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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 September 30, 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 November 4, 1999, 24,972,903 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 (Unaudited)
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
Three and Nine months ended September 30, 1999 and 1998 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 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>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -------------
(unaudited) (Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,108,000 $ 3,490,000
Short-term investments 3,114,000 1,513,000
Accounts receivable, net 3,624,000 1,301,000
Inventory 854,000 1,353,000
Prepaid expenses and other current assets 360,000 639,000
------------- -------------
Total current assets 9,060,000 8,296,000
Property and equipment, net 274,000 391,000
Long-term investments -- 407,000
Notes receivable from officer -- 235,000
Other assets 2,140,000 2,398,000
------------- -------------
Total assets $ 11,474,000 $ 11,727,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 360,000 $ 430,000
Accrued compensation and benefits 352,000 731,000
Accrued clinical trials expense 415,000 2,402,000
Accrued professional fees 805,000 731,000
Other accrued expenses 127,000 157,000
------------- -------------
Total current liabilities 2,059,000 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;
24,958,371 and 21,534,056 shares issued and outstanding 123,908,000 115,981,000
Net unrealized gain on available-for-sale securities -- 9,000
Accumulated deficit (114,493,000) (109,562,000)
------------- -------------
Total shareholders' equity 9,415,000 6,428,000
------------- -------------
Total liabilities and shareholders' equity $ 11,474,000 $ 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 Nine months ended
September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Product revenue $ 2,513,000 $ 1,006,000 $ 6,091,000 $ 2,361,000
Contract revenue -- -- 307,000 100,000
------------ ------------ ------------ ------------
Total revenue 2,513,000 1,006,000 6,398,000 2,461,000
Cost of product sales 429,000 253,000 1,185,000 681,000
------------ ------------ ------------ ------------
Gross profit 2,084,000 753,000 5,213,000 1,780,000
Operating expenses:
Research and development 836,000 2,132,000 3,639,000 6,495,000
Special research and development charge -- 708,000 -- 708,000
Marketing 1,548,000 1,307,000 4,305,000 3,862,000
General and administrative 541,000 926,000 2,313,000 2,773,000
------------ ------------ ------------ ------------
Total operating expenses 2,925,000 5,073,000 10,257,000 13,838,000
------------ ------------ ------------ ------------
Loss from operations (841,000) (4,320,000) (5,044,000) (12,058,000)
Interest and investment income, net 44,000 132,000 113,000 480,000
------------ ------------ ------------ ------------
Net loss (797,000) (4,188,000) (4,931,000) (11,578,000)
Deemed dividend on issuance of preferred stock -- -- -- (3,143,000)
------------ ------------ ------------ ------------
Net loss attributable to common shareholders $ (797,000) $ (4,188,000) $ (4,931,000) $(14,721,000)
============ ============ ============ ============
Net loss per common share
(basic & diluted) $ (0.03) $ (0.26) $ (0.23) $ (0.94)
============ ============ ============ ============
Weighted average shares used in
computing per share amounts 24,384,502 15,954,322 21,694,890 15,640,453
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
4
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SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(4,931,000) $(11,578,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 141,000 170,000
Acquisition of product rights -- 708,000
Changes in operating assets and liabilities:
Prepaid expenses and other assets 531,000 (1,866,000)
Accounts receivable (2,323,000) (638,000)
Inventory 499,000 556,000
Accounts payable and other accrued expenses (100,000) (5,000)
Accrued compensation and benefits 141,000 939,000
Accrued clinical trials expense (1,987,000) 82,000
Accrued professional fees 74,000 (133,000)
----------- ------------
Net cash used in operating activities (7,955,000) (11,765,000)
----------- ------------
INVESTING ACTIVITIES:
Purchase and disposal of property and equipment, net (24,000) (77,000)
Sale (Purchase) of marketable securities, net (1,203,000) 4,576,000
----------- ------------
Net cash provided by (used in) investing activities (1,227,000) 4,499,000
----------- ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock and financing cost, net 6,565,000 1,299,000
Proceeds from issuance of Series C preferred stock and warrants, net -- 3,957,000
Payment on notes receivable from officer 235,000 750,000
----------- ------------
Net cash provided by financing activities 6,800,000 6,006,000
----------- ------------
Net (decrease) increase in cash and cash equivalents (2,382,000) (1,260,000)
Cash and cash equivalents, beginning of period 3,490,000 3,619,000
----------- ------------
Cash and cash equivalents, end of period $ 1,108,000 $ 2,359,000
=========== ============
Supplemental disclosures of non-cash financing activities:
Deemed dividend on issuance of Series C preferred stock -- $ 3,143,000
Warrants attributable to Series C preferred stock -- $ 245,000
Warrants attributable to equity line financing -- $ 460,000
Warrants attributable to Sclavo acquisition rights -- $ 735,000
Conversion of Series C preferred stock to common stock -- $ 944,000
Common stock issued to acquire product rights -- $ 1,885,000
Issuance of common stock as payment
in lieu for accrued compensation and benefits $ 565,000 --
</TABLE>
See notes to consolidated financial statements
5
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SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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, 2001. 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 nine-month periods ended September 30, 1999 and 1998, total
comprehensive loss amounted to $(4,940,000) and $(14,759,000),
respectively.
4. The following is a summary of inventories at September 30, 1999:
<TABLE>
<S> <C>
Raw materials $826,000
Finished goods 28,000
--------
$854,000
========
</TABLE>
5. The following is a summary of other assets at September 30, 1999:
<TABLE>
<S> <C>
Intangible product rights - net $2,012,000
Other 128,000
----------
$2,140,000
==========
</TABLE>
Product rights acquired are being amortized over 6 years beginning in
September 1998. The Company identifies and records impairment losses, as
circumstances dictate, on intangible product rights when events and
circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are
less than the carrying amounts of those assets.
6. In April 1999, the Company received $235,000 from its chief executive
officer in payment of the remaining balance of a loan. As of September
30, 1999, the balance in "Notes receivable from officer" was $0.
7. 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
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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.
8. 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.
9. On July 2, 1999, the Company completed a $2,000,000 (before deducting
expenses) private placement to strategic institutional and accredited
investors. The offering consisted of units of 1,370,145 shares of common
stock and redeemable warrants to purchase 1,370,145 shares of common
stock. Each unit, comprised of one share of common stock and a
redeemable warrant to purchase one share of common stock, was priced at
$1.46. These redeemable warrants are exercisable during the five-year
period ending July 1, 2004 at an exercise price of $ 1.33 per share.
10. On July 21, 1999, the Company completed a $4,000,000 (before deducting
expenses) private placement to strategic institutional investors led by
Brown Simpson Asset Management and The New York Life Insurance Company.
The offering consisted of units of 2,515,934 shares of common stock and
redeemable warrants to purchase 2,515,934 shares of common stock. Each
unit, comprised of one share of common stock and a redeemable warrant to
purchase one share of common stock, was priced at $1.59. These
redeemable warrants are exercisable during the five-year period ending
July 20, 2004 at an exercise price of $1.72 per share.
11. The Company does not have any minimum purchase requirements under its
contract manufacturing supply agreements for ZADAXIN(R) and CPX.
12. The Company recognizes contract/grant revenue when services have been
performed. 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 Company
expects the grant to be paid in installments as services are performed
over approximately the next 6 months. The first installment of $107,000
was received in June 1999. In March 1999, the Company received a
non-refundable $200,000 FDA Orphan Drug Grant for phase 2 development of
CPX. As the Company has no future performance obligations with respect
to such FDA grant, the Company recognized the entire amount as revenue
in March 1999.
13. The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task
Force ("EITF") 96-18. Warrants issued in connection with equity and debt
arrangements are valued using the Black-Scholes option valuation model.
Warrants issued to placement agents and similar parties in connection
with equity financing are accounted as stock issuance cost with an
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equal amount recorded as additional paid-in capital. Warrants issued to
purchasers of the Company's equities are not specifically accounted for
as their value is a sub-component of additional paid-in capital. The
fair value of warrants issued in connection with debt arrangements, if
material, is accounted for as a debt discount and amortized as
additional interest expense over the term of the related debt.
14. In the second quarter ended June 30, 1998, the Company recognized a
deemed dividend in the amount $3,143,000 in connection with the issuance
of the Series C preferred stock. This amount was computed in accordance
to EITF Appendix D-60, "Accounting for the Issuance of Convertible
Preferred Stock and Debt Securities with a Nondetachable Conversion
Feature ("EITF D-60"), because the Series C preferred stock had a
beneficial conversion feature at the date of issue that allowed it to be
converted to common stock at a discount to the common stock's market
price at the date of conversion.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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. These forward-looking statements relate to future events or the
Company's future clinical or product development or financial performance. Such
forward-looking statements include, but are not limited to, those which
management has identified with an asterisk (*). All forward-looking statements
reflect only management's current expectations and are subject to risks and
uncertainties, including those risks and uncertainties 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. Such risks and uncertainties include (i) the Company's
current reliance on a single product, ZADAXIN 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 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 in major pharmaceutical markets;
(v) 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; (vi) market acceptance of the Company's
products; (vii) the Company's ability to obtain reimbursement for its products
from third party payers, where appropriate; (viii) 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.
These factors may cause the Company's actual results to differ materially from
any forward-looking statements.
OVERVIEW
SciClone Pharmaceuticals 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,
HIV/AIDS 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 has two drug candidates,
SCV-07 and DAX, in preclinical development. To date, the Company's principal
focus has been the development and commercialization of ZADAXIN for hepatitis B,
hepatitis C and cancer and the development of CPX for cystic fibrosis.
From commencement of operations in 1989 through September 30, 1999, the
Company incurred a cumulative net loss of approximately $114.5 million. The
Company expects its operating expenses to increase over the next several years
consistent with its expansion of sales, research and development, and
preclinical and clinical testing.* The Company's ability to expand its
operations or achieve profitability is dependent in part on 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 in the U,S.,
Europe and Japan, entering into additional partnering arrangements for product
development and commercialization, where appropriate, obtaining additional
financing to support its long-term product development and commercialization
efforts, and continuing to transition from a development operation into a
successful marketing and development operation.
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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.
RESULTS OF OPERATIONS
SciClone's total revenue was approximately $2,513,000 and $6,398,000 for
the three-month and nine-month periods ended September 30, 1999, as compared to
approximately $1,006,000 and $2,461,000 for the corresponding periods in 1998.
For the three months ended September 30, 1999, $2,513,000 of SciClone's total
revenue was derived from ZADAXIN product sales. For the nine months ended
September 30, 1999, four distributors in The People's Republic of China
accounted for 84% of the Company's ZADAXIN 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 received
ZADAXIN marketing approval in 16 countries but has not yet commercially launched
ZADAXIN in all of such countries. 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 its product revenue to
continue to increase in 1999 and beyond, upon the commencement of ZADAXIN
product sales in newly approved markets and in additional markets once
regulatory approvals are secured.* However, the level of ZADAXIN product sales
in newly approved and potential markets and increases in existing markets, if
any, is dependent in part upon the Company's long-term product development and
commercialization efforts, increased ZADAXIN market penetration, additional
ZADAXIN marketing approvals and successful ZADAXIN launch efforts.
Cost of sales was approximately $429,000 and $1,185,000 for the
three-month and nine-month periods ended September 30, 1999, as compared to
approximately $253,000 and $681,000 for the corresponding periods in 1998. The
increase was attributable to increased ZADAXIN product sales. The Company
expects cost of sales to vary from quarter to quarter, dependent upon the level
of ZADAXIN product sales, the absorption of fixed product-related costs, and any
charges associated with excess or expiring finished product.
Research and development expenses were approximately $836,000 and
$3,639,000 for the three-month and nine-month periods ended September 30, 1999,
as compared to approximately $2,132,000 and $6,495,000 for the corresponding
periods in 1998. The decrease in the comparable three-month period was primarily
attributable to decreased clinical trial expenses, decreased consulting fees and
payroll expenses partially offset by increased drug product manufacturing
toxicology laboratory expenses and increased international field sales expenses.
The decrease in the nine-month period was primarily attributable to decreased
clinical trial expenses, decreased in license fees associated with acquisition
of rights to thymosin alpha 1, and decreased consulting fees, partially offset
by increased payroll expenses related to the Company's restructuring program.
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 the use of ZADAXIN
in overseas markets. The initiation and continuation of these and other clinical
programs by the Company in the United States had and will continue to have a
significant effect on the Company's research and development expenses in the
future and could 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
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strategy of initiating additional clinical trials and testing, entering into
partnering arrangements, acquiring product rights, and expanding regulatory
activities.*
Marketing expenses were approximately $1,548,000 and $4,305,000 for the
three-month and nine-month periods ended September 30, 1999, as compared to
approximately $1,307,000 and $3,862,000 for the corresponding periods in 1998.
The increase relates to increased payroll expenses and expenses for advertising
and conferences associated with the expansion in the Company's existing ZADAXIN
markets partially 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 $541,000 and
$2,313,000 for the three-month and nine-month periods ended September 30, 1999,
as compared to approximately $926,000 and $2,773,000 for the corresponding
periods in 1998. The decrease was attributable to decreased payroll and investor
and public relations expenses partially offset by increased amortization
expense. 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, particularly in the United States, and regulatory,
pre-commercialization and marketing activities.*
Net interest and investment income was approximately $44,000 and
$113,000 for the three-month and nine-month periods ended September 30, 1999, as
compared to approximately $132,000 and $480,000 for the corresponding periods in
1998. The decrease primarily resulted from decreased interest and investment
income due to lower average invested cash balances.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had approximately $4,222,000 in cash,
cash equivalents and liquid short-term investments.
Net cash used by the Company in operating activities amounted to
approximately $7,955,000 for the nine-month period ended September 30, 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, accounts payable
and other accrued expenses. These uses of cash were partially offset by non-cash
charges associated with depreciation and amortization, and decreases in
prepayments of certain future expenses and inventory. Net cash used by the
Company in operating activities amounted to approximately $11,765,000 for the
nine-month period ended September 30, 1998. Net cash used in operating
activities in the 1998 period is less than the Company's net loss for such
period due to non-cash charges associated with depreciation and amortization,
and acquisition of product rights as well as decreases in inventory and
increases in amount owed to third parties for clinical trials and professional
fees. These were partially offset by increases in accounts receivable,
prepayments of certain future expenses and payments to employees for
compensation and benefits.
Net cash used in investing activities amounted to approximately
$1,227,000 for the nine-month period ended September 30, 1999 and related to the
net purchase of approximately $1,203,000 of marketable securities and the net
purchase and disposal of approximately $24,000 in equipment and furniture. Net
cash provided by investing activities amounted to approximately $4,499,000 for
the nine-month period ended September 30, 1998 related to the net sale of
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approximately $4,576,000 of marketable securities offset by the purchase of
approximately $77,000 in equipment and furniture.
Net cash provided by financing activities for the nine-month period
ending September 30, 1999 amounted to approximately $6,800,000 primarily
consisting of $5,446,000 in net proceeds received from the issuance of common
stock and redeemable warrants to institutional and accredited investors, payment
in full of $235,000 on a note receivable from the Company's President and Chief
Executive Officer, and $1,120,000 in net proceeds from issuance of common stock
under the Company's employee stock purchase plan and issuance of restricted
common stock to Sigma-Tau, the Company's ZADAXIN development and marketing
partner in Italy, Spain and Switzerland. Net cash provided by financing
activities for the nine-month period ending September 30, 1998 amounted to
approximately $6,006,000, consisting of the following: a partial repayment of
$750,000 on a note receivable from the Company's President and Chief Executive
Officer; approximately $3,957,000 in net proceeds received from the issuance of
Series C preferred stock and warrants; approximately $342,000 in deemed net
proceeds from the issuance of warrants under the Company's former equity line;
$735,000 in deemed net proceeds from the issuance of warrants under the Sclavo
agreement; and $222,000 in net proceeds from issuance of common stock under the
Company's stock option plan and 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. In July 1999, SciClone
completed two private placements of common stock and redeemable common stock
warrants which resulted in aggregate net proceeds of approximately $5.5 million,
excluding the proceeds which will be received if the warrants issued in
connection with such private placements are exercised. Assuming ZADAXIN product
sales continue to increase quarter to quarter at growth rates similar to what
the Company has achieved over the past seven quarters, management believes its
existing capital resources and interest on funds available are adequate to
maintain its current and planned operations until it reaches profitability,
which is anticipated by the end of the fourth quarter of 2000.* The timing the
Company's of profitability and capital requirements may change depending upon
numerous factors, including the level of ZADAXIN product sales, the timing and
amount of manufacturing costs related to ZADAXIN and CPX, the availability of
complementary products, technologies and businesses, the initiation and
continuation of preclinical and clinical trials and testing, particularly in the
United States, the timing of regulatory approvals, developments in relationships
with existing or future collaborative partners and the status of competitive
products. In the event the Company needs to raise additional financing, the
unavailability or the timing of financing could prevent or delay the Company's
long-term product development and commercialization programs.
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
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
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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 to test 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 November 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
IF SCICLONE DOES NOT CONTINUE TO INCREASE ITS ZADAXIN PRODUCT SALES, THE COMPANY
MAY NOT BECOME PROFITABLE WHICH MAY PREVENT OR DELAY ITS LONG-TERM PRODUCT
DEVELOPMENT AND COMMERCIALIZATION EFFORTS
SciClone began to generate revenues from thymosin alpha 1, which the
Company sells under the branded trademark ZADAXIN, in 1997. Future ZADAXIN
product sales are uncertain. SciClone's other drug under clinical development,
CPX, is a drug that targets the underlying cause of cystic fibrosis, a disease
caused by genetic defects. Marketing approvals for CPX and additional marketing
approvals for ZADAXIN are uncertain. SciClone has experienced significant
operating losses since its inception and has a substantial accumulated deficit.
Furthermore, the Company expects its operating expenses to increase over the
next several years
13
<PAGE> 14
if it expands its development, testing and marketing capabilities.* SciClone's
ability to become profitable depends in large part on whether the Company:
- - increases ZADAXIN product sales in existing markets;
- - launches ZADAXIN in newly-approved markets;
- - obtains additional regulatory approvals for ZADAXIN and/or future
products;
- - obtains regulatory approvals for CPX;
- - enters into partnering arrangements for development of ZADAXIN in the
U.S. and Europe for hepatitis C; and
- - enters into agreements for development and commercialization of
additional products.
If SciClone does not become profitable when expected, or at all, the
Company may have to delay or curtail its long-term product development and
commercialization efforts.
IF SCICLONE EXPERIENCES DIFFICULTIES IN ITS FOREIGN SALES AND OPERATIONS, THE
COMPANY'S FINANCIAL CONDITION WOULD SUFFER
SciClone's financial condition in the near term is highly dependent on
ZADAXIN product sales in foreign jurisdictions. The majority of the Company's
current ZADAXIN product sales are to customers in the People's Republic of
China. However, ZADAXIN product sales in the People's Republic of China may be
limited due to its low average income and poorly developed infrastructure. In
addition, SciClone's ZADAXIN product sales and operations in Asia, Latin America
and the Middle East are subject to inherent risks, including:
- - difficulties and delays in obtaining pricing approvals and
reimbursement;
- - difficulties and delays in obtaining product health registration;
- - difficulties and delays in obtaining importation permits;
- - unexpected changes in regulatory requirements;
- - tariffs and other barriers;
- - political instability;
- - the difficulties of staffing and managing foreign operations;
- - long payment cycles;
- - difficulty in accounts receivable collection;
- - currency fluctuations; and
- - potential adverse tax consequences.
SciClone currently does not have any sales in the United States with which to
offset any decrease in revenue from ZADAXIN product sales in Asia, Latin America
and the Middle East. In addition, certain countries in these territories
regulate pharmaceutical prices. This regulation may reduce prices for ZADAXIN
significantly below those that would prevail in a free market.
IF SCICLONE FAILS TO OBTAIN ADDITIONAL REGULATORY APPROVALS OR MARKET ACCEPTANCE
FOR ZADAXIN OR IF SCICLONE FAILS TO OBTAIN REGULATORY APPROVAL FOR CPX, THE
COMPANY'S POTENTIAL FUTURE REVENUE WOULD BE LIMITED
SciClone's principal drug development efforts currently focus on its two
lead drugs, ZADAXIN and CPX. The Company needs favorable results from additional
clinical trials of ZADAXIN to get regulatory approval in major pharmaceutical
markets, including the United States and Europe. ZADAXIN has been approved for
commercial sale in 16 countries,
14
<PAGE> 15
principally as a treatment for hepatitis B and hepatitis C, diseases caused by
viruses that affect the liver. However, SciClone may not be able to obtain
approvals for ZADAXIN in other countries or for the treatment of additional
medical conditions, such as cancer.
Future sales of ZADAXIN will depend in part on market acceptance and
successful distribution in additional countries. In many of the Company's
ZADAXIN markets, particularly the People's Republic of China, low average per
capita income and poorly developed distribution infrastructure may make it
difficult to successfully commercialize ZADAXIN. Because SciClone currently
relies on ZADAXIN product sales as its sole source of revenue, the Company's
failure to demonstrate ZADAXIN's safety and efficacy in future clinical trials,
obtain additional marketing approvals or successfully commercialize ZADAXIN
would adversely affect its potential future revenue and operating results.
CPX is currently undergoing phase 2 clinical testing in the United
States. SciClone may experience delays and difficulties in clinical trials of
CPX. In addition, clinical trials may not prove that CPX is an effective
treatment for cystic fibrosis. SciClone's inability to demonstrate the safety
and efficacy of CPX as a treatment for cystic fibrosis in a clinical trial,
obtain regulatory approval of CPX as a treatment for cystic fibrosis or
successfully commercialize CPX could adversely affect the Company's potential
future revenue and operating results.
IF THE COMPANY DOES NOT BECOME PROFITABLE WHEN EXPECTED, IT MAY NEED TO OBTAIN
ADDITIONAL FUNDS IN ORDER TO SUPPORT ITS LONG-TERM PRODUCT DEVELOPMENT AND
COMMERCIALIZATION PROGRAMS
Since inception, SciClone has financed its operations primarily through
sales of stock. Due to the Company's continuing operating losses, the Company's
independent auditors issued an opinion on the Company's financial statements for
the period ended December 31, 1998 that includes a paragraph emphasizing the
uncertainty surrounding the Company's ability to continue as a going concern.
However, in July 1999, the Company completed two private placements of common
stock and redeemable common stock warrants which resulted in aggregate net
proceeds of approximately $5.5 million, excluding the proceeds which will be
received if the warrants are exercised. If SciClone does not continue to
increase its ZADAXIN product sales and become profitable when expected, the
Company will need to obtain additional financing to support its long-term
product development and commercialization programs.
The Company's need for capital will depend on many factors, including:
- - the level of future ZADAXIN product sales;
- - the timing, scope and results of preclinical studies and clinical
trials;
- - the size and complexity of the Company's programs;
- - the timing and cost of regulatory approvals;
- - the costs involved in filing, prosecuting and enforcing patent claims;
- - competing technological and market developments;
- - whether any or all of the Company's outstanding common stock warrants
are exercised and the timing and amount of such exercises;
- - the Company's ability to establish and maintain partnering arrangements;
- - whether the Company elects to establish additional partnering
arrangements for development, sales, manufacturing and marketing of its
products, particularly development and marketing of ZADAXIN in the
United States and Europe for Hepatitis C; and
- - the cost of manufacturing or obtaining preclinical and clinical
material.
15
<PAGE> 16
Many of the foregoing factors not within the Company's control. The
unavailability or timing of any necessary financing could prevent or delay the
Company's long-term product development and commercialization programs. There is
no assurance that additional financing to meet the Company's capital
requirements will be available, if needed, on terms favorable to the Company or
at all.
IF SCICLONE ISSUES ADDITIONAL COMMON STOCK OR SECURITIES CONVERTIBLE INTO COMMON
STOCK, THE PERCENTAGE OWNERSHIP OF THE COMPANY'S THEN-CURRENT SHAREHOLDERS WOULD
BE REDUCED AND THE MARKET PRICE OF THE COMPANY'S COMMON STOCK MAY DECREASE
In July 1999, SciClone completed two strategic equity financings in
which the Company issued an aggregate of 3,886,079 shares of common stock and
redeemable warrants to purchase an aggregate of 4,415,191 shares of common
stock. Any common stock issued upon exercise of the warrants would reduce the
percentage ownership of the company's then-current shareholders and decrease any
earnings per share. Public resale of the common stock issued in the strategic
equity financings and issuable upon exercise of the redeemable common stock
warrants and the possibility of such resales may depress the market price of the
Company's common stock.
Similarly, if SciClone raises additional funds through the issuance of
common stock or securities convertible into or exercisable for common stock, the
percentage ownership of the Company's then-current shareholders will be reduced.
IF SCICLONE DOES NOT CONTINUE TO COMPLY WITH CERTAIN NASDAQ LISTING
REQUIREMENTS, THE COMPANY'S COMMON STOCK MAY BE DELISTED WHICH WOULD MAKE IT
MORE DIFFICULT TO SELL ITS COMMON STOCK
SciClone's common stock is listed on the Nasdaq National Market. To
remain listed on the Nasdaq, a company must meet certain criteria, including:
- - a minimum bid price of $1.00 per share;
- - $4,000,000 in net tangible assets; and
- - $5,000,000 market value of the public float, excluding shares held
directly or indirectly by any of the Company's officers or directors and
by anyone holding beneficially more than 10% of the Company's
outstanding shares.
As of November 11, 1999, the closing bid price of the Company's common
stock was $2.28 and as of November 11, 1999, the market value of the Company's
public float was approximately $52,000,000. As of September 30, 1999, SciClone
had net tangible assets of approximately $7,403,000.
If SciClone fails to meet Nasdaq's listing criteria its common stock may
be delisted. SciClone's common stock would thereafter be traded in the
non-Nasdaq, over-the-counter market. If the Company's common stock were
delisted, it may be more difficult to dispose of, or get an accurate market
value of, its common stock. This could severely limit the Company's common
shareholders' ability to sell the Company's common stock in the secondary
market.
IF THE COMPANY DOES NOT OBTAIN ADDITIONAL PRODUCT RIGHTS FROM THIRD PARTIES OR
IF THE COMPANY'S LICENSEES DO NOT PERFORM THEIR OBLIGATIONS, THE COMPANY'S
POTENTIAL FUTURE REVENUE WOULD BE LIMITED
16
<PAGE> 17
SciClone's strategy includes entering into various partnering
arrangements. To date, the Company has acquired rights to ZADAXIN, CPX, SCV-07,
DAX and certain other drugs but it is only actively pursuing clinical
development of ZADAXIN and CPX and preclinical development of SCV-07 and DAX. If
SciClone does not license or otherwise acquire rights to additional drugs, or
advance SCV-07 and DAX into clinical development, the Company may have a
shortage of drugs to develop which would limit its potential future revenue.
In addition, SciClone has exclusively sublicensed its rights to develop
and market ZADAXIN in Japan to Schering-Plough K.K. However, Schering-Plough
K.K. already has a substantial commitment to alpha interferon, which is an
approved drug for hepatitis B and hepatitis C in Japan. SciClone's relationship
with Schering-Plough K.K. may not be successful and the Company may not be able
to negotiate similar additional arrangements in the future. The Company
generally does not have control over the amount and timing of resources that its
collaborators devote to their activities with the Company. If these parties do
not perform their obligations as the Company expects them to, the development
and sale of the Company's products could be limited or delayed.
SciClone's ability to obtain regulatory approval in one country may be
delayed or adversely affected by the timing of regulatory activities and
approvals in other countries, particularly if the Company does not participate
in the regulatory approval process in these other countries. Any delay or
failure to achieve regulatory approvals may limit the Company's potential future
revenue.
IF SCICLONE FAILS TO PROTECT ITS PRODUCTS, TECHNOLOGIES AND TRADE SECRETS, THE
COMPANY MAY NOT BE ABLE TO SUCCESSFULLY USE, MANUFACTURE OR MARKET AND SELL ITS
PRODUCTS OR THE COMPANY MAY FAIL TO ADVANCE OR MAINTAIN ITS COMPETITIVE POSITION
The United States composition of matter patent, which covers the
chemical structure of thymosin alpha 1, and most of the European composition of
matter patents for thymosin alpha 1 have expired. Going forward, SciClone will
have limited patents covering the chemical structure of thymosin alpha 1 and
this could adversely affect the Company's proprietary rights. SciClone's success
depends significantly on its ability to obtain patent or other commercial
protection for its products and technologies, to preserve the Company's trade
secrets and to avoid infringing on the proprietary rights of third parties.
However, SciClone's pending patent applications may not result in issued
patents. Any patents that are issued may not provide a competitive advantage to
the Company or may be invalidated or circumvented by the Company's competitors.
Others may independently develop similar products or designs around patents
issued or licensed to the Company. Patents issued to or patent applications
filed by other companies could have an adverse effect on SciClone's ability to
use, manufacture or market its products or maintain the Company's competitive
position with respect to its products. Many of the Company's patents and patent
applications relating to thymosin alpha 1 are held under exclusive licenses. If
the Company breaches the terms of any of these licenses it could lose its rights
to these patents and patent applications. Holders of patents licensed to the
Company may not file, prosecute, extend or maintain their patents in countries
where SciClone has rights.
Other companies obtaining patents on products or processes useful to the
Company may bring infringement actions against the Company. This type of
litigation is typically costly and time-consuming and could require the Company
to obtain licenses from others, or prevent the Company from using, manufacturing
or marketing its products. These licenses may not be available on commercially
reasonable terms, if at all.
17
<PAGE> 18
Pharmaceuticals are not patentable or have only recently become
patentable in certain countries in the territory in which the Company has
exclusive rights to ZADAXIN. Enforcement of intellectual property rights in many
countries in this territory has been limited or non-existent. Future enforcement
of patents and proprietary rights in many countries in this territory will
likely be problematic or unpredictable. Moreover, the issuance of a patent in
one country does not assure the issuance of a similar patent in another country.
Claim interpretation and infringement laws vary by nation, so the extent of any
patent protection is uncertain and may vary in different jurisdictions.
IF SCICLONE FAILS TO OBTAIN REGULATORY APPROVALS FOR ITS PRODUCTS IN COUNTRIES
IN WHICH THE COMPANY HAS NOT BEEN APPROVED, THE COMPANY CANNOT DEVELOP, MARKET
AND SELL ITS PRODUCTS IN THOSE COUNTRIES
The research, preclinical and clinical development, manufacturing,
marketing and sale of ZADAXIN, CPX and the Company's other drug candidates are
subject to extensive regulation by governmental authorities. ZADAXIN, CPX and
any other products must be approved before they can be sold in any jurisdiction.
Obtaining regulatory approval is time-consuming and expensive. In some countries
where the Company is contemplating marketing and selling ZADAXIN, the regulatory
approval process for drugs that have not been previously approved in the United
States or certain European countries with established clinical trial review
procedures is uncertain, and this may delay the grant of regulatory approvals
for ZADAXIN.
The Company is currently sponsoring clinical trials and pursuing
regulatory approvals for ZADAXIN in a number of countries and it is currently
sponsoring clinical trials of CPX in the United States. However, the Company may
not be able to complete these trials in a timely or cost-effective manner, and
even if completed, these trials may not fulfill the relevant regulatory approval
criteria. The Company ultimately may not be able to obtain regulatory approvals
in these countries. Adverse results in the Company's development programs also
could result in restrictions on the use of ZADAXIN and, if approved, CPX.
SciClone's failure to comply with applicable United States or foreign
regulatory requirements could, among other things, result in warning letters,
fines, suspensions of regulatory approvals, product recalls or seizures,
operating restrictions, injunctions and criminal prosecutions. In addition,
government regulations may be established or imposed which prevent or delay
regulatory approval of ZADAXIN, CPX or the Company's future products.
IF THE COMPANY IS NOT ABLE TO ESTABLISH AND MAINTAIN ADEQUATE MANUFACTURING AND
SUPPLY RELATIONSHIPS, THE DEVELOPMENT AND SALE OF ITS PRODUCTS COULD BE IMPAIRED
SciClone has entered into contract manufacturing and supply agreements
for ZADAXIN and CPX. To be successful, SciClone'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 to establish
and maintain manufacturing relationships with experienced suppliers*, the
Company may not be able to establish long-term manufacturing relationships with
these suppliers. The Company currently has vialing and packaging supply
agreements in effect and a sufficient supply of finished ZADAXIN for the near
term. The Company has recently changed and upgraded its manufacturing source of
finished ZADAXIN for the Company's international markets, excluding Japan. In
certain countries, this change may require additional regulatory approvals. If
SciClone does not obtain any required regulatory approvals of this manufacturing
change in a timely fashion, new ZADAXIN marketing approvals
18
<PAGE> 19
may be delayed or sales may be interrupted until the manufacturing change is
approved.
Production interruptions, if any, could significantly delay clinical
development of potential products and reduce third party or clinical researcher
interest and support of proposed trials. These kinds of interruptions could also
impede commercialization of the Company's products, including sales of ZADAXIN
in approved markets, and impair their competitive position, which would have a
material adverse effect on the Company's business.
SCICLONE MAY LOSE MARKET SHARE OR OTHERWISE FAIL TO COMPETE IN THE INTENSELY
COMPETITIVE PHARMACEUTICAL INDUSTRY
Competition in the pharmaceutical industry is intense and the Company
expects that competition to increase. SciClone believes that the principal
competitive factors in the pharmaceutical industry include the efficacy, safety,
price, therapeutic regimen and manufacturing quality assurance associated with a
given drug. SciClone's competitors include pharmaceutical companies,
biotechnology firms, universities and other research institutions, both in the
United States and abroad, that are actively engaged in research and development
of chronic and life-threatening diseases such as hepatitis B, hepatitis C,
cancer, immune system disorders and cystic fibrosis. Most of SciClone's
competitors, particularly large pharmaceutical companies, have substantially
greater financial, technical, regulatory, manufacturing, marketing and human
resource capabilities than the Company. Most of them also have extensive
experience in undertaking the clinical testing and obtaining the regulatory
approvals necessary to market drugs. In addition, SciClone currently relies on
sales of ZADAXIN as a treatment for hepatitis B and hepatitis C as its primary
source of revenue. Several large pharmaceutical companies have substantial
commitments to alpha interferon, which is an approved drug for treating
hepatitis B and hepatitis C.
IF THIRD PARTY REIMBURSEMENT IS NOT AVAILABLE OR PATIENTS CANNOT OTHERWISE PAY
FOR ZADAXIN, THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY MARKET ZADAXIN
SciClone's ability to successfully sell ZADAXIN depends in part on
whether pharmaceutical drug consumers will be reimbursed for the cost of
ZADAXIN. This reimbursement may come from government health administration
authorities, private health insurers and other organizations. Third-party
reimbursement for new therapeutic products is highly uncertain and may not be
available for the Company's future products. In many of the foreign countries in
which the Company currently operates or intends to operate, reimbursement for
ZADAXIN under government or private health insurance programs is currently not
available, particularly in Cambodia, the People's Republic of China, Mexico, the
Philippines, Peru, Myanmar and Malaysia. In the United States, certain proposed
health care reforms could limit the amount of third-party reimbursement
available for the Company's products. In many countries where the Company has
marketing rights to ZADAXIN, government resources and per capita income may be
so low that the Company's products will be prohibitively expensive. In these
countries, the Company may not be able to market its products on economically
favorable terms, if at all.
IF THE COMPANY IS UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL OR IF THE
COMPANY'S PRESIDENT AND CHIEF EXECUTIVE OFFICER, CHIEF OPERATING OFFICER, CHIEF
BUSINESS OFFICER OR REGIONAL MANAGING DIRECTOR FOR GREATER CHINA LEFT THE
COMPANY, THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE
ITS PRODUCTS
SciClone is highly dependent upon its ability to attract and retain
qualified personnel because of the specialized, scientific and international
nature of the Company's business. There is intense competition for qualified
management, scientific and technical personnel in the
19
<PAGE> 20
pharmaceutical industry, and SciClone may not be able to attract and retain the
qualified personnel the Company needs to grow and develop its business globally.
In addition, many key responsibilities at SciClone are assigned to a small
number of individuals, such as the Company's President and Chief Executive
Officer, Chief Operating Officer, Chief Business Officer and its Regional
Managing Director for Greater China. If the Company is unable to attract and
retain qualified personnel as needed or promptly replace those employees who are
critical to its product development and commercialization, the development and
commercialization of the Company's products would be adversely affected.
SciClone does not maintain "key person" life insurance on any of its key
personnel.
SCICLONE HAS LIMITED PRODUCT LIABILITY INSURANCE AND ANY PRODUCT LIABILITY
CLAIMS ASSERTED AGAINST THE COMPANY COULD RESULT IN SIGNIFICANT EXPENSES AND
DECREASED DEMAND FOR ITS PRODUCTS
Companies which test, manufacture, market and sell pharmaceutical
products commonly receive product liability claims. These claims may be asserted
against the Company. Product liability insurance for the pharmaceutical industry
generally is expensive, if it is available at all. SciClone has product
liability insurance coverage for its clinical trials and commercial sales.
However, product liability claims in excess of the Company's insurance coverage
or that resulted in the payment of large deductibles would adversely affect the
Company's financial condition and demand for its products.
ISSUING PREFERRED STOCK WITH RIGHTS SENIOR TO THOSE OF THE COMPANY'S COMMON
STOCK COULD ADVERSELY AFFECT HOLDERS OF COMMON STOCK OR HINDER TAKEOVER
TRANSACTIONS THAT OFFER COMMON SHAREHOLDERS AN OPTIMAL PRICE FOR THEIR SHARES
SciClone's charter documents give the Company's board of directors the
authority to issue additional series of preferred stock without a vote or action
by the Company's shareholders. The board also has the authority to determine the
terms of preferred stock, including price, preferences and voting rights. The
rights of holders of the Company's common stock may be adversely affected by the
rights granted to holders of preferred stock. For example, a series of preferred
stock may be granted the right to receive a liquidation preference -- a pre-set
distribution in the event SciClone is liquidated -- that would reduce the amount
available for distribution to holders of common stock. In addition, the issuance
of preferred stock could make it more difficult for a third party to acquire a
majority of the Company's outstanding voting stock. As a result, common
shareholders could be prevented from participating in transactions that would
offer an optimal price for their shares.
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 $15,561 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 September 30, 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 July 2, 1999, the Company completed a $2,000,000 (before deducting
expenses) private placement to strategic institutional and accredited investors.
The offering consisted of units of 1,370,145 shares of common stock and
redeemable warrants to purchase 1,370,145 shares of common stock. Each unit,
comprised of one share of common stock and a redeemable warrant to purchase one
share of common stock, was priced at $1.46. These redeemable warrants are
exercisable during the five-year period ending July 1, 2004 at an exercise price
of $ 1.33 per share.
On July 21, 1999, the Company completed a $4,000,000 (before deducting
expenses) private placement to strategic institutional investors led by Brown
Simpson Asset Management and The New York Life Insurance Company. The offering
consisted of units of 2,515,934 shares of common stock and redeemable warrants
to purchase 2,515,934 shares of common stock. Each unit, comprised of one share
of common stock and a redeemable warrant to purchase one share of common stock,
was priced at $1.59. These redeemable warrants are exercisable during the
five-year period ending July 20, 2004 at an exercise price of $1.72 per share.
(d)
None.
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(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).
10.4 Prospectus to July 2, 1999 private placement
(incorporated by reference to the Company's filing
pursuant to Rule 424(b)(3) (No. 333-84497) filed with
the Commission on August 20, 1999).
10.5 Prospectus to July 20, 1999 private placement
(incorporated by reference to the Company's Registration
Statement on Form S-3 (No. 99-001557) filed with the
Commission on August 20, 1999).
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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: November 12, 1999 Donald R. Sellers
-----------------------------------------
Donald R. Sellers
President, Chief Executive Officer and
Interim Chief Financial Officer
(Principal Executive Officer and
Principal Financial & Accounting Officer)
23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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(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).
10.4 Prospectus to July 2, 1999 private placement (incorporated by
reference to the Company's filing pursuant to Rule 424(b)(3)
(No. 333-84497) filed with the Commission on August 20, 1999).
10.5 Prospectus to July 20, 1999 private placement (incorporated by
reference to the Company's Registration Statement on Form S-3
(No. 99-001557) filed with the Commission on August 20, 1999).
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,108
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0
0
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</TABLE>
