional funding and may not be able to obtain needed
financing. Draws under the Equity Line are subject to the satisfaction of
certain conditions, including registration of the investor's resale of the
shares, a minimum trading price per share, volume limitations, limitations on
the number of shares that can be issued without shareholder approval and
limitations on the number of shares of the Company's common stock the investor
may hold at any point in time. Unless the Company and the investor agree
otherwise, the facility is not available when the Company's stock is trading at
less than $1.50 per share, which price has been decreased to $1.00 pursuant to
an oral agreement between the parties. The unavailability or timing of financing
could prevent or delay the Company's long-term product development and
commercialization programs and would require the Company to curtail or cease
operations.
Compliance With Nasdaq Listing Requirements. The Company's common stock
is quoted on the Nasdaq National Market (the "National Market"). However, in
order to continue to be included in the National Market, a company must meet
certain maintenance criteria. The maintenance criteria require a minimum bid
price of $1.00 per share, $4,000,000 in net tangible assets (total assets less
total liabilities and goodwill) and $5,000,000 market value of the public float
(excluding shares held directly or indirectly by any officer or director of the
Company and by any person holding beneficially more than 10% of the Company's
outstanding shares). As of April 30, 1999 the closing bid price of the Company's
Common Stock was $1.50 and the market value of the Company's public float was
approximately $29,250,000. As of March 31, 1999 the Company had net tangible
assets of $6,688,000.
Failure to meet these maintenance criteria may result in the delisting
of the Company's common stock from the National Market. Trading, if any, in the
Company's common stock would thereafter be conducted in the non-Nasdaq
over-the-counter market. If the Company's common stock were delisted from
trading on Nasdaq, an investor may find it more difficult to dispose of, or to
obtain accurate quotation as to the market value of, the Company's common stock,
which could severely limit the market liquidity of the common stock and limit
the ability of the Company's shareholders to sell the common stock in the
secondary market.
Dependence on Third Parties. The Company's strategy contemplates that it
will enter into various collaborative arrangements with other entities. To date,
the Company has acquired rights to ZADAXIN, CPX and certain other drugs but is
only actively pursuing clinical development of ZADAXIN and CPX. Failure to
license or otherwise acquire rights to additional drugs would result in a
shortage of products for development. In addition, the Company has licensed
exclusive rights to develop and market ZADAXIN in Japan to Schering-Plough K.K.
15
<PAGE> 16
Schering-Plough K.K. has a substantial commitment to alpha interferon, which is
an approved therapy for hepatitis B and hepatitis C in Japan. There can be no
assurance that the relationship will prove successful or that the Company will
be able to negotiate additional arrangements in the future, including a
corporate partnering arrangement for development in the U.S. and Europe of a
combination therapy for hepatitis C including ZADAXIN plus interferon. The
amount and timing of resources that collaborators devote to their activities
with the Company will not be within the control of the Company and may be
affected by financial difficulties or other factors affecting these third
parties. There can be no assurance that such parties will perform their
obligations as expected. Moreover, the Company's ability to obtain regulatory
approval in one country may be delayed or adversely affected by the timing of
regulatory activities and approvals in one or more other countries, particularly
if the Company does not participate in the regulatory approval process in such
other countries.
Foreign Sales and Operations. The Company's financial condition in the
near term will be highly dependent on ZADAXIN sales in foreign jurisdictions,
where sales and operations are subject to inherent risks, including difficulties
and delays in obtaining pricing approvals and reimbursement, unexpected changes
in regulatory requirements, tariffs and other barriers, political instability,
difficulties in staffing and managing foreign operations, longer payment cycles,
greater difficulty in accounts receivable collection, currency fluctuations and
potential adverse tax consequences. Certain foreign countries regulate pricing
of pharmaceuticals and such regulation may result in prices significantly below
those that would prevail in a free market. The majority of the Company's current
sales are to customers in the People's Republic of China.
Patents and Proprietary Rights. The U.S. and most European composition
of matter patents for thymosin alpha 1 have expired. The Company will in the
future have only limited composition of matter patents for thymosin alpha 1 and
this could adversely affect the Company's proprietary rights. However, the
Company owns or has exclusive licenses for use and/or process patents or patent
applications in the U.S., Europe, Japan and other jurisdictions for thymosin
alpha 1, and for CPX in the U.S. and will seek to protect such products from
competition through such patent protection and through other means. The
Company's success is significantly dependent on its ability to obtain patent
protection for its products and technologies and to preserve its trade secrets
and operate without infringing on the proprietary rights of third parties. No
assurance can be given that the Company's pending patent applications will
result in the issuance of patents or that any patents will provide competitive
advantages or will not be invalidated or circumvented by its competitors.
Moreover, no assurance can be given that patents are not issued to, or patent
applications have not been filed by, other companies which would have an adverse
effect on the Company's ability to use, manufacture or market its products or
maintain its competitive position with respect to its products. Numerous patents
and patent applications relating to thymosin alpha 1 are held under exclusive
license and the breach by the Company of the terms of such license could result
in the loss of the Company's rights to such patents and patent applications.
Other companies obtaining patents claiming products or processes useful to the
Company may bring infringement actions against the Company and such litigation
is typically costly and time-consuming. As a result, the Company may be required
to obtain licenses from others or not be able to use, manufacture or market its
products. Such licenses may not be available on commercially reasonable terms,
if at all.
The patent positions of biotechnology firms generally are highly
uncertain and involve complex legal and factual questions. No consistent policy
has emerged regarding the validity and scope of claims in biotechnology patents,
and courts have issued varying interpretations in the recent past, and legal
standards concerning validity, scope and interpretations of claims in
16
<PAGE> 17
biotechnology patents may continue to evolve. Even issued patents may later be
modified or revoked by the U.S. Patent and Trademark Office, the European Patent
Office or the courts in proceedings instituted by third parties. Moreover, the
issuance of a patent in one country does not assure the issuance of a patent
with similar claims in another country and claim interpretation and infringement
laws vary among countries, so the extent of any patent protection is uncertain
and may vary in different countries.
Pharmaceuticals are not patentable in certain countries in SciClone's
ZADAXIN territory, or have only recently become patentable, and enforcement of
intellectual property rights in many countries in such territory has been
limited or non-existent. Future enforcement of patents and proprietary rights in
many countries in SciClone's ZADAXIN territory can be expected to be problematic
or unpredictable. There can be no assurance that any patents issued or licensed
to the Company will provide it with competitive advantages or will not be
challenged by others. No assurance can be given that holders of patents licensed
to the Company will file, prosecute, extend or maintain their patents in
countries where the Company has rights. Furthermore, there can be no assurance
that others will not independently develop similar products or will not design
around patents issued or licensed to the Company.
Government Regulation and Product Approvals. The research, preclinical
and clinical development, manufacturing, marketing and sales of pharmaceuticals,
including ZADAXIN, CPX and the Company's other drug candidates, are subject to
extensive regulation by governmental authorities. Products developed by the
Company cannot be marketed commercially in any jurisdiction in which they have
not been approved. The process of obtaining regulatory approvals is lengthy and
requires the expenditure of substantial resources. In some countries where the
Company contemplates marketing ZADAXIN, the regulatory approval process for
drugs not previously approved in countries that have established clinical trial
review procedures is uncertain and this uncertainty may result in delays in
granting regulatory approvals. The Company is currently sponsoring clinical
trials and pursuing regulatory approvals of ZADAXIN in a number of countries and
of CPX in the U.S., but there can be no assurance that the Company will be able
to complete such trials, that such trials, if completed, will fulfill regulatory
approval criteria or that the Company will ultimately obtain approvals in such
countries. Adverse results in the Company's development programs also could
result in the placement of restrictions on the use of ZADAXIN and, if approved,
CPX. Failure to comply with the applicable U.S. or foreign regulatory
requirements can, among other things, result in Warning Letters, fines,
suspensions of regulatory approvals, product recalls or seizures, operating
restrictions, injunctions and criminal prosecutions. Further, additional
government regulation may be established or imposed which could prevent or delay
regulatory approval of ZADAXIN, CPX or any future products of the Company.
Manufacturing. The Company has entered into contract manufacturing and
supply agreements to source ZADAXIN and CPX. The Company has experienced delays
of supply of ZADAXIN bulk drug in the past and could do so again in the future.
To be successful, the Company's products must be manufactured in commercial
quantities in compliance with regulatory requirements and at an acceptable cost.
While the Company believes it has and will be able in the future to establish
manufacturing relationships with experienced suppliers capable of meeting the
Company's needs, there can be no assurance that the Company will establish long
term manufacturing relationships with suppliers or that these suppliers will
prove satisfactory. The Company currently has vialing and packaging supply
agreements in effect and has a sufficient supply of finished ZADAXIN for the
near term. The Company has recently changed and upgraded its manufacturing
source of finished ZADAXIN for its international markets,
17
<PAGE> 18
excluding Japan. In certain countries, this change may require additional
regulatory approvals. If regulatory approvals of such manufacturing change, if
required, are not obtained in a timely fashion, new ZADAXIN marketing approvals
may be delayed or sales may be interrupted until the manufacturing change is
approved. Production interruptions, if they occur, could significantly delay
clinical development of potential products, reduce third party or clinical
researcher interest and support of proposed clinical trials. Such interruptions
could also delay commercialization of the Company's products and impair their
competitive position, which would have a material adverse effect on the business
and financial condition of the Company.
Marketing and Sales. The Company has established distribution
arrangements with local pharmaceutical distribution companies covering countries
in Asia, Latin America and the Middle East. However, no assurance can be given
that any such distribution arrangements will remain in place or prove
successful.
Technological Change and Competition. Rapid technological development
may result in the Company's products becoming obsolete before they are marketed
or before the Company recovers a significant portion of the related development
and commercialization expenses. Competition in the pharmaceutical field is
intense and the Company expects that competition will increase. The Company's
competitors include major pharmaceutical companies, biotechnology firms and
universities and other research institutions, both in the U.S. and abroad, that
are actively engaged in research and development of products in the therapeutic
areas being pursued by the Company. Many of these companies and institutions
have substantially greater financial, technical, manufacturing, marketing and
human resource capabilities than the Company and extensive experience in
undertaking clinical testing and obtaining regulatory approvals necessary to
market drugs. Principal competitive factors in the pharmaceutical field include
efficacy, safety, price and therapeutic regimen. Where comparable products are
marketed by other companies price is also a competitive factor.
Uncertainty of Third Party Reimbursement; Resources of Patient
Populations. The Company's ability to successfully commercialize its products
may depend in part on the extent to which reimbursement for the cost of such
products will be available from government health administration authorities,
private health insurers and other organizations. Significant uncertainty exists
as to the reimbursement status of new therapeutic products and there can be no
assurance that third party reimbursement will be available for therapeutic
products the Company might develop. In many of the foreign countries in which
the Company intends to operate, reimbursement of ZADAXIN under government or
private health insurance programs will not be available. In the U.S., health
care reform is an area of increasing national attention and a priority of many
governmental officials. Certain reform proposals, if adopted, could impose
limitations on the prices the Company will be able to charge in the U.S. for its
products or the amount of reimbursement for the Company's products from
governmental agencies or third party payors. In many countries where the Company
has marketing rights for ZADAXIN, government resources and per capita income
levels may be so low that the Company's products will be prohibitively expensive
for a large percentage of the population. In such countries, there can be no
assurance that the Company will be successful in marketing its products on
economically favorable terms, if at all.
Dependence on Qualified Personnel and Key Individuals. Because of the
specialized scientific and international nature of the Company's business, the
Company is highly dependent upon its ability to continue to attract and retain
qualified management, scientific and technical personnel. There is intense
competition for qualified personnel in the areas of the Company's
18
<PAGE> 19
activities, and there can be no assurance that the Company will be able to
continue to attract and retain the qualified personnel necessary for the
development of its business. In addition, many key responsibilities within the
Company have been assigned to a relatively small number of individuals. Loss of
the services of any of these individuals unless they were promptly replaced
could be significantly detrimental to the Company's development. The Company
does not maintain key person life insurance on the lives of any of its key
personnel.
Product Liability; Absence of Insurance. The Company's business will
expose it to potential product liability risks which are inherent in the
testing, manufacturing, marketing and sale of pharmaceutical products, and there
can be no assurance that product liability claims will not be asserted against
the Company. Product liability insurance for the pharmaceutical industry
generally is expensive to the extent that it is available at all. The Company
has product liability insurance coverage for clinical trials and commercial
sales. However, there can be no assurance that a product liability claim would
not adversely affect the business or financial condition of the Company.
Preferred Stock. The Company's Board of Directors has the authority to
issue additional series of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, without any
further vote or action by the Company's shareholders. The rights of the holders
of the Common Stock will be subject to, and may be adversely affected by, the
rights of the holders of any Preferred Stock that may be issued in the future.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company.
19
<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary objective of the Company's investment activities is to
preserve principal while at the same time maximizing yields without
significantly increasing risk. To achieve this objective, the Company invests in
highly liquid and high quality debt securities. The Company's investments in
debt securities are subject to interest rate risk. To minimize the exposure due
to adverse shift in the interest rates the Company invests in short term
securities and maintains an average maturity of less than 2 years. A
hypothetical 60 basis point increase in interest rates would result in an
approximate $29,945 decrease (less than 0.5%) in fair value of the Company's
available-for-sale securities.
The potential change noted above is based on sensitivity analyses
performed on the Company's financial positions at March 31, 1999. Actual results
may differ materially.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
On April 1, 1998, the Company issued and sold 661,157 shares of Series C
Convertible Preferred Stock ("Preferred Stock") at $6.05 per share to three
institutional investors, and received $3,712,000 in net proceeds from the sale.
As of December 31, 1998, all but 58,356 shares were converted. In January 1999,
46,922 of the remaining 58,356 shares of common stock were converted into
299,483 shares of common stock and 11,434 shares of such remaining shares of
Series C preferred stock were redeemed at a conversion price of $0.95 per common
share. As a result, there are no outstanding shares of Series C preferred stock.
In conjunction with the sale, the Company granted to the investors and the
Company's placement agent warrants to purchase a total of 150,000 shares of
common stock. These warrants are exercisable during the five-year period ending
March 2003 at an exercise price of $5.67 per share. Such securities were not
registered under the Securities Act of 1933, as amended (the "Act") in reliance
upon the exemptions provided by Section 4(2) of the Act and/or Regulation D
promulgated thereunder as a transaction by an issuer not involving a public
offering.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(i).1 Restated Articles of Incorporation (incorporated
by reference from the Company's Registration
Statement on Form S-1 (No. 33-45446), declared
effective by the Commission on March 17, 1992).
3(i).2 Certificate of Amendment of Restated Articles of
Incorporation (incorporated by reference from
the Company's Registration Statement on Form S-8
(No. 33-66832) filed with the Commission on
August 3, 1993).
3(i).3 Certificate of Determination (incorporated by
reference from the Company's Current Report on
Form 8-K filed on October 14, 1997).
3(i).4 Certificate of Determination Regarding the terms
of the Series C Preferred Stock. (incorporated
by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1997).
3(ii).1 Bylaws (incorporated by reference from the
Company's Registration Statement on Form S-1
(No. 33-45446), declared effective by the
Commission on March 17, 1992).
3(ii).2 Certificate of Amendment of Bylaws (incorporated
by reference from the Company's Registration
Statement on Form S-8 (No. 33-66832) filed with
the Commission on August 3, 1993).
4.2 Rights Agreement, dated as of July 25, 1997,
between SciClone and ChaseMellon Shareholder
Services, LLC. (incorporated by reference to the
Company's Current Report on Form 8-K filed on
October 14, 1997).
27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K filed on April 12, 1999 reporting the Company's sale
and issuance of 445,000 shares of unregistered common stock to
the Sigma-Tau Group for a purchase price of $1,000,000.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCICLONE PHARMACEUTICALS, INC.
(Registrant)
Date: May 14, 1999 Donald R. Sellers
----------------------------------------------
Donald R. Sellers
Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 1999 Diane Lee
----------------------------------------------
Diane Lee
Director, Corporate Finance and Administration
(Principal Financial & Accounting Officer)
23
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