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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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)
<TABLE>
<S> <C>
CALIFORNIA 94-3116852
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
901 MARINER'S ISLAND BOULEVARD
SAN MATEO, CALIFORNIA 94404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(650) 358-3456
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $454,161,000 as of March 23, 2000, based upon
the closing sale price of the Registrant's Common Stock on The Nasdaq National
Market on such date. Shares of Common Stock held by each executive officer and
director have been excluded from the calculation because such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 23, 2000, there were 30,369,379 shares of the Registrant's
Common Stock outstanding.
Part III incorporates by reference from the definitive proxy statement for
the Registrant's 2000 Annual Meeting of Shareholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this Form.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Annual Report on Form 10-K 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 are based on our
current expectations, estimates and projections about our industry, management's
beliefs and certain assumptions made by us. Words such as "anticipates,"
"expects," "intends," "plans," "believes" or similar expressions are intended to
identify forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual results could
differ materially and adversely from those expressed in any forward-looking
statements as a result of various factors including, but not limited to, our
expectations regarding future ZADAXIN(R) sales growth, our ability to operate
profitably, the safety and efficacy of ZADAXIN in combination with other agents
for the treatment of hepatitis B, hepatitis C, HIV, drug-resistant tuberculosis
and cancer, the timing of the commencement of our planned ZADAXIN U.S. and
European pivotal phase 3 studies for hepatitis C, our expectations regarding our
planned and ongoing ZADAXIN and CPX U.S. phase 2 development programs, our
expectations regarding our partnering arrangements in the U.S., Europe and Japan
for development and marketing of ZADAXIN, risks associated with international
operations, general economic conditions and conditions in the markets we
address, and other factors. This Annual Report on Form 10-K and our other SEC
filings discuss some of the important risk factors that may affect our business,
results of operations and financial condition. We undertake no obligation to
revise or update publicly any forward-looking statements for any reason.
PART I
ITEM 1. BUSINESS
OVERVIEW
We develop and commercialize novel medicines for treating a broad range of
the world's most serious diseases. We have focused our current product
development and commercial activities on the following diseases:
- hepatocellular carcinoma, the most common and deadliest form of liver
cancer worldwide;
- malignant melanoma, the deadliest form of skin cancer and one of the most
rapidly increasing types of cancer worldwide;
- hepatitis C, an infectious disease affecting 170 million people
worldwide;
- hepatitis B, an infectious disease affecting 350 million people
worldwide;
- HIV, the virus that causes AIDS;
- drug-resistant tuberculosis, an infectious disease reaching pandemic
proportions worldwide; and
- cystic fibrosis, the most common fatal genetic disease among Caucasians.
Our flagship drug is ZADAXIN(R), an immunotherapy. ZADAXIN boosts the
body's immune system in the fight against multiple types of cancer and
infectious diseases. ZADAXIN is in or expected to enter phase 2 and phase 3
development in the U.S., Europe and Japan, the world's largest pharmaceutical
markets, targeting six diseases: hepatocellular carcinoma, malignant melanoma,
hepatitis C, hepatitis B, HIV and drug-resistant tuberculosis. Approximately
3,000 patients have been treated with ZADAXIN in over 70 clinical trials
covering a broad range of life-threatening diseases in which the immune system
plays a key role in the patient's ability to fight back.
Unlike most biotechnology companies, we are currently selling our lead
drug -- ZADAXIN. ZADAXIN is currently approved for sale in 19 countries,
principally for the treatment of hepatitis B and hepatitis C and as a vaccine
adjuvant. Total ZADAXIN sales for 1999 were $9,090,000, a 151% increase over
1998 sales of $3,625,000. ZADAXIN marketing applications are pending in 18
additional countries. We plan to file 8 additional ZADAXIN marketing
applications in 2000.
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Our second product in clinical development, CPX, is a novel protein-repair
therapy for cystic fibrosis, the most common fatal genetic disease among
Caucasians. Currently approved drugs treat only the symptoms of cystic fibrosis,
not the underlying cause of the disease. CPX, which we in-licensed from the U.S.
National Institutes of Health, is designed to repair the underlying
protein-associated defect responsible for cystic fibrosis in most patients, not
just the symptoms of the disease. CPX is currently undergoing phase 2
development in the U.S.
Additional preclinical drug candidates include SCV-07, the lead orally
active compound in our new class of immunotherapies, and DAX. We expect to
develop SCV-07 for drug-resistant tuberculosis, cancer and viral hepatitis. DAX
is targeted at cystic fibrosis.
OUR MARKETS
We are focusing on a large number of discrete but widespread
life-threatening diseases that afflict different parts of the human body. We
believe the significance, prevalence and diversity of our disease targets, and
the known limitations of current treatment alternatives, have created a
compelling need for improved therapies, with novel medicines often enjoying
premium pricing and rapid market acceptance. Our current product development and
commercial activities are focused on this large, unmet market need.
The fundamentals of the cancer, infectious disease and cystic fibrosis
markets that are particularly advantageous for us include:
- inadequate treatment alternatives;
- high incidence and prevalence;
- accelerated FDA approval procedures;
- highly concentrated populations of specialists, allowing a small sales
force to be effective; and
- favorable pricing reimbursement.
OUR STRATEGY
Our objective is to be a leading global immunotherapy and protein-repair
therapy company. Our strategy consists of the following key elements:
- focus on specialist-oriented markets for cancer, infectious disease and
cystic fibrosis;
- develop our portfolio of products for a broad range of diseases;
- use our ZADAXIN sales in Asia, Latin America and the Middle East to fund
late-stage development of our products in the U.S., Europe and Japan, the
world's largest pharmaceutical markets;
- form strategic collaborations to support our development and
commercialization programs, particularly in Europe and Japan; and
- use our global expertise in immunotherapy and protein-repair therapy to
identify and in-license or acquire additional product candidates;
- selectively outsource activities to reduce our development and
manufacturing costs.
All of our current product rights were in-licensed. We observe a
disciplined approach to product acquisition, in-licensing and development, the
key elements of which are that:
- we do not engage in drug discovery or perform early-stage research;
- we only acquire, in-license and develop drug candidates with strong
evidence of preclinical or human efficacy;
- we only acquire, in-license and develop compounds that can be
administered by a highly concentrated population of specialists, allowing
a small sales force to be effective;
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- we only acquire, in-license and develop drugs protected by patents, have
patents pending or qualify for orphan drug status from the FDA; and
- we establish strategic collaborations when appropriate to share the cost
and risk of drug development and commercialization, especially in large
overseas markets such as Europe and Japan.
CURRENT PRODUCT DEVELOPMENT ACTIVITIES
The following table summarizes our current product development activities:
<TABLE>
<CAPTION>
PRODUCT/PRODUCT
CANDIDATE DISEASE STATUS LOCATION
- --------------- ------- ------ --------
<S> <C> <C> <C>
ZADAXIN(R) Hepatitis B Phase 2 U.S.
Pivotal Phase 3 Japan
Approved Brunei, Cambodia, Kuwait,
Laos, Malaysia, Malta,
Myanmar, Peru, Pakistan,
People's Republic of China,
Philippines, Singapore, Sri
Lanka, Thailand, Venezuela,
Vietnam
Hepatitis C Entering Pivotal Phase 3 U.S.
Entering Pivotal Phase 3 Europe
Phase 2 Japan
Approved Cambodia, Laos, Malta,
Myanmar, Philippines,
Singapore, Venezuela
Hepatocellular Carcinoma Entering Phase 2 U.S.
Entering Phase 2 People's Republic of China
Malignant Melanoma Entering Phase 2 U.S.
Entering Phase 2 Australia
Drug-Resistant Tuberculosis Entering Phase 2 U.S.
HIV Entering Phase 2 Singapore
Influenza vaccine adjuvant Approved Argentina, Italy, Laos,
Malta, Mexico, People's
Republic of China,Thailand
CPX Cystic Fibrosis Phase 2 U.S.
SCV-07 Hepatitis B Preclinical U.S.
Hepatitis C Preclinical U.S.
Drug-Resistant Tuberculosis Preclinical U.S., Russia
DAX Cystic Fibrosis Preclinical U.S.
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THE IMMUNE SYSTEM
The immune system is an astonishingly intricate network of cells and organs
that defends the body against invading bacteria, viruses and abnormal cells,
such as cancer cells. A properly functioning immune system specifically
recognizes and fights off attacks from "foreign" invaders, including cancerous
cells and the hepatitis B and hepatitis C viruses. We are targeting virally
infected and cancerous cells with our ZADAXIN and SCV-07 immunotherapy programs.
The immune system includes the lymphocytes, or white blood cells, which reside
both in the tissues and the circulation. These cells include natural killer (NK)
cells, as well as the "T" lymphocytes (so-called because they mature in the
thymus gland), including both CD8 ("cytotoxic") and CD4 ("helper") cells. These
latter cells, referred to as T cells, can mature into different subsets (TH1 and
TH2) releasing different molecules called "cytokines" depending on the kind of
invading cell that is targeted. A malfunctioning or incompetent immune system
can result in a multitude of chronic diseases, as the body is unable to fight
the infection or cancer.
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ZADAXIN(R) -- A NOVEL IMMUNOTHERAPY FOR CANCER AND INFECTIOUS DISEASES
ZADAXIN is our lead immunotherapy. ZADAXIN is able to fight disease by
boosting the immune system. The immune enhancement effects of ZADAXIN include
stimulation of NK cells and CD8 cells, which directly kill virally infected and
cancerous cells. ZADAXIN also increases the production of cytokines such as
interferon gamma and interleukin 2 (IL-2), and increases the Th1 subset of
disease fighting white blood cells (CD4 cells). ZADAXIN has also recently been
shown to increase the development of stem cells into CD4 cells, and to increase
important cellular proteins (MHC) required to enable the immune system to
identify and destroy virally infected cells. Like alpha interferon before it, we
expect ZADAXIN to be an effective treatment for multiple cancers and infectious
diseases. In sharp contrast to other major immunotherapies such as alpha
interferon, as well as the leading antiviral drugs and chemotherapies, ZADAXIN
has been virtually free of any serious drug-related side effects or toxicities
in over 3,000 patients in more than 70 clinical studies, even in patients with a
poor performance status prior to treatment, including those with decompensated
liver disease and kidney disease requiring hemodialysis.
Hepatitis B
Hepatitis B is one of the most common potentially fatal infectious diseases
in the world. The hepatitis B virus is up to 100 times more infectious than HIV,
the virus that causes AIDS. Hepatitis B is transmitted through infected blood to
blood contact. Other modes of transmission include blood transfusions,
contaminated needles, sexual contact, breast milk and open sores. Most people
infected with acute hepatitis B have no symptoms and are able to fight off the
infection themselves. According to the American Liver Foundation, however, 5% to
10% of those infected with hepatitis B will become chronic carriers of the
virus.
The World Health Organization estimates that approximately 350 million
individuals worldwide, or 5% of the world's population, are long term carriers
of hepatitis B in their blood. There are over 1 million carriers of hepatitis B
in the U.S. and an estimated 200,000 people contract acute hepatitis B each
year. Most are unaware that they are infected or have minimal disease with no
clinically evident symptoms. However, carriers of the hepatitis B virus have a
200-fold increased chance of developing liver cancer, the most common cancer in
the world, and a significant number develop cirrhosis of the liver. We are not
aware of any diagnostic tools to predict accurately which carriers will or will
not become chronic carriers.
A safe and effective vaccine against hepatitis B is available. However, the
vaccine only benefits those who have not yet been infected by the hepatitis B
virus. Most approved treatments benefit a minority of patients but have serious
adverse side effects.
ZADAXIN for Hepatitis B
We commissioned a meta analysis of randomized and controlled trials of
ZADAXIN in hepatitis B. Meta analysis is the statistical pooling of data derived
from two or more clinical trials. By using data from two or more studies, overly
positive or negative random effects are reduced and the precision of estimates
will increase as sample size increases. A valuable use of meta analysis is to
assess the efficacy of a drug in the treatment of a particular disease across
many studies. Our meta analysis of ZADAXIN was performed by MetaWorks, Inc. of
Boston, Massachusetts, and included two U.S. hepatitis B trials sponsored by
Alpha 1 Biomedicals and our Taiwan hepatitis B trial. A statistically
significant benefit (p = 0.04) was demonstrated in the meta analysis with an
overall response rate of 36% compared to 19% for the control group. The results
also showed no indications of toxicity or significant drug related side effects.
In Asia, Latin America and the Middle East, we are currently marketing
ZADAXIN for the treatment of hepatitis B. ZADAXIN is currently an
investigational drug in the U.S.
We are developing ZADAXIN as a single agent therapy and in combination with
certain antiviral drugs, particularly nucleoside analogues, as a treatment for
hepatitis B. In January 2000, we initiated a U.S. phase 2 hepatitis B study
using ZADAXIN with lamivudine, an FDA-approved nucleoside analogue. In two
previous pilot studies conducted in Asia, the combination of ZADAXIN plus
nucleoside analogues produced durable responses, as measured by the sustained
seroconversion of hepatitis B e antigen and disappearance of
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hepatitis B virus DNA, in a clinically significant number of patients. In Japan,
our exclusive partner, Schering-Plough, K.K., is conducting a ZADAXIN pivotal
phase 3 hepatitis B trial.
Competition -- Hepatitis B
Alpha interferon, a synthetic version of a natural immune substance
manufactured and sold by numerous companies, is approved to treat hepatitis B.
However, most patients do not respond to alpha interferon. In addition, alpha
interferon is associated with debilitating "flu-like" side effects, including
fever, chills, headaches, fatigue and weakness, as well as psychiatric side
effects such as depression, lethargy and mental confusion that can lead to
reduction in dose and discontinuation of treatment.
Lamivudine, an oral antiviral drug originally developed for HIV and
recently approved in the U.S. and certain other countries for the treatment of
hepatitis B, often only eliminates the hepatitis B virus from the blood, but not
from the body tissue. Importantly, levels of hepatitis B virus may rebound
rapidly when lamivudine treatment is interrupted or stopped. The Antiviral Drugs
Advisory Committee (an FDA advisory committee) expressed uncertainty and concern
over the safety and effectiveness of treatment with lamivudine beyond one year,
the optimal duration of treatment of the drug, the safety and efficacy of
lamivudine for pregnant women and children, and the efficacy of a second round
or subsequent rounds of therapy, especially in patients who have developed
lamivudine-induced mutations in the hepatitis B virus which infects them.
Hepatitis C
Hepatitis C is a worldwide epidemic. Approximately 170 million people
worldwide are infected by the hepatitis C virus, including over 10 million
people infected in the U.S., Europe and Japan, the world's leading
pharmaceutical markets. According to the American Liver Foundation, 12,000
people die from complications of hepatitis C each year in the U.S. In the year
2000, the number of deaths in the U.S. from complications of hepatitis C are
estimated to exceed deaths caused by HIV, the virus that causes AIDS. Without
improved prevention and treatment, the American Liver Foundation and the Centers
for Disease Control and Prevention estimate the number of deaths from hepatitis
C in the U.S. will more than triple to 38,000 by 2010. There is no approved
vaccine to prevent hepatitis C.
Hepatitis C is the most common chronic bloodborne virus in the U.S. It is a
highly contagious virus that attacks the liver and can cause cirrhosis (liver
scarring), liver failure and liver cancer. Most people infected with hepatitis C
have no symptoms and are unaware that they carry this potentially deadly virus.
Because they are symptomless carriers, they can unknowingly infect others. Over
85% of people infected with hepatitis C become long-term or chronic carriers
unable to clear the virus without treatment. Today, over 4 million Americans are
infected with hepatitis C. The hepatitis C epidemic in America is arguably one
of the greatest health care threats facing our country. In Europe, it is
estimated that over 5 million people are infected with the hepatitis C virus.
Six main genotypes of hepatitis C have been recognized so far. There are a
large number of subtypes within each of these genotypes. Some genotypes of
hepatitis C (types 1a, 2a and 2b) show a worldwide distribution, while others
(such as type 5a and 6a) are only found in specific geographical regions. The
genetic plasticity of the hepatitis C virus allows it to adapt rapidly to
antiviral treatment and host immune response, so that mutants which are
resistant to treatment can arise. ZADAXIN, in combination with interferon, has
been shown in studies to be effective against even the most difficult to treat
genotypes such as 1a and 1b.
We believe that there is a consensus in the medical community is that
combination therapies will be required to fight viruses causing diseases such as
hepatitis B, hepatitis C and HIV. We are developing ZADAXIN in combination with
alpha interferon as a treatment for hepatitis C. We believe that early
therapeutic intervention and increased public awareness can reduce significantly
the threat of hepatitis C.
ZADAXIN for Hepatitis C
Although interferon has been shown to be safe and effective in the
treatment of hepatitis C, dissatisfaction with the low sustained response rate
(5% to 20%) to interferon alone has led to the study of
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interferon in combination with other therapies. Clinical data demonstrate that
the combination of ZADAXIN plus interferon could represent a significant
therapeutic advance in the global fight against hepatitis C.
Three studies, published as full articles or abstracts, describe the
response in patients with hepatitis C to the combination of ZADAXIN plus
interferon. The strength of pooled analysis and meta analysis techniques was
applied to the three studies. Patients were treated for 6 to 12 months with the
combination of ZADAXIN plus interferon and followed for 6 to 12 months after
treatment. Interferon-treated patients from the randomized controlled trials and
historical controls from an open label trial were used as controls. A total of
121 patients (67 ZADAXIN plus interferon combination therapy and 54 interferon
monotherapy) were compared.
Pooled intent-to-treat analysis revealed an end of treatment biochemical
(ALT, a liver enzyme) response of 44.7% in the combination of ZADAXIN plus
interferon group compared to 22.2% in the interferon monotherapy group (p =
0.0096). Meta analysis demonstrated an end of treatment biochemical response
odds ratio and 95% confidence interval of greater than 1, indicating that the
combination of ZADAXIN plus interferon was significantly superior to interferon
alone. Meta analysis also showed an end of treatment virological response odds
ratio and 95% confidence interval of greater than 1, indicating that the
combination of ZADAXIN plus interferon was significantly superior to interferon
alone.
Pooled intent-to-treat analysis revealed a trend showing sustained
biochemical (ALT) response of 22.3% in the combination of ZADAXIN plus
interferon group compared to 9.26% in the interferon monotherapy group (p =
0.1). Meta analysis demonstrated a sustained response odds ratio of greater than
1 and a 95% confidence interval slightly overlapping 1, indicating that the
combination of ZADAXIN plus interferon was superior to interferon alone. This
sustained biochemical response analysis demonstrates a statistical trend in
favor of the combination of ZADAXIN plus interferon group and suggests that
there is only a small chance that this difference occurred by chance alone. Meta
analysis of sustained virological response also showed an odds ratio and 95%
confidence interval of greater than 1, indicating that the combination of
ZADAXIN plus interferon was significantly superior to interferon alone.
The three studies also showed there were no increased or new side effects
or toxicities in the combination of ZADAXIN plus interferon group compared to
patients treated with interferon alone.
We expect ZADAXIN pivotal phase 3 hepatitis C trials to begin in the U.S.
and Europe in 2000.
Competition -- Hepatitis C
There are two approved drug treatments for hepatitis C in the U.S. -
interferon (available from several manufacturers) and interferon in combination
with ribavirin, an antiviral drug. While interferon does not eliminate the virus
from the body, it reduces viral load and protects the liver from damage.
However, interferon is associated with debilitating "flu-like" side effects,
including fever, chills, headaches, fatigue and weakness, as well as psychiatric
side effects such as depression, and results in a durable, long-lasting response
in only 10% to 15% of patients.
Published clinical trial results indicate interferon plus ribavirin may
benefit up to 40% to 65% of hepatitis C patients, particularly those who have
relapsed following interferon therapy. However, this combination is only
effective in up to 28% of patients infected with the difficult to treat
hepatitis C genotype 1, the most common hepatitis C genotype. Unlike ZADAXIN,
which does not add to interferon's side effects, ribavarin adds the risk of
significant additional side effects when combined with interferon therapy. We
believe that ZADAXIN may offer the same or better therapeutic benefit,
especially in genotype 1 patients, which comprise over 70% of the hepatitis C
patients in the U.S. and Europe, but without the risk of added side effects.
Cancer
Cancer is characterized by uncontrolled division of cells and can occur in
almost any tissue or organ in the body. Cancerous cells can grow into a mass
known as a tumor. If not destroyed, cancer cells can spread
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throughout the body. It is estimated that one in three Americans will be
diagnosed with cancer at some point in their lives.
ZADAXIN Immunotherapy for Cancer
ZADAXIN immunotherapy has been examined as a treatment for several types of
cancer. The rationale for such use is that ZADAXIN has shown significant
efficacy in multiple animal cancer models where the improvement in survival
appears to be related to improved immune function and in multiple pilot phase 2
clinical studies. Patients with some cancers have depressed cellular immunity,
and progression of some cancers is related to an impaired immune system. This
has been shown to be the case for malignant melanoma, hepatocellular carcinoma,
and renal cell carcinoma. In some cases, immune modulation has shown promising
results for treatment of human cancers. The results summarized below suggest
that ZADAXIN may have usefulness in treating certain forms of cancer. We plan to
conduct additional phase 2 clinical trials to confirm these results.
Hepatocellular Carcinoma
Hepatocellular carcinoma (HCC), liver cancer, is the most prevalent
malignant disease in the world, killing up to 1.25 million persons per year.
There is a strong correlation between HCC and hepatitis B. Recently, an
association between HCC and hepatitis C also has been determined. Although HCC
is a common malignancy in Africa and Asia, it accounts for approximately 4,000
to 6,000 cases per year in the U.S.
When identified in its early stages HCC can be treated with surgical
resection or liver transplantation, and some patients may be cured. However,
sometimes the disease is not amenable to surgical treatment, either because of
tumor size or because of poor liver function. In these situations the prognosis
is dire.
Other treatment approaches have been tried when surgery or liver
transplantation are not feasible. Systemic chemotherapy results are at best
dismal. Conversely, a large number of reports have provided encouraging
perspectives for regional chemotherapy. Transcatheter arterial
chemo-embolization (TACE) is a combination of regional chemotherapy and some
form of hepatic artery occlusion. Consistently higher response rates have been
reported for TACE when compared with systemic chemotherapy.
ZADAXIN for Hepatocellular Carcinoma
A pilot phase 2 study has been completed in Italy which examined the
efficacy and safety of ZADAXIN plus TACE for treatment of HCC. Eleven patients
had liver cirrhosis of class A or B according to Child's criteria, with tumors
classified as Okuda stage I or II. One patient was classified as Child's class C
and had an Okuda stage III tumor. The diagnosis of HCC was based on
ultrasonography and histology. The patients were treated with ZADAXIN and TACE
mixed with 40-60 mg of doxorubicin for 6 months. Results were compared to a
matched historical control group treated with TACE alone.
Patients treated with the combination of ZADAXIN plus TACE showed longer
survival compared to the historical control group treated with TACE alone, that
reached statistical significance 7 months after the end of treatment (82% vs.
41% survival; p<0.05, Kaplan-Meier and Mantel-Haenszel test). Patients receiving
the ZADAXIN plus TACE demonstrated a significant increase in cytotoxic T cells
(CD8) and NK cells (CD16 and CD56) at 3 months and 1 month, respectively, after
completion of treatment. The delayed after-treatment effect of ZADAXIN observed
in this study is concordant with studies in hepatitis B where it is common to
see patients respond to ZADAXIN during the follow-up period.
The FDA recently granted Orphan Drug Status to ZADAXIN for the treatment of
HCC.
We expect to begin a U.S. phase 2 trial of ZADAXIN plus TACE for HCC in
2000.
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Malignant Melanoma
Melanoma is the most dangerous and malignant of skin cancers and one of the
most rapidly increasing types of cancer worldwide. Although melanoma accounts
for only 5% of skin cancer cases, it is responsible for about 75% of all skin
cancer deaths. Since 1973, the number of new melanomas diagnosed each year in
the U.S. has doubled. According to the American Cancer Society, about 44,200 new
melanomas were diagnosed in the U.S. in 1999. The standard treatment for primary
melanoma tumors is surgical removal, and patient prognosis is not good unless
the tumor is detected early.
ZADAXIN for Malignant Melanoma
Malignant melanoma is resistant to most forms of therapy, with response
rates to dacarbazine (commonly referred to as DTIC), the most active single
agent for the disease, of approximately 17-20%, and without impact on patient
survival. The effects of ZADAXIN in combination with chemotherapy and cytokine
therapy for treatment of malignant melanoma were examined in three trials in
Italy with comparisons to historical controls. In one trial, ZADAXIN was used
following DTIC therapy in combination with alpha interferon. In 26 treated
patients evaluated by World Health Organization criteria there was an overall
response rate of 50%, with a mean duration of response of 13.5 months. In
another trial with the same combination treatment, 20 patients with Stage III or
IV unresectable metastatic melanoma were treated with up to nine cycles of
therapy. Ten patients responded to therapy for an overall response rate of 50%.
Median survival time was 11.5 months with a median time to progression of 5.5
months. Importantly, 7 patients survived for more than two years and 2 patients
were disease free after more than five years. In a third trial, ZADAXIN was
administered following DTIC therapy in combination with IL-2, an
immunomodulator. There were 42 evaluable patients that showed an overall
response rate of 36%, with a median time to progression of 5.5 months and median
survival of 11 months. Historical controls have shown response rates of about
27% with DTIC and alpha interferon and about 22% with DTIC and IL-2. Thus, the
ZADAXIN treated patients showed greater overall response over these other
regimens, namely DTIC with alpha interferon or IL-2 .
We expect to begin a ZADAXIN phase 2 malignant melanoma trial in the U.S.
and Australia in 2000.
CYSTIC FIBROSIS
Cystic Fibrosis is the most common fatal genetic disease among Caucasians.
Currently, there is no cure for the disease which affects approximately 70,000
children and young adults worldwide, including approximately 30,000 in the U.S.
and 30,000 in Europe. In the U.S., 1,000 new cases are diagnosed each year,
usually by the age of three. Tragically, 50% of cystic fibrosis patients may die
by age 31. Cystic fibrosis patients suffer from chronic lung infections and
sinusitis, as well as the inability to secrete enough digestive enzymes to
properly digest food and absorb nutrients.
Cystic fibrosis is caused by a mutated gene that produces an abnormal
protein, the Cystic Fibrosis Transmembrane Conductance Regulator (CFTR) protein.
This basic defect in cystic fibrosis cells results in the faulty transport of
chloride and sodium within epithelial cells (which line organs such as the lungs
and pancreas). This faulty transport causes the body to produce abnormally
thick, sticky mucus which clogs the lungs and leads to fatal infections. This
mucus also obstructs the pancreas, preventing enzymes from reaching the
intestines to digest food. Most cystic fibrosis patients die from lung disease.
Cystic fibrosis also affects other areas of the body, including the sweat
glands, liver, gallbladder and male reproductive organs.
One in every 29 Americans, more than 10 million people, is an unknowing,
symptomless carrier of the gene. A child must inherit two defective copies of
the cystic fibrosis gene, one from each parent, to have cystic fibrosis. Each
time two carriers conceive a child there is a 25% chance that the child will
have cystic fibrosis, a 50% chance that the child will be a carrier, and a 25%
chance that the child will be a non-carrier.
Currently, there is no cure for cystic fibrosis. Approved cystic fibrosis
treatments only address the symptoms of the disease and the underlying
protein-associated defect causing cystic fibrosis in most patients -- impaired
chloride ion transport and abnormal CFTR protein trafficking. The treatment of
cystic
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fibrosis depends upon the stage of the disease and which organs are involved.
One means of treatment, postural drainage (also called chest physical therapy),
requires vigorous percussion (by using cupped hands) on the back and chest to
dislodge the thick, sticky mucus from the lungs. Antibiotics are also used to
treat lung infections and are administered intravenously, orally or in medicated
vapors that are inhaled to open up clogged airways. In addition, mucolytic
(mucus-thinning) drugs are used to thin the viscosity of the mucus. When cystic
fibrosis affects the digestive system, the body cannot absorb enough nutrients.
Therefore, people with cystic fibrosis may need to eat an enriched diet and take
both replacement vitamins and enzymes. The annual average cost of care of a
cystic fibrosis patient has been estimated by the Cystic Fibrosis Foundation to
be approximately $50,000 per patient, including hospitalizations, chest physical
therapy and medications.
CPX -- A PROMISING NEW PROTEIN-REPAIR THERAPY FOR CYSTIC FIBROSIS
We are currently developing a promising new protein-repair therapy for the
treatment of cystic fibrosis -- CPX. The use of CPX for cystic fibrosis was
co-discovered by Dr. Harvey Pollard and Dr. Kenneth Jacobson at the U.S.
National Institutes of Health (NIH). Laboratory testing was so promising that
our clinical research is being supported in part by grants from the U.S. FDA and
the Cystic Fibrosis Foundation.
The FDA has granted Orphan Drug Status to CPX as a treatment for cystic
fibrosis.
CPX has demonstrated efficacy in human cells in NIH laboratory studies. We
are now looking for ways to replicate this efficacy in cystic fibrosis patients.
CPX is the only drug currently under clinical development that targets and
corrects the effects of the underlying protein-associated defect that causes
cystic fibrosis in more than 70% of patients. All other current therapies treat
only the symptoms of the disease.
Laboratory research at the NIH suggests that CPX repairs the defective CFTR
protein and helps it do its job in the following two ways:
- CPX binds to the defective CFTR protein and improves the ability of the
CFTR protein to properly move through the epithelial cell, a process
called trafficking, by binding with the defective CFTR protein and
protecting it from being destroyed as it makes its way to the surface of
the cell; and
- CPX improves the working of the defective CFTR protein so that it
successfully provides increased transport of chloride through the
epithelial cells.
CPX is currently in phase 2 development in the U.S. In the initial phase 2
study of CPX, the unique drug absorption characteristics of cystic fibrosis
patients precluded achievement of sustained blood concentrations of CPX
necessary to evaluate efficacy in this study. Our new formulation program is
intended to address this drug absorption issue. Working closely with scientists
and clinical investigators in the Cystic Fibrosis Foundation's Therapeutics
Development Network, we plan to study a new formulation of CPX in additional
U.S. phase 2 studies.
MARKETING AND SALES
Assuming FDA approval of ZADAXIN and CPX, we plan to directly market the
drugs in the U.S. potentially in collaboration with a pharmaceutical company. In
Europe and Japan, our key future international markets, we plan to market
ZADAXIN in collaboration with our exclusive corporate partners Sigma-Tau S.p.A
("Sigma-Tau") and Schering-Plough, K.K., respectively. Outside these territories
we plan to market ZADAXIN on our own through our broad distribution network.
In our ZADAXIN markets in Asia (excluding Japan), Latin America and the
Middle East, we conduct medical education and clinical trial programs targeting
the leading specialists (e.g. hepatologists, immunologists and oncologists) at
the leading hospitals in each of our markets. Local importers/distributors
assist us with regulatory submissions to the ministries of health and are
responsible for the importation, inventory, physical distribution and invoicing
of ZADAXIN. Our wholly-owned international subsidiary, SciClone Pharmaceuticals
International Ltd. ("SPIL"), is based in Hong Kong and has international offices
in Beijing, Hong Kong, Milan, Panama City, Shanghai, Singapore and Osaka. SPIL
manages a distribution center in Hong Kong which is the source for all ZADAXIN
re-exported to our non-U.S. markets, except Japan. We
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<PAGE> 11
have established distribution arrangements with local pharmaceutical
wholesale/distribution companies covering 46 countries outside of the U.S.,
Europe and Japan. In those markets where ZADAXIN is approved in Asia, Latin
America and the Middle East, we have established or plan to establish in the
near term ZADAXIN marketing programs. ZADAXIN sales in our currently approved
markets and pending markets are and will be managed by SPIL employees.
MANUFACTURING
We do not intend to acquire or establish our own dedicated manufacturing
facilities for any of our products at this time. There are numerous facilities
in compliance with FDA Good Manufacturing Practice, or the foreign equivalent of
such standards, available for contract manufacturing. We have entered into
exclusive contract manufacturing and supply agreements to produce ZADAXIN and
CPX. These manufacturers are supplying the ZADAXIN and CPX required for our
current and planned clinical trial activities, and have demonstrated, with
respect to ZADAXIN, the capability to supply commercial quantities of the drug
to fulfill our expected near term commercial requirements. We believe that, in
the event of the termination of an agreement with any single supplier or
manufacturer, we would likely be able to enter into arrangements with other
suppliers or manufacturers on similar terms.
We directly monitor production runs of our products and maintain our own
quality assurance audit programs.
PATENTS AND PROPRIETARY RIGHTS
We are either a patentee or exclusive licensee of composition of matter,
process and use patents and pending applications related to thymosin alpha 1,
the generic name of ZADAXIN, in the U.S. and abroad.
We are the exclusive licensee of foreign patents directed to the thymosin
alpha 1 composition of matter which are owned by F. Hoffmann-La Roche AG and the
Board of Regents of the University of Texas System. We are a co-patentee of
thymosin alpha 1 composition of matter patents in New Zealand and South Africa.
Most of these foreign composition of matter patents have expired. However, we
are a patentee of a number of composition of matter patents and applications
directed to analogs and derivatives of thymosin alpha 1 and we are seeking
numerous other proprietary rights for thymosin alpha 1. We are either a patentee
or exclusive licensee and are directing prosecution of use and process patents
related to the method of making and therapeutic uses of thymosin alpha 1.
Our process patents are directed to methods of making thymosin alpha 1 and
have issued in the U.S., a majority of European countries, Hong Kong, Canada,
Japan, Korea and Taiwan.
We are also a co-patentee of patents and pending applications covering
numerous uses of thymosin alpha 1. Patents covering use of thymosin alpha 1 for
treatment of hepatitis C have issued in the U.S. and a majority of European
countries, Taiwan, Australia, Indonesia, Malaysia and South Africa. Patents for
which we are a co-patentee have additionally issued in the U.S., South Africa
and Taiwan covering the use of thymosin alpha 1 to treat autoimmune hepatitis;
in Australia and South Africa for the use of thymosin alpha 1 in treating
hepatitis C in non-responders to interferon treatment; and in the U.S. and New
Zealand covering the use of thymosin alpha 1 to treat decompensated liver
disease. Patents which we own have issued in the U.S., Japan, Taiwan, Malaysia
and South Africa covering the use of thymosin alpha 1 to treat hepatitis B
carriers with minimal disease. We are the exclusive licensee of patents which
have issued in the U.S. and Australia which cover the use of thymosin alpha 1 to
treat small cell and non-small cell lung cancer; in Japan covering the treatment
of hepatitis B using thymosin alpha 1; in the U.S., Taiwan and South Africa
covering the use of thymosin alpha 1 to treat septic shock; and in the U.S.,
Australia, the Philippines, Taiwan and South Africa covering the treatment of
infertility in mammalian males using thymosin alpha 1. Numerous corresponding
additional patent applications in other countries are pending for each of the
above named indications.
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We are the exclusive licensee of an issued U.S. patent covering the use of
CPX to treat cystic fibrosis, as well as an issued U.S. patent and pending
foreign patent applications covering DAX and other CPX analogs and their use in
treating cystic fibrosis.
We are the exclusive licensee of an issued U.S. patent covering the
composition of matter of SCV-07 and related compounds, as well as similar
pending foreign patent applications.
In addition to patent protection, we intend to use other means to protect
our portfolio of proprietary rights. Certain marketing exclusivity periods may
be available under regulatory provisions in certain countries including the
U.S., European Union countries and Japan, which benefits the holder of the first
marketing approval for new chemical entities or their equivalents for a given
indication and we are pursuing such rights. Orphan drug protection has been or
will be sought where available, granting additional market exclusivity. We hold
an orphan drug product designation for thymosin alpha 1 for hepatocellular
carcinoma, hepatitis B and DiGeorge Anomaly in the U.S. Recognition and
protection of trademarks for thymosin alpha 1 is being accomplished through
worldwide filing of trademark applications for ZADAXIN and other trademarks
which appear on the commercial packaging of the product and are used in
promotional literature. Copyrights for the commercial packaging may provide us
with means to take advantage of procedures available in certain countries to
exclude counterfeit products or genuine but unauthorized products from entering
a particular country by parallel importation. We have also implemented
anti-counterfeiting measures on commercial packaging and plans to register the
packaging with customs departments in countries where such procedures exist.
We are pursuing similar types of protection for CPX, where applicable. We
hold an orphan drug product designation for CPX to treat cystic fibrosis in the
U.S.
We also rely upon trade secrets, which we seek to protect, in part, by
entering into confidentiality agreements with our employees, consultants,
corporate partners, suppliers and licensees.
SPONSORED RESEARCH AND DEVELOPMENT
For the years ended December 31, 1999, 1998 and 1997, we expended
$4,604,000, $9,293,000 and $8,642,000, respectively, in our sponsored research
and development activities.
COMPETITION
Competition in the discovery and development of methods for treating
cancer, infectious diseases and cystic fibrosis is intense and we expect that
the competition will increase. Our 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 we are pursuing, particularly
cancer, hepatitis B, hepatitis C and HIV. In certain instances, our competitors
are currently marketing drugs for cancer, hepatitis B, hepatitis C and HIV or
have products in late-stage clinical trials.
Many of our competitors have substantially greater financial, technical,
clinical testing, manufacturing, marketing, regulatory compliance and human
resource capabilities. Additional mergers and acquisitions in the pharmaceutical
industry may result in ever more resources being concentrated with our
competitors. Principal competitive factors in the pharmaceutical field include
efficacy, safety, and therapeutic regimen. Where comparable products are
marketed by other companies price is also a competitive factor.
In the area of immunotherapy, we anticipate that our competition for
ZADAXIN may be reduced by the fact that ZADAXIN administered in combination with
numerous antiviral and anti-cancer agents is expected to be complementary rather
than competitive to such agents in enhancing the immune system. We expect
continuing advancements in and increasing awareness of the use of immunotherapy
to fight cancer and infectious diseases may create new competitors as well as
numerous new opportunities for expanded use of ZADAXIN worldwide.
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<PAGE> 13
GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. and foreign countries is
a significant factor in the manufacturing of products for the Company and the
marketing of products by the Company, as well as in ongoing research and
development activities and in preclinical and clinical trials and testing
related to our products. If our products are manufactured, tested or sold in the
U.S., they will be regulated in accordance with the Federal Food, Drug, and
Cosmetic Act ("FD&C Act") and the U.S. Public Health Service Act. The standard
process required by the FDA before a pharmaceutical agent may be marketed in the
U.S. includes (i) preclinical laboratory and animal tests, (ii) submission to
the FDA of an IND, which must become effective before human clinical trials may
commence, (iii) adequate well-controlled human clinical trials to establish the
safety and efficacy of the product for its intended indication, (iv) submission
to the FDA of a New Drug Application ("NDA") with respect to drugs, or Biologics
License Application ("BLA") for biological products and (v) FDA approval of the
NDA prior to any commercial marketing, sale or shipment of the drug. In addition
to obtaining FDA approval for each product, each domestic manufacturing
establishment must be registered with the FDA. Domestic manufacturing
establishments are subject to inspections by the FDA and by other federal, state
and local agencies and must comply with current U.S. Good Manufacturing
Practices ("cGMP").
The steps required before a new drug or biological product may be
distributed commercially in the U.S. generally include:
- conducting appropriate preclinical laboratory evaluations of the
product's chemistry, formulation and stability, and animal studies to
assess the potential safety and efficacy of the product;
- submitting the results of these evaluations and tests to the FDA, along
with manufacturing information and analytical data, in an Investigational
New Drug Application ("IND");
- making the IND effective after the resolution of any safety or regulatory
concerns of FDA;
- obtaining approval of Institutional Review Boards, or IRBs, to introduce
the drug into humans in clinical studies;
- conducting adequate and well-controlled human clinical trials that
establish the safety and efficacy of the drug product candidate for the
intended use, typically in the following three sequential, or slightly
overlapping stages:
- Phase I: The drug is initially introduced into healthy human subjects or
patients and tested for safety, dose tolerance, absorption, metabolism,
distribution and excretion;
- Phase II: The drug is studied in patients to identify possible adverse
effects and safety risks, to determine dose tolerance and the optimal
dosage, and to collect initial efficacy data; and
- Phase III: The drug is studied in an expanded patient population at
multiple clinical study sites, to confirm efficacy and safety at the
optimized dose, by measuring a primary endpoint established at the
outset of the study;
- submitting the results of preliminary research, preclinical studies, and
clinical studies as well as chemistry, manufacturing and control
information on the drug to the FDA in a NDA or BLA; and
- obtaining FDA approval of the NDA or BLA prior to any commercial sale or
shipment of the drug product.
In approving an NDA or BLA, the FDA may require further post-marketing
studies, referred to as phase 4 studies. When used in this Report in connection
with trials and filings in other countries, terms such as "phase 1," "phase 2,"
"phase 3," "phase 4," "new drug application" and "marketing application" refer
to what we believe are comparable trials and filings in such other countries.
Congress recently amended the FD&C Act to facilitate and expedite the
development and review of drugs and biological products intended for treatment
of serious or life-threatening conditions that demonstrate the potential to
address unmet medical needs for such conditions. These provisions, which combine
existing
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<PAGE> 14
FDA expedited approval and accelerated approval procedures, set forth a new
procedure for designation of a drug as a "fast track product." Concurrent with
or after an IND is filed, the sponsor may request designation as a fast track
product, and the FDA will respond within 60 calendar days.
If designated fast track, the FDA must take such actions as are appropriate
to facilitate the development and expedite review of applications for these
products. Another advantage of fast track designation is that sponsors may
submit, and the FDA may commence review of, portions of an application before
the complete application is submitted, provided that a schedule for submission
of the completed application is provided. Sponsors of fast track products also
may seek and obtain FDA approval based upon a determination that the product has
an effect on a clinical endpoint or on a surrogate endpoint that is reasonably
likely to predict clinical benefit. Products approved on such basis are subject
to rigorous postmarket compliance requirements. For example, the sponsor may be
required to conduct post-approval studies to validate or confirm the endpoint
and/or may be required to submit copies of all promotional materials 30 days
prior to their dissemination. The FDA may withdraw approval of fast track
products if, for example, the sponsor fails to conduct required post-approval
studies or disseminates false or misleading promotional materials.
Even after initial FDA approval has been obtained, further studies,
including post-marketing studies, may be required to provide additional data on
the product's risks, benefits, and optimal use, and will be required to gain
approval for the use of a product as a treatment for clinical indications other
than those for which the product was initially tested. Also, the FDA will
require post-marketing reporting to monitor the side effects of the drug.
Results of post-marketing programs may limit or expand the further marketing of
the products. Further, if there are any modifications to the drug, including
changes in indication, labeling, or a change in manufacturing facility, an NDA
or BLA supplement may be required to be submitted to the FDA. Pursuant to recent
amendments to the FD&C Act, major manufacturing changes, defined as changes that
have substantial potential to have an adverse effect on the identity, strength,
quality, purity, or potency of a product as they may relate to the safety an
effectiveness of the product, require the submission of a supplement and
approval by FDA prior to distribution of the product made using the change.
Moderate changes are defined as having moderate potential to have an adverse
effect on the identity, strength, quality, purity, or potency of the product as
they may relate to the safety or effectiveness. Some moderate changes, such as a
move to a different manufacturing site for the manufacture or processing of any
drug product, in-process material, or drug substance, require submission of a
supplement to FDA at least 30 days before the distribution of the product made
using the change. Other moderate changes, such as a move to a different
manufacturing site for the manufacture or processing of the final intermediate,
may occur when FDA receives the supplement. Minor changes, defined as having
minimal potential to have an adverse effect on the identity, strength, quality,
purity, or potency of the product as they may relate to the safety or
effectiveness, must be described in the next required Annual Report to FDA by
the manufacturer.
The orphan drug provisions of the FD&C Act provide incentives to drug and
biologics manufacturers to develop and manufacture drugs for the treatment of
rare diseases, currently defined as diseases that affect fewer than 200,000
individuals in the U.S. or, for a disease that affects more than 200,000
individuals in the U.S., where the sponsor does not realistically anticipate its
product becoming profitable. Under these provisions, a manufacturer of a
designated orphan product can seek tax benefits, and the holder of the first FDA
approval of a designated orphan product will be granted a seven year period of
marketing exclusivity for that product for the orphan indication. While the
marketing exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same compound for the same indication, it would not
prevent other types of drugs from being approved for the same use. We have been
granted orphan designation by the FDA for CPX for cystic fibrosis, and for
ZADAXIN for chronic active hepatitis B, DiGeorge Anomaly and hepatocellular
carcinoma. In prior years, legislation was introduced in the U.S. Congress that
would restrict the duration of the marketing exclusivity of an orphan drug.
There can be no assurances that this type of legislation will not be
reintroduced and passed into law, or that the benefits of the existing statute
will remain in effect.
Under the Drug Price Competition and Patent Term Restoration Act of 1984
("DPCPTRA"), a sponsor may be granted marketing exclusivity for a period of time
following FDA approval of certain drug applications, regardless of patent
status, if the drug is a new chemical entity or new clinical studies were used
to support the
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<PAGE> 15
marketing application. This marketing exclusivity would prevent a third party
from obtaining FDA approval for a similar or identical drug through an
Abbreviated New Drug Application ("ANDA"), which is the application form
typically used by manufacturers seeking approval of a generic drug, or 505(b)(2)
application. The statute also allows a patent owner to extend the term of the
patent for a period equal to one-half the period of time elapsed between the
filing of an IND and the filing of the corresponding NDA plus the period of time
between the filing of the NDA and FDA approval with the maximum patent extension
term being five years. Once a drug is granted some form of marketing
exclusivity, the recently enacted FDA Modernization Act provides an additional
six months of marketing exclusivity for certain pediatric research conducted at
the written request of the FDA.
We may seek the benefits of orphan, DPCPTRA, or fast track provisions, but
there can be no assurance that we will be able to obtain any such benefits.
We are subject to foreign regulations governing human clinical trials and
pharmaceutical sales. The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement vary widely from country to
country. Whether or not FDA approval has been obtained, approval of a product by
the comparable regulatory authorities of foreign countries is required prior to
the commencement of marketing of our products in those countries. The approval
process varies from country to country and the time required for approval may be
longer or shorter than that required for FDA approval. In general, foreign
countries use one of three forms of regulatory approval process. In one form,
local clinical trials must be undertaken and the data must be compiled and
submitted for review and approval. In Japan, for example, the process is time-
consuming and costly because clinical trials and preclinical studies must be
conducted in Japan. A second form of approval process requires clinical trial
submissions, but permits use of foreign clinical trials and typically also
requires some form of local trial as well. A third form of approval process does
not require local clinical trials, but rather contemplates submission of an
application including proof of approval by countries that have clinical trial
review procedures. Thus, a prior approval in one or more of the U.S., Japan,
most European Union countries or Australia, among others, is often sufficient
for approval in countries using this third form of approval process.
In addition to required foreign approvals, the FDA regulates the export of
drugs or bulk pharmaceuticals from the U.S. In general, a drug that has been
approved for commercial sale in the U.S. may be exported for commercial sale. In
1996, export reform legislation was passed in the U.S. that provides that an
unapproved drug may be exported to a "listed country" for investigational
purposes without FDA authorization if exported in accordance with laws of the
foreign country, and in accordance with the export requirements. The listed
countries include Australia, Canada, Israel, Japan, New Zealand, Switzerland,
South Africa, and countries in the European Union and the European Economic
Area. Export of drugs to an unlisted country for clinical trial purposes
continues to require FDA approval. We have obtained, where necessary, FDA
approval for all exports of ZADAXIN from the U.S. to date for clinical trial
purposes, and will seek to obtain FDA approval, where necessary, for any future
shipments from the U.S. to any unlisted country. The export reform legislation
further provides that an unapproved drug can be exported to any country for
commercial purposes without prior FDA approval, provided that the drug: (i)
complies with the laws of that country; and (ii) has valid marketing
authorization or the equivalent from the appropriate authority in a "listed
country." Export of drugs not approved in the U.S. that do not have marketing
authorization in a listed country continue to require FDA export approval.
Pursuant to the Prescription Drug User Fee Act of 1992, drug and biologics
manufacturers generally are required to pay three types of user fees: (1) a
one-time application fee for approval of an NDA or BLA; (2) an annual product
fee imposed on prescription drugs and biologics after FDA approval; and (3) an
annual establishment fee imposed on facilities used to manufacture prescription
drugs and biologics. The fee rates for 2000 are: (1) $285,470 one-time fee for
an application requiring clinical data, or $142,870 fee for an application not
requiring clinical data; (2) $14,971 annual establishment fee; and (3) $19,959
annual product fee. These fee amounts are likely to increase in the future. Fee
waivers or reductions are available in certain instances, including a waiver of
the application fee for the first application filed by a small business.
Additionally, no user fees are assessed on NDAs or BLAs for products designated
as orphan drugs, unless such drug also includes a non-orphan indication.
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Among the conditions for NDA or BLA approval in the U.S. is the requirement
that the prospective manufacturer's quality control and manufacturing procedures
conform to cGMP. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of
production and quality control to ensure full technical compliance.
We are also subject to various federal, state and local laws, regulations
and recommendations relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with research work
and preclinical and clinical trials and testing. The extent of government
regulation that might result from future legislation or administrative action in
these areas cannot be accurately predicted.
As the preceding discussion indicates, the research, preclinical
development, clinical development, manufacturing, marketing and sales of
pharmaceuticals, including ZADAXIN and CPX, are subject to extensive regulation
by governmental authorities. Products we develop cannot be marketed commercially
in any jurisdiction in which they have not been approved. The process of
obtaining regulatory approvals is lengthy, uncertain and requires the
expenditure of substantial resources. For example, in some countries where we
contemplate 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. In addition, in certain countries such as Japan, the
process for obtaining regulatory approval is time consuming and costly. We are
currently pursuing regulatory approvals of ZADAXIN in a number of countries, and
of CPX in the U.S., but there can be no assurance that we will ultimately obtain
approvals in such countries in a timely and cost-effective manner or at all.
Failure to comply with 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,
total or partial suspension of production, civil penalties, and criminal
prosecutions. Further, additional government regulation may be established or
imposed by legislation or otherwise, which could prevent or delay regulatory
approval of ZADAXIN, CPX or any of our future products. Adverse events related
to our products in any of our existing or future markets could cause regulatory
authorities to withdraw market approval for such products, if any, or prevent us
from receiving market approval in the future.
THIRD PARTY REIMBURSEMENT
Our ability to successfully commercialize its products may depend in part
on the extent to which coverage and reimbursement for such products will be
available from government health care programs, private health insurers and
other third party payors or organizations. Significant uncertainty exists as to
the reimbursement status of new therapeutic products and there can be no
assurance that third party insurance coverage and reimbursement will be
available for therapeutic products we might develop. In many of the foreign
countries in which we intend to market ZADAXIN, 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. Recent legislation, for example,
imposes limitations on the amount of reimbursement available for specific drug
products under some governmental health care programs. There can be no assurance
that future additional limitations will not be imposed in the future on drug
coverage and reimbursement.
EMPLOYEES
As of December 31, 1999, we had 46 employees, 16 in the U.S., and 30 in
foreign offices. We consider our relations with our employees to be
satisfactory. We expect to hire other experienced professionals in 2000 to,
among other things, address expanded clinical, manufacturing and marketing
activities.
In addition to our employees, we have direct access to the activities of
approximately 54 employees of our overseas distributors. We also have engaged
the services of numerous experienced consultants worldwide with pharmaceutical
and business backgrounds to assist in our product development and ZADAXIN
commercialization activities. We plan to leverage our key personnel by
continuing to make extensive use of contract
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laboratories, development consultants and collaborations with pharmaceutical
companies to develop and market our products.
RECENT DEVELOPMENTS
In March 2000, Sigma-Tau acquired exclusive development and marketing
rights to ZADAXIN in the European Union. We retain all rights to ZADAXIN in the
U.S. Under the agreement, Sigma-Tau will fund the pan-European pivotal phase 3
hepatitis C trial of ZADAXIN and also fund more than one third of our clinical
expenses for a complementary pivotal phase 3 hepatitis C trial in the U.S. Both
the U.S. and European ZADAXIN pivotal phase 3 hepatitis C trials are planned to
start in 2000.
ITEM 2. PROPERTIES
We currently lease approximately 7,500 square feet of office space at our
headquarters in San Mateo, California and limited office space for marketing
purposes in Beijing, Hong Kong, Milan, Panama City, Shanghai, Singapore and
Osaka. We believe that our existing facilities will be adequate for our current
needs and that additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the quarter
ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Our Common Stock trades on The Nasdaq National Market under the symbol
"SCLN."
The following table sets forth the high and low sale prices per share for
the quarterly periods indicated, as reported by The Nasdaq National Market. The
quotations shown represent inter-dealer prices without adjustment for retail
markups, markdowns, or commissions, and may not necessarily reflect actual
transactions.
<TABLE>
<CAPTION>
PRICE RANGE
COMMON STOCK
--------------
HIGH LOW
----- -----
<S> <C> <C>
1999
4th quarter............................................... $7.38 $1.56
3rd quarter............................................... 2.50 1.19
2nd quarter............................................... 1.94 1.25
1st quarter............................................... 2.50 1.00
1998
4th quarter............................................... $2.00 $0.94
3rd quarter............................................... 3.94 1.69
2nd quarter............................................... 5.13 3.13
1st quarter............................................... 4.69 1.78
</TABLE>
Through December 31, 1998, all but 58,356 of the 661,157 shares of Series C
preferred stock issued in a 1998 private placement were converted into a total
of 3,168,404 shares of common stock. In January 1999, 46,922 of the remaining
58,356 shares of Series C preferred stock were converted into 299,483 shares of
common stock and 11,434 of such remaining shares of Series C 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 April 1999, we completed a $1,000,000 private placement of 445,000
shares of restricted common stock to the Sigma-Tau Group, one of the leading
pharmaceutical companies in Southern Europe. 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.
On July 2, 1999, we 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 was priced at
$1.46 and consisted of one share of common stock and one five-year redeemable
warrant to purchase one share of common stock at an exercise price of $1.33 per
share. In addition, we issued to our placement agents an aggregate of 183,179
five-year redeemable warrants to purchase 183,179 shares of common stock at an
exercise price of $1.66 per share.
On July 21, 1999, we 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 was priced at $1.59 and consisted of
one share of common stock and one five-year redeemable warrant to purchase one
share of common stock at an exercise price of $1.72 per share. In addition, we
issued to our placement agents an aggregate of 345,932 five-year redeemable
warrants to purchase 345,932 shares of common stock at an exercise price of
$1.83 per share.
As of March 23, 2000, 3,586,842 of the redeemable warrants from the two
July 1999 private placements had been exercised for aggregate proceeds to us of
approximately $5,848,000. We expect 746,225 of the remaining
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<PAGE> 19
828,348 redeemable warrants from these private placements to be exercised on or
before April 7, 2000 for additional aggregate proceeds to us of approximately
$1,070,000.
As of March 23, 2000, there were approximately 327 holders of record and
approximately 13,659 beneficial holders of our Common Stock.
We have not paid any dividends on our Common Stock and currently intend to
retain any future earnings for use in our business.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
This section presents selected historical financial data for each of the
last five fiscal years and is qualified by reference to and should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Product sales............... 9,091,000 $ 3,625,000 $ 2,223,000 $ 703,000 $ 273,000
Contract revenue............ 307,000 100,000 -- -- --
=========== ============ ============ ============ ============
Total revenue............... 9,398,000 3,725,000 2,223,000 703,000 273,000
----------- ------------ ------------ ------------ ------------
Cost of product sales....... 1,761,000 1,036,000 990,000 740,000 737,000
----------- ------------ ------------ ------------ ------------
Gross margin................ 7,637,000 2,689,000 1,233,000 (37,000) (464,000)
----------- ------------ ------------ ------------ ------------
Operating expenses:
Research and
development............ 4,604,000 9,293,000 8,642,000 9,904,000 10,386,000
Marketing................. 5,911,000 5,391,000 4,145,000 4,240,000 4,323,000
General and
administrative......... 2,978,000 3,714,000 3,662,000 3,183,000 2,904,000
----------- ------------ ------------ ------------ ------------
Total operating expenses.... 13,493,000 18,398,000 16,449,000 17,327,000 17,613,000
----------- ------------ ------------ ------------ ------------
Loss from operations........ (5,856,000) (15,709,000) (15,216,000) (17,364,000) (18,077,000)
Writedown of note receivable
from former officer....... -- (5,944,000) -- -- --
Interest and investment
income, net............... 389,000 582,000 1,219,000 2,618,000 3,302,000
----------- ------------ ------------ ------------ ------------
Net loss.................... $(5,467,000) $(21,071,000) $(13,997,000) $(14,746,000) $(14,775,000)
Deemed dividend on issuance
of preferred stock........ -- (3,143,000) -- -- --
----------- ------------ ------------ ------------ ------------
Net loss attributable to
common stockholders....... $(5,467,000) $(24,214,000) $(13,997,000) $(14,746,000) $(14,775,000)
=========== ============ ============ ============ ============
Basic net loss per share.... $ (0.26) $ (1.48) $ (0.85) $ (0.85) $ (0.88)
=========== ============ ============ ============ ============
Weighted average shares used
in computing basic and
diluted net loss per
share..................... 21,162,936 16,335,096 16,472,765 17,421,312 16,882,000
=========== ============ ============ ============ ============
BALANCE SHEET DATA:
Cash, cash equivalents and
investments............... $ 3,621,000 $ 5,410,000 $ 12,901,000 $ 35,106,000 $ 47,390,000
Working capital............. 7,091,000 3,845,000 7,416,000 9,224,000 19,283,000
Total assets................ 13,124,000 11,727,000 19,196,000 42,728,000 54,151,000
Redeemable preferred
stock..................... -- 848,000 -- -- --
Total shareholders'
equity.................... 9,301,000 6,428,000 15,724,000 37,466,000 49,555,000
</TABLE>
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<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operation should be read in conjunction with the "Selected
Consolidated Financial Data" and our financial statements and related notes
thereto included elsewhere in this Annual Report on Form 10-K. This Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other parts of this Annual Report on Form 10-K contain forward-looking
statements which involve risks and uncertainties. Our actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in "Risk Factors."
OVERVIEW
During the periods encompassed by this Annual Report on Form 10-K we have
devoted substantially all of our resources to our ZADAXIN and CPX product
development programs and our ZADAXIN commercialization activities. We conduct
our research and product development efforts through a combination of internal
and collaborative programs. In addition to internal management and staff, we
rely upon arrangements with universities, other clinical research sites and
contract research organizations for a significant portion of our product
development efforts. Oversight of all external and collaborative programs is
conducted by our executive officers and other staff from our headquarters
located in San Mateo, California.
From commencement of operations through December 31, 1999, the Company has
incurred a cumulative net loss of approximately $115 million. We expect our
sales, gross margin and operating expenses to increase over the next several
years as we expand our sales, research and development, clinical testing and
marketing capabilities. Our ability to achieve and sustain operating
profitability is primarily dependent on obtaining additional financing to
support our operations and long-term product development and commercialization
programs, the initiation and continuation of new clinical trials, maintaining
our ZADAXIN corporate partnering arrangements in Europe and Japan, increasing
ZADAXIN sales in approved markets, securing regulatory approvals for ZADAXIN in
additional countries, particularly in the U.S., Europe and Japan, and
successfully launching ZADAXIN, if approved, in such countries. In addition,
other factors may also impact our ability to achieve and sustain operating
profitability such as spending associated with successful development of CPX,
acquiring rights to additional drugs, and entering into and extending agreements
for product development and commercialization, where appropriate.
Our operating results may fluctuate from quarter to quarter and such
fluctuations may be substantial as a result of, among other factors, market
acceptance of ZADAXIN, the number, timing, costs and results of preclinical and
clinical trials of our products, the regulatory approval process, the timing of
FDA or international regulatory approvals, the acquisition of additional product
rights and the funding, if any, provided as a result of corporate partnering
arrangements. Setbacks in the launch, sale or distribution of ZADAXIN,
preclinical or clinical development of our products 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 our common stock in any
given period.
RESULTS OF OPERATIONS
Product sales were $9,091,000, $3,625,000, and $2,223,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. In 1997, sales were
relatively flat through the quarters as the four geographic regions of the
People's Republic of China, northern, central, southern and Guangzhou area, were
established. In 1998 and 1999, both unit and U.S. dollar sales grew at an
average of 25% and 24%, respectively, quarter to quarter as the awareness and
use of ZADAXIN expanded. Currently, we have received approval to market ZADAXIN
in 19 countries. The People's Republic of China, currently ZADAXIN's largest
market, 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. In 1997, we sold to
one principal importer/agent who then resold to four distributors inside the
People's Republic of China. Reflecting the expansion and stability of our sales
to the People's Republic of China in 1998, we began
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<PAGE> 21
working extensively with a second importing agent in addition to the agent used
in 1997. This enabled the expansion of sales to the four distributors. For the
year ended December 31, 1999, four distributors in China accounted for 87% of
our product sales. In addition, we have filed for approval to market ZADAXIN in
18 additional countries and anticipate additional filings in other countries. We
expect ZADAXIN sales to increase both in our existing approved markets and in
new markets once regulatory approvals are secured. The level of such sales
increase is dependent upon increased ZADAXIN market penetration in our existing
approved markets, additional ZADAXIN marketing approvals and the successful
launch of ZADAXIN in new markets. Although we remain optimistic regarding the
prospects of ZADAXIN, there can be no assurance that we will ever achieve
significant levels of sales or that we will receive additional ZADAXIN market
approvals.
Cost of product sales was $1,761,000, $1,036,000 and $990,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. The increase was
attributable to increased ZADAXIN sales. We expect cost of product sales to vary
from quarter to quarter, depending upon the level of ZADAXIN sales, the
absorption of fixed product-related costs, and any charges associated with
excess or expiring finished product.
Gross margin was $7,637,000, $2,689,000 and $1,233,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. Gross profit margin increased
from 55% in 1997 to 71% in 1998 and 81% in 1999 due to increased unit sales of
ZADAXIN with associated economies of scale, in addition to cost improvement and
cost reduction programs.
Research and development expenses were $4,604,000, $9,293,000 and
$8,642,000 for the years ended December 31, 1999, 1998, and 1997, respectively.
The decrease in 1999 over 1998 was primarily attributable to decreased clinical
trial expenses, decreased license fees expense associated with acquisition of
rights to ZADAXIN, and decreased consulting fees, partially offset by increased
payroll expenses related to our restructuring program. For the year ended
December 31, 1998, the increase in research and development expenses as compared
to 1997 was due to increased clinical trial expenses. Additional pilot clinical
studies to expand the use of ZADAXIN in overseas markets were started in 1998.
Clinical trial expenses in 1998 also increased due to clinical trial expenses in
Japan, and additional clinical trial expenses for the clinical development of
CPX. The initiation and continuation of these programs and additional programs
by us has had and will continue to have a significant effect on our research and
development expenses and will require us to seek additional capital resources.
In general, we expect product research and development expenses to increase over
the next several years and to vary quarter to quarter as we pursue our strategy
of initiating additional preclinical and clinical trials and testing, acquiring
product rights, and expanding regulatory activities.
Marketing expenses were $5,911,000, $5,391,000 and $4,145,000 for the years
ended December 31, 1999, 1998, and 1997, respectively. The increase in 1999 over
1998 related to increased payroll expenses and expenses for advertising and
conferences associated with the expansion in our existing ZADAXIN markets
partially offset by decreased travel expenses. The increase in 1998 over 1997
reflected the increases in activities related to expanding distribution and
marketing efforts around the world in addition to increased professional
services related to the 1998 sales increase. We expect marketing expenses to
increase significantly in the next several quarters and years as we expand our
commercialization and marketing efforts and pursue additional strategic
collaborations.
General and administrative expenses were $2,978,000, $3,714,000 and
$3,662,000 for the years ended December 31, 1999, 1998, and 1997, respectively.
The decrease in 1999 as compared to 1998 was attributable to decreased payroll
and investor and public relations expenses partially offset by increased
amortization expense in relation to its intangible product rights acquired in
1998. In the near term, we expect general and administrative expenses to vary
quarter to quarter as we augment our general and administrative activities and
resources to support increased expenditures on preclinical and clinical trials
and testing, and regulatory, pre-commercialization and marketing activities.
On July 23, 1997, we loaned to Thomas E. Moore, our former Chairman and
Chief Executive Officer, $5,944,000 in exchange for a promise to repay the loan
on demand and the pledge of 1,882,500 shares of SciClone Common Stock owned by
Mr. Moore as collateral for such loan. During 1998 it was determined that
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<PAGE> 22
the value of the collateral underlying the loan made to Mr. Moore was more than
temporarily impaired and that a writedown of the book value of the note would be
required. Upon further investigation relative to the collectibility of the
demand note, and repeated attempts to obtain full repayment of the note
receivable it was determined that repayment of the $5,944,000 loan, plus
accumulated interest of approximately $689,000, was in substantial doubt. As a
result of this determination we elected to cancel the 1,882,500 shares of
SciClone common stock held as collateral and write off the entire remaining book
value in a non-cash charge to earnings in the fourth quarter of 1998. As of
March 23, 2000, such shares would have had a market value of approximately
$28,708,000. Under a new agreement in 1999, Mr. Moore received credit against
his total indebtedness of approximately $6,633,000 equal to the value at that
date of his 1,882,500 shares of SciClone common stock. After calculating and
applying the appropriate credit of $3,142,000, Mr. Moore agreed to pay the
balance of the remaining debt, $3,615,000, in five installments according to a
schedule beginning on October 1, 1999 at $20,000 and increasing by a factor of 4
each six month anniversary thereafter with final payment due no later than
October 1, 2001. The first $20,000 payment was paid in October 1999. See "Note
8 -- Shareholder's Equity of Notes to Consolidated Financials."
A non-cash charge to earnings was recorded in April 1998 for $3,143,000
representing a deemed dividend associated with the issuance of the Series C
preferred stock.
Net interest and investment income was approximately $389,000, $582,000,
and $1,219,000 for the years ended December 31, 1999, 1998, and 1997,
respectively. The decrease in 1999 as compared to 1998 and in 1998 as compared
to 1997 resulted from lower average invested cash balances. We recognized other
income of approximately $242,000, based on the net value of an asset available
for sale at approximately $1,184,000 less current liability at approximately
$942,000, related to the foreclosure on the loans. (See "Note 1" -- "Assets
Available for Sale").
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999 and 1998, we had $3,621,000 and $5,410,000,
respectively, in cash, cash equivalents and marketable securities. The
marketable securities consist primarily of highly liquid short-term and
long-term investments.
Net cash used by us in operating activities amounted to $8,909,000,
$13,353,000, and $14,056,000, for the years ended December 31, 1999, 1998, and
1997, respectively. Net cash used in operating activities for the year ended
December 31, 1999 was greater than the net loss due to increases in accounts
receivable and decreases in amounts owed to third parties for clinical trials.
These amounts 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 in operating activities for the year ended
December 31, 1998 was less than the net loss primarily due to increases in
clinical trial expense accruals primarily for Japan, inventory decreases, and
impairment of a note receivable from a former officer. These amounts were
partially offset by increases in prepaid expense primarily for product marketing
rights acquired for the U.S. and Europe. Net cash used in operating activities
for the year ended December 31, 1997 was greater than our net loss for such
period primarily due to increases in accounts receivable associated with sales
from our launch of ZADAXIN in its approved markets and increases in payments to
third parties for goods and services and to employees for compensation and
benefits. These amounts were partially offset by non-cash charges associated
with depreciation and amortization, decreases in prepayments of certain future
expenses, and increases in amounts owed to third parties for clinical trials.
Net cash provided by investing activities for the year ended December 31,
1999 primarily related to the net sale of $120,000 in marketable securities
offset by the net purchase and disposal of approximately $42,000 in equipment
and furniture. Net cash provided by investing activities for the year ended
December 31, 1998 primarily related to the net sale of $7,388,000 in marketable
securities offset by the purchase of approximately $99,000 in equipment and
furniture. Net cash provided by investing activities for the year ended December
31, 1997 primarily related to the net sale of $21,335,000 in marketable
securities offset by the purchase of approximately $404,000 in equipment and
furniture
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Net cash provided by financing activities for the year ended December 31,
1999 consisted of $7,169,000 in proceeds, approximately $5,430,000 of which
related to the issuance of common stock and redeemable warrants to institutional
and accredited investors in two private placements, payment in full of $235,000
on a note receivable from our President and Chief Executive Officer, and
approximately $1,581,000 related to the issuance of common stock under our
employee stock purchase plan, exercise of warrants and issuance of restricted
common stock to Sigma-Tau, our ZADAXIN development and marketing partner in
Europe. Net cash provided by financing activities for the year ended December
31, 1998 consisted of $6,342,000 in proceeds, approximately $3,931,000 of which
related to our sale and issuance of 661,157 shares of Series C preferred stock,
approximately $529,000 of which related to the issuance of common stock and
approximately $1,882,000 of which related to the payment on notes receivable
from former and current officers. Net cash used in financing activities for the
year ended December 31, 1997 consisted of $4,267,000 related to our repurchase
of our common stock under our approved stock repurchase plan and the amounts
loaned to Mr. Moore referred to above of $5,944,000 offset by $2,313,000 in
proceeds received from the issuance of common stock by the exercise of
outstanding warrants and from the issuance of common stock under our stock
option plan and employee stock purchase plan.
In July 1999, we completed two private placements of common stock and
redeemable common stock warrants to institutional and accredited investors,
which resulted in aggregate net proceeds of approximately $5,430,000. 280,000
warrants exercised resulted in gross proceeds of approximately $377,000 in 1999.
In January 2000, we completed a private placement of common stock and redeemable
common stock warrants to an institutional investor which resulted in aggregate
net proceeds of approximately $6,100,000, excluding gross proceeds of $5,600,000
which will be received if the warrants issued in connection with such private
placements are fully exercised. In March 2000, we completed a $3,100,000 private
placement to Sigma-Tau consisting of 198,072 shares of restricted common stock
and 400,000 common stock warrants, which, if fully exercised, will result in
additional gross proceeds of $9,400,000. As of March 22, 2000, 3,650,336
warrants exercised resulted in aggregate gross proceeds of approximately
$7,100,000. Our 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. Assuming ZADAXIN product sales continue to increase
quarter to quarter at growth rates similar to what we have achieved over the
past eight quarters, management believes its existing capital resources and
interest on funds available are adequate to maintain its current and planned
operations. The initiation and continuation of U.S. clinical development
programs could, however, require additional funding either from a collaborative
partner or through equity or debt financing. The timing and sustainability of
our operating 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
U.S., the timing of regulatory approvals, developments in relationships with
existing or future collaborative partners and the status of competitive
products. In the event we need to raise additional financing, the unavailability
or the timing of financing could prevent or delay our long-term product
development and commercialization programs. Without additional financing, 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 for at
least the next twelve months.
INCOME TAXES
At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $47,700,000 which expire in the
years 2006 through 2019. The difference between the cumulative losses for
financial reporting purposes and federal income tax purposes is primarily
attributable to losses incurred by the Company's foreign subsidiaries. At
December 31, 1999, the Company has federal tax credit carryforwards of
approximately $2,100,000 which expire in the years 2009 through 2019.
Because of the "change in ownership" provisions of the Internal Revenue
Code, a portion of the Company's net operating loss carryforwards and tax credit
carryforwards may be subject to an annual
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<PAGE> 24
limitation regarding their utilization against taxable income in future periods.
As a result of the annual limitation, a portion of these carryforwards may
expire before ultimately becoming available to reduce future income tax
liabilities.
IMPACT OF THE YEAR 2000
In prior years, we discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believed those systems
successfully responded to the Year 2000 date change. We expensed approximately
$10,000 during 1999 in connection with remediating our systems. We are not aware
of any material problems resulting from Year 2000 issues, either with our
internal systems, or the products and services of third parties. We will
continue to monitor our mission critical computer applications and those of our
suppliers and vendors throughout the year 2000 to ensure that any latent Year
2000 matters that may arise are addressed promptly.
RECENT ACCOUNTING PRONOUNCEMENT
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin no. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). This summarizes certain areas of the staff's view in applying generally
accepted accounting principles to revenue recognition in financial statements.
We are currently evaluating the impact of SAB 101 on our results of operations
and financial position.
RISK FACTORS
In evaluating our company and its business and prospects, you should
carefully consider the risk factors discussed below in addition to the other
information contained in this report.
WE HAVE NOT ACHIEVED OPERATING PROFITABILITY AND EXPECT TO CONTINUE TO INCUR
LOSSES IN THE NEAR TERM. IF WE DO NOT CONTINUE TO INCREASE OUR ZADAXIN SALES, WE
MAY NOT ACHIEVE OPERATING PROFITABILITY WHICH MAY PREVENT OR DELAY OUR LONG-TERM
PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS
We began to generate revenues from ZADAXIN in December 1996. Future ZADAXIN
sales are uncertain. Our other drug under clinical development, CPX, targets the
underlying cause of cystic fibrosis, a disease caused by genetic defects.
Marketing approvals for CPX and additional marketing approvals for ZADAXIN,
particularly in the U.S., Europe and Japan, are uncertain. We have experienced
significant operating losses since our inception and have a substantial
accumulated deficit. Furthermore, we expect our operating expenses to increase
over the next several years as we expand our development, testing and marketing
capabilities. Our ability to achieve and sustain operating profitability depends
in large part on whether we:
- increase ZADAXIN sales in existing markets;
- launch ZADAXIN in newly-approved markets;
- commence and continue clinical programs for, and obtain additional
regulatory approvals for, ZADAXIN, CPX, SCV-07, DAX and/or future
products, particularly in the U.S., Europe and Japan;
- are able to maintain our partnering arrangements for development and
marketing of ZADAXIN in Europe and Japan; and
- enter into other agreements for product development and commercialization
of our products in the U.S.
If we do not achieve operating profitability as anticipated we may have to delay
or curtail our long-term product development and commercialization efforts.
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<PAGE> 25
IF WE EXPERIENCE DIFFICULTIES IN OUR FOREIGN SALES AND OPERATIONS, OUR FINANCIAL
CONDITION WOULD SUFFER
Our financial condition in the near term is highly dependent on ZADAXIN
sales in foreign jurisdictions. The majority of our current ZADAXIN sales are to
customers in the People's Republic of China. However, ZADAXIN sales in the
People's Republic of China may be limited due to its low average income and
poorly developed infrastructure. In addition, our ZADAXIN 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.
We currently do not have any product sales in the U.S. with which to offset any
decrease in revenue from ZADAXIN sales in Asia, Latin America and the Middle
East. In addition, some 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 WE FAIL TO OBTAIN ADDITIONAL REGULATORY APPROVALS OR MARKET ACCEPTANCE FOR
ZADAXIN OR IF WE FAIL TO OBTAIN REGULATORY APPROVAL FOR CPX, OUR POTENTIAL
FUTURE REVENUE WOULD BE LIMITED
Our principal late-stage clinical development efforts currently focus on
ZADAXIN and CPX. We need favorable results from additional clinical trials of
ZADAXIN to get regulatory approval in the U.S., Europe and Japan. ZADAXIN has
been approved for commercial sale in 19 countries, principally as a treatment
for hepatitis B, hepatitis C and as a vaccine adjuvant. However, we may not be
able to obtain approvals for ZADAXIN in the U.S., Europe and Japan or other
countries or for the treatment of hepatitis, HIV and other medical conditions,
such as cancer.
Future sales of ZADAXIN will depend on market acceptance and successful
distribution in additional countries. In many of our 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 we currently rely on ZADAXIN sales
as our primary source of revenue, our failure to demonstrate ZADAXIN's safety
and efficacy in future clinical trials, obtain additional marketing approvals or
successfully commercialize ZADAXIN would adversely affect our future revenue and
operating results.
CPX is currently undergoing phase 2 development in the U.S. We may
experience delays and difficulties in the preclinical and clinical development
of CPX. In addition, clinical trials may not prove that CPX is an effective
treatment for cystic fibrosis. Our 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 our potential future revenue and
operating results.
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<PAGE> 26
REGARDLESS OF WHETHER OR NOT WE ACHIEVE OPERATING PROFITABILITY AS ANTICIPATED,
WE MAY NEED TO OBTAIN ADDITIONAL FUNDS IN ORDER TO SUPPORT OUR LONG-TERM PRODUCT
DEVELOPMENT AND COMMERCIALIZATION PROGRAMS
Since inception, we have financed our operations primarily through sales of
stock. If we do not continue to increase our ZADAXIN revenue and achieve
operating profitability as anticipated, we will need to obtain additional
financing to support our long-term product development and commercialization
programs.
Our need for capital will depend on many factors, including:
- the level of future ZADAXIN sales;
- the timing, location, scope and results of ongoing and planned
preclinical studies and clinical trials;
- the size and complexity of our programs;
- the timing and cost of FDA and international regulatory approvals;
- the costs involved in filing, prosecuting and enforcing patent claims;
- competing technological and market developments;
- whether any or all of our outstanding common stock warrants are exercised
and the timing and amount of such exercises;
- our ability to establish and maintain partnering arrangements for
development, sales, manufacturing and marketing of our products;
- whether we elect to establish additional partnering arrangements for
development, sales, manufacturing, and marketing of our products; and
- the cost of manufacturing or obtaining preclinical and clinical
materials.
Many of the foregoing factors are not within our control. The unavailability or
timing of any necessary financing could prevent or delay our long-term product
development and commercialization programs. We have no commitments or
arrangements for additional funding and we may not be able to obtain financing
if and when needed.
THE PRICE OF OUR COMMON STOCK HAS EXPERIENCED SUBSTANTIAL VOLATILITY AND MAY
CONTINUE TO DO SO IN THE FUTURE
There has been significant volatility in the market prices for publicly
traded shares of biopharmaceutical companies, including ours. In 1999, the price
of our common stock fluctuated from a low of $1.06 to a high of $6.13. On March
23, 2000, our common stock closed at a price of $15.25. The price of our common
stock may not remain at or exceed current levels. The following factors may have
an adverse impact on the market price of our common stock:
- announcements of technical or product developments by us or our
competitors;
- market conditions for pharmaceutical and biotechnology stocks;
- market conditions generally;
- governmental regulation;
- healthcare legislation;
- public announcements regarding advances in the treatment of the disease
states that we are targeting;
- public announcements from government officials relating to the
biotechnology or pharmaceutical industries;
- patent or proprietary rights developments;
- changes in third-party reimbursement policies for our products; or
- fluctuations in our operating results.
26
<PAGE> 27
IF WE ISSUE ADDITIONAL COMMON STOCK OR SECURITIES CONVERTIBLE INTO COMMON STOCK,
THE PERCENTAGE OWNERSHIP OF OUR THEN-CURRENT SHAREHOLDERS WOULD BE REDUCED AND
THE MARKET PRICE OF OUR COMMON STOCK MAY DECREASE
Future sales of substantial amounts of our common stock could adversely
affect the market price of our common stock. As of March 23, 2000, there were
outstanding stock options for 4,210,345 shares of common stock, of which
3,138,379 were currently exercisable, and there were warrants outstanding that
were exercisable for 2,903,471 shares of common stock. Upon exercise and
issuance, all of these shares of common stock will be freely tradable.
Similarly, if we raise additional funds through the issuance of common
stock or securities convertible into or exercisable for common stock, the
percentage ownership of our then-current shareholders will be reduced.
IF WE DO NOT OBTAIN ADDITIONAL PRODUCT RIGHTS FROM THIRD PARTIES OR IF OUR
LICENSEES DO NOT PERFORM THEIR OBLIGATIONS, OUR POTENTIAL FUTURE REVENUE WOULD
BE LIMITED AND OUR FUTURE DEVELOPMENT EXPENSES WOULD INCREASE
Our strategy includes entering into various partnering arrangements. To
date, we have in-licensed rights to ZADAXIN, CPX, SCV-07, DAX and other drug
candidates but we are only actively pursuing clinical development of ZADAXIN and
CPX at this time. If we do not license or otherwise acquire rights to additional
drugs or advance SCV-07 and DAX from preclinical into clinical development, we
may have a shortage of drugs to develop which would limit our potential future
revenue.
In addition, we have exclusively sublicensed our rights to develop and
market ZADAXIN in Europe and Japan to Sigma-Tau S.p.A. and Schering-Plough K.K.,
respectively. However, these companies already have a substantial commitment to
alpha interferon, which is an approved drug for cancer, hepatitis B and
hepatitis C in Europe and Japan. Our relationships with these companies may not
be successful and we may not be able to negotiate similar additional
arrangements in the future in Europe and Japan or other major markets. We
generally do not have control over the amount and timing of resources that our
collaborators devote to their activities with us. If these parties do not
perform their obligations as we expect them to, our development expenses would
increase and the development and sale of our products could be limited or
delayed.
Our 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 we do not participate in the regulatory approval
process in these other countries. Any delay or failure to achieve regulatory
approvals may limit our potential future revenue.
IF WE FAIL TO PROTECT OUR PRODUCTS, TECHNOLOGIES AND TRADE SECRETS, WE MAY NOT
BE ABLE TO SUCCESSFULLY USE, MANUFACTURE OR MARKET AND SELL OUR PRODUCTS OR WE
MAY FAIL TO ADVANCE OR MAINTAIN OUR COMPETITIVE POSITION
The U.S. composition of matter patent, which covers the chemical structure
of ZADAXIN, and most of the European composition of matter patents for ZADAXIN
have expired. Going forward, we will have only limited patents covering the
chemical structure of ZADAXIN and this could adversely affect our proprietary
rights. Our success depends significantly on our ability to obtain patent
protection for our products and technologies, to preserve our trade secrets and
to avoid infringing on the proprietary rights of third parties. However, our
pending patent applications may not result in issued patents. Any patents that
are issued may not provide a competitive advantage to us or may be invalidated
or circumvented by our competitors. Others may independently develop similar
products or designs around patents issued or licensed to us. Patents issued to
or patent applications filed by other companies could have an adverse effect on
our ability to use, manufacture or market our products or maintain our
competitive position with respect to our products. Many of our patents and
patent applications relating to ZADAXIN are held under exclusive licenses. If we
breach the terms of any of these licenses we could lose our rights to these
patents and patent applications. Holders of patents licensed to us may not file,
prosecute, extend or maintain their patents in countries where we have rights.
Other companies obtaining patents on products or processes useful to us may
bring infringement actions against us. This type of litigation is typically
costly and time-consuming and could require us to obtain licenses from others,
or prevent us from using, manufacturing or marketing our products. These
licenses may not be available on commercially reasonable terms, if at all.
27
<PAGE> 28
Pharmaceuticals are not patentable or have only recently become patentable
in several countries in the territory in which we have 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 WE FAIL TO OBTAIN REGULATORY APPROVALS FOR OUR PRODUCTS IN COUNTRIES IN WHICH
WE HAVE NOT BEEN APPROVED, WE CANNOT DEVELOP, MARKET AND SELL OUR PRODUCTS IN
THOSE COUNTRIES
The research, preclinical and clinical development, manufacturing,
marketing and sale of ZADAXIN, CPX and our 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 we
are contemplating marketing and selling ZADAXIN, the regulatory approval process
for drugs that have not been previously approved in countries with established
clinical trial review procedures is uncertain, and this may delay the grant of
regulatory approvals for ZADAXIN.
We are currently sponsoring or planning clinical trials and pursuing
regulatory approvals for ZADAXIN in a number of countries and we are currently
sponsoring clinical trials of CPX in the U.S. However, we may not be able to
commence or complete these trials in a timely or cost-effective manner, and even
if completed, these trials may not fulfill the relevant regulatory approval
criteria. We ultimately may not be able to obtain regulatory approvals in these
countries. Adverse results in our development programs also could result in
restrictions on the use of ZADAXIN and, if approved, CPX.
Our failure, or failure by one or more of our partners, to comply with
applicable U.S. 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 our future
products.
IF WE ARE NOT ABLE TO ESTABLISH AND MAINTAIN ADEQUATE MANUFACTURING AND SUPPLY
RELATIONSHIPS, THE DEVELOPMENT AND SALE OF OUR PRODUCTS COULD BE IMPAIRED
We have entered into long-term contract manufacturing and supply agreements
for ZADAXIN and CPX. To be successful, our products must be manufactured in
commercial quantities, in compliance with regulatory requirements and at an
acceptable cost. While we currently have long-term manufacturing relationships
with experienced suppliers, we may not be able to maintain these long-term
manufacturing relationships with these suppliers. We currently have vialing and
packaging supply agreements in effect and a sufficient supply of finished
ZADAXIN for the near term. We have recently changed and upgraded our
manufacturing source of finished ZADAXIN for our international markets,
excluding Japan. In some countries, this change may require additional
regulatory approvals. If we do not obtain any required regulatory approvals of
this manufacturing change 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 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 our products, including sales of ZADAXIN in approved
markets, and impair their competitive position, which would have a material
adverse effect on our business.
WE MAY LOSE MARKET SHARE OR OTHERWISE FAIL TO COMPETE IN THE INTENSELY
COMPETITIVE PHARMACEUTICAL INDUSTRY
Competition in the pharmaceutical industry is intense and we expect that
competition to increase. We believe 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. Our
competitors
28
<PAGE> 29
include pharmaceutical companies, biotechnology firms, universities and other
research institutions, both in the U.S. 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 our competitors, particularly large pharmaceutical companies, have
substantially greater financial, technical, regulatory, manufacturing, marketing
and human resource capabilities than we do. Most of them also have extensive
experience in undertaking the clinical testing and obtaining the regulatory
approvals necessary to market drugs. In addition, we currently rely on sales of
ZADAXIN as a treatment for hepatitis B and hepatitis C as our 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, WE MAY NOT BE ABLE TO SUCCESSFULLY MARKET ZADAXIN
Our 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 our
future products. In most of the foreign countries in which we sell ZADAXIN or
intend to sell ZADAXIN, reimbursement for ZADAXIN under government or private
health insurance programs is currently not widely available. In the U.S.,
proposed health care reforms could limit the amount of third-party reimbursement
available for our products. In many countries where we have marketing rights to
ZADAXIN, government resources and per capita income may be so low that our
products will be prohibitively expensive. In these countries, we may not be able
to market our products on economically favorable terms, if at all.
IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL OR IF OUR PRESIDENT
AND CHIEF EXECUTIVE OFFICER, CHIEF OPERATING OFFICER, CHIEF BUSINESS OFFICER OR
OUR REGIONAL MANAGING DIRECTOR FOR GREATER CHINA LEFT THE COMPANY, WE MAY NOT BE
ABLE TO SUCCESSFULLY DEVELOP AND COMMERCIALIZE OUR PRODUCTS
We are highly dependent upon our ability to attract and retain qualified
personnel because of the specialized, scientific and international nature of our
business. There is intense competition for qualified management, scientific and
technical personnel in the pharmaceutical industry, and we may not be able to
attract and retain the qualified personnel we need to grow and develop our
business globally. In addition, numerous key responsibilities at SciClone are
assigned to a small number of individuals, such as our President and Chief
Executive Officer, Chief Operating Officer, Chief Business Officer and our
Regional Managing Director for Greater China. If we are unable to attract and
retain qualified personnel as needed or promptly replace those employees who are
critical to our product development and commercialization, the development and
commercialization of our products would adversely be affected. We do not
maintain "key person" life insurance on any of our key personnel.
WE HAVE LIMITED PRODUCT LIABILITY INSURANCE AND ANY PRODUCT LIABILITY CLAIMS
ASSERTED AGAINST US COULD RESULT IN SIGNIFICANT EXPENSES AND DECREASED DEMAND
FOR OUR PRODUCTS
Companies which test, manufacture, market and sell pharmaceutical products
commonly receive product liability claims. These claims may be asserted against
us. Product liability insurance for the pharmaceutical industry generally is
expensive, if it is available at all. We have product liability insurance
coverage for our clinical trials and commercial sales. However, product
liability claims in excess of our insurance coverage or that resulted in the
payment of large deductibles would adversely affect our financial condition and
demand for our products.
ISSUING PREFERRED STOCK WITH RIGHTS SENIOR TO THOSE OF OUR COMMON STOCK COULD
ADVERSELY AFFECT HOLDERS OF COMMON STOCK OR HINDER TAKEOVER TRANSACTIONS THAT
OFFER COMMON SHAREHOLDERS AN OPTIMAL PRICE FOR THEIR SHARES
Our charter documents give our board of directors the authority to issue
additional series of preferred stock without a vote or action by our
shareholders. The board also has the authority to determine the terms of
29
<PAGE> 30
preferred stock, including price, preferences and voting rights. The rights of
holders of our 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 our 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we invest in highly liquid and high quality debt
securities. Our investments in debt securities are subject to interest rate
risk. To minimize the exposure due to adverse shift in the interest rates, we
invest in short term securities and maintain an average maturity of less than 1
year. A hypothetical 60 basis point increase in interest rates would result in
an approximate $12,456 decrease (less than 0.6%) in fair value of our
available-for-sale securities.
The potential change noted above is based on sensitivity analyses performed
on our financial positions at December 31, 1999. Actual results may differ
materially.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SCICLONE PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS AT DECEMBER 31, 1999 AND 1998 AND FOR
EACH OF THE THREE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997.
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
1. Report of Ernst & Young LLP, Independent Auditors........... 31
2. Consolidated Balance Sheets at December 31, 1999 and 1998... 32
3. Consolidated Statements of Operations for each of the three
years ended December 31, 1999, 1998 and 1997................ 33
4. Consolidated Statement of Shareholders' Equity for the three
years ended December 31, 1999, 1998 and 1997................ 34
5. Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1999, 1998 and 1997................ 35
6. Notes to Consolidated Financial Statements.................. 36
</TABLE>
30
<PAGE> 31
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
SciClone Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of SciClone
Pharmaceuticals, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the three years in the period ended December 31, 1999. Our audits also include
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SciClone
Pharmaceuticals, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Ernst & Young, LLP
Palo Alto, California
January 28, 2000
31
<PAGE> 32
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,828,000 $ 3,490,000
Short-term investments.................................... 1,793,000 1,513,000
Accounts receivable, net of allowances of $74,000 in 1999
and $76,000 in 1998.................................... 4,343,000 1,301,000
Inventory................................................. 1,081,000 1,353,000
Prepaid expenses and other current assets................. 685,000 639,000
Assets available-for-sale................................. 1,184,000 --
------------- -------------
Total current assets........................................ 10,914,000 8,296,000
Property and equipment, net................................. 235,000 391,000
Long-term investments....................................... -- 407,000
Notes receivable from officers.............................. -- 235,000
Other assets................................................ 1,975,000 2,398,000
------------- -------------
Total assets................................................ $ 13,124,000 $ 11,727,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 825,000 $ 430,000
Accrued compensation and employee benefits................ 730,000 731,000
Accrued clinical trials expense........................... 258,000 2,402,000
Accrued professional fees................................. 865,000 731,000
Other accrued expenses.................................... 203,000 157,000
Other current liabilities................................. 942,000 --
------------- -------------
Total current liabilities................................... 3,823,000 4,451,000
Commitments and contingencies (Note 7)
Redeemable preferred stock, no par value; 10,000,000 shares
Authorized; 0 and 58,356 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;
25,258,395 and 21,534,056 shares issued and
outstanding............................................ 124,328,000 115,981,000
Accumulated other comprehensive income.................... 2,000 9,000
Accumulated deficit....................................... (115,029,000) (109,562,000)
------------- -------------
Total shareholders' equity.................................. 9,301,000 6,428,000
------------- -------------
Total liabilities and shareholders' equity.................. $ 13,124,000 $ 11,727,000
============= =============
</TABLE>
See notes to consolidated financial statements
32
<PAGE> 33
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Product sales................................... $ 9,091,000 $ 3,625,000 $ 2,223,000
Contract revenue................................ 307,000 100,000 --
----------- ------------ ------------
Total revenues.................................... 9,398,000 3,725,000 2,223,000
----------- ------------ ------------
Cost of product sales............................. 1,761,000 1,036,000 990,000
----------- ------------ ------------
Gross margin...................................... 7,637,000 2,689,000 1,233,000
----------- ------------ ------------
Operating expenses:
Research and development........................ 4,604,000 9,293,000 8,642,000
Marketing....................................... 5,911,000 5,391,000 4,145,000
General and administrative...................... 2,978,000 3,714,000 3,662,000
----------- ------------ ------------
Total operating expenses.......................... 13,493,000 18,398,000 16,449,000
----------- ------------ ------------
Loss from operations.............................. (5,856,000) (15,709,000) (15,216,000)
Writedown of note receivable from former
officer......................................... -- (5,944,000) --
Interest and investment income, net............... 389,000 582,000 1,219,000
----------- ------------ ------------
Net loss.......................................... (5,467,000) (21,071,000) (13,997,000)
Deemed dividend on issuance of preferred stock.... -- (3,143,000) --
----------- ------------ ------------
Net loss attributable to common shareholders...... $(5,467,000) $(24,214,000) $(13,997,000)
----------- ------------ ------------
Basic and diluted net loss per share.............. $ (0.26) $ (1.48) $ (0.85)
=========== ============ ============
Weighted average shares used in computing basic
and diluted net loss per share.................. 21,162,936 16,335,096 16,472,765
=========== ============ ============
</TABLE>
See notes to consolidated financial statements
33
<PAGE> 34
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE ACCUMULATED
COMMON STOCK RECEIVABLE OTHER TOTAL
------------------------- FROM FORMER ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT OFFICER DEFICIT INCOME EQUITY
---------- ------------ ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........ 17,532,195 $108,988,000 $ -- $ (71,351,000) $(171,000) $ 37,466,000
Issuance of common stock from
exercise of stock options and
warrants and employee stock
purchase plan..................... 495,663 2,313,000 -- -- -- 2,313,000
Repurchase of common stock.......... (684,500) (4,267,000) -- -- -- (4,267,000)
Note receivable from former
officer........................... -- -- (5,944,000) -- -- (5,944,000)
Net loss............................ -- -- -- (13,997,000) -- (13,997,000)
Net unrealized gain on
available-for-sale securities..... -- -- -- -- 153,000 153,000
------------
Total comprehensive loss............ (13,844,000)
---------- ------------ ----------- ------------- --------- ------------
Balance at December 31, 1997........ 17,343,358 107,034,000 (5,944,000) (85,348,000) (18,000) 15,724,000
Issuance of common stock from
exercise of stock options and
warrants and employee stock
purchase plan..................... 97,591 529,000 -- -- -- 529,000
Conversion of preferred stock to
common stock...................... 3,168,404 3,083,000 -- -- -- 3,083,000
Shares issued in asset purchase..... 924,703 2,192,000 -- -- -- 2,192,000
Writedown of note receivable from
former officer.................... -- -- 5,944,000 -- -- 5,944,000
Net loss............................ -- -- -- (21,071,000) -- (21,071,000)
Net unrealized gain on
available-for-sale securities..... -- -- -- -- 27,000 27,000
------------
Total comprehensive loss............ (21,044,000)
Deemed dividend on issuance of
preferred Stock................... -- 3,143,000 -- (3,143,000) -- --
---------- ------------ ----------- ------------- --------- ------------
Balance at December 31, 1998........ 21,534,056 115,981,000 -- (109,562,000) 9,000 6,428,000
Retirement of common stock from
former officer.................... (1,882,500) -- -- -- -- --
Issuance of common stock from
exercise of stock options,
warrants and employee stock
purchase plan..................... 361,427 581,000 -- -- -- 581,000
Issuance of common stock bonus...... 411,330 565,000 -- -- -- 565,000
Issuance of common stock in asset
purchase.......................... 50,297 69,000 -- -- -- 69,000
Issuance of common stock to
vendors........................... 153,223 189,000 -- -- -- 189,000
Issuance of common stock from
private placements................ 4,331,079 6,430,000 -- -- -- 6,430,000
Conversion of preferred stock to
common stock...................... 299,483 513,000 -- -- -- 513,000
Net loss............................ -- -- -- (5,467,000) -- (5,467,000)
Net unrealized loss on
available-for-sale securities..... -- -- -- -- (7,000) (7,000)
------------
Total comprehensive loss............ (5,474,000)
---------- ------------ ----------- ------------- --------- ------------
Balance at December 31, 1999........ 25,258,395 $124,328,000 $ -- $(115,029,000) $ 2,000 $ 9,301,000
========== ============ =========== ============= ========= ============
</TABLE>
See notes to consolidated financial statements
34
<PAGE> 35
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net loss.................................................. $(5,467,000) $(21,071,000) $(13,997,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 626,000 351,000 178,000
Writedown of note receivable from former officer.......... -- 6,139,000 --
Non-cash charge on acquisition of technology rights....... 1,511,000 --
Non-cash income from the foreclosure of loan from former
officer................................................. (242,000) -- --
Changes in operating assets and liabilities:
Accounts receivable..................................... (3,042,000) (276,000) (780,000)
Inventory............................................... 272,000 693,000 563,000
Prepaid expenses and other assets....................... (51,000) (1,499,000) 1,770,000
Accounts payable and other accrued expenses............. 441,000 (97,000) (401,000)
Accrued clinical trials expense......................... (2,144,000) 1,192,000 246,000
Accrued professional fees............................... 134,000 (87,000) (1,576,000)
Accrued compensation and employee benefits.............. 564,000 (209,000) (59,000)
----------- ------------ ------------
Net cash used in operating activities............... (8,909,000) (13,353,000) (14,056,000)
----------- ------------ ------------
Investing activities:
Purchase of property and equipment........................ (42,000) (99,000) (404,000)
Payment on acquisition of technology rights............... -- (407,000) --
Sale of marketable securities, net........................ 120,000 7,388,000 21,335,000
----------- ------------ ------------
Net cash provided by investing activities................... 78,000 6,882,000 20,931,000
----------- ------------ ------------
Financing activities:
Proceeds from issuance of Series C preferred stock net.... -- 3,931,000 --
Proceeds from issuance of common stock, net............... 6,934,000 529,000 2,313,000
Payment on notes receivable from former and current
officers................................................ 235,000 1,882,000 --
Note receivable from former officer....................... -- -- (5,944,000)
Repurchase of common stock................................ -- -- (4,267,000)
----------- ------------ ------------
Net cash provided by (used in) financing activities......... 7,169,000 6,342,000 (7,898,000)
----------- ------------ ------------
Net decrease in cash and cash equivalents................... (1,662,000) (129,000) (1,023,000)
Cash and cash equivalents, beginning of year................ 3,490,000 3,619,000 4,642,000
----------- ------------ ------------
Cash and cash equivalents, end of year...................... $ 1,828,000 $ 3,490,000 $ 3,619,000
=========== ============ ============
Supplemental schedule of non cash financing and investing
activities:
Issuance of common stock in lieu of bonus................. 565,000 -- --
Issuance of common stock for professional fees............ 189,000 -- --
Issuance of common stock in asset purchase................ 69,000 2,192,000 --
Conversion of preferred stock to common stock............. 513,000 3,083,000 --
</TABLE>
See notes to consolidated financial statements
35
<PAGE> 36
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
SciClone Pharmaceuticals, Inc. ("SciClone" or the "Company") is a global
biopharmaceutical company that develops and commercializes novel medicines for
treating a broad range of the world's most serious diseases. The Company's
current product development and commercial activities are focused on hepatitis
B, hepatitis C, cancer and cystic fibrosis.
On January 18, 2000, the Company completed a private placement of common
stock and common stock warrants which resulted in aggregate net proceeds of
approximately $5,720,000, excluding $5,600,000 in aggregate proceeds which will
be received if the warrants issued in connection with such private placement are
fully exercised. In addition, from January 1, 2000 through January 28, 2000, the
Company received approximately $5,029,000 in aggregate net proceeds from
exercises of outstanding common stock warrants and employee stock options.
Without additional financing, 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 for at least the next twelve months.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. The principal office of the Company's
subsidiary is located in Hong Kong. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents and Investments
Cash equivalents consist of highly liquid investments with original
maturities of three months or less. All cash equivalents are carried at cost
plus accrued interest, which approximates market.
The Company has classified its entire investment portfolio as
available-for-sale and records these investments at fair value, as determined by
available market information, on the balance sheet. The portfolio primarily
consists of U.S. Government securities and short-term and long-term debt
instruments. Unrealized holding gains or losses are included in accumulated
other comprehensive income. The amortized cost of debt securities classified as
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in investment income along
with interest earned. Realized gains or losses, and declines in value judged to
be other than temporary are also included in investment income. Management
believes the credit risk associated with these investments is limited due to the
nature of investments.
For the years ended December 31, 1999, 1998 and 1997, net unrealized gains
(loss) of approximately $(7,000), $27,000 and $153,000, respectively, were
charged to accumulated other comprehensive income.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the respective
assets (three to five years) on the straight-line basis.
36
<PAGE> 37
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Notes Receivable from Officers
At December 31, 1999 and 1998, the fair value of the notes receivable from
officers was $0 and $235,000 respectively. The fair value was estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms of borrowers of similar credit quality.
In August 1996, the Company extended a loan to one of its then executive
officers with an aggregate principal amount of $1,000,000 to be used to finance
the purchase of his primary residence. The loan was secured by a first deed of
trust on the property, accrued interest at 8% per annum and was payable in July
2000. Approximately $750,000 was repaid against this note in March 1998 and the
remaining balance was repaid in April 1999.
Assets Available-for-sale
In July 1995, the Company extended a loan to one of its former board
members and former executive officers in the principal amount of $95,000 which
carries an interest rate of 7.375%. In December 1995, the Company extended an
additional loan to this individual in the principal amount of $600,000, which
carried an interest rate of 7.50%. The loans were due and payable in December
1997 after which they became subject to an additional 3.5% accelerated interest.
The loans were secured by a second deed of trust on residential property owned
by this individual. At December 31, 1998, these loans had not been repaid and
the Company fully reserved for this loan. In January 1999, the Company
foreclosed on the loans, is in possession of the underlying property and is
actively seeking to sell the property. The Company has recorded the net value of
the property in assets available-for-sale at approximately $1,184,000, the
related assumed mortgage liability in other current liabilities at approximately
$942,000, and other income at approximately $242,000.
Other Assets
Other assets include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Intangible product rights........................... $2,456,000 $2,456,000
Accumulated amortization............................ (546,000) (118,000)
---------- ----------
1,910,000 2,338,000
Other............................................... 65,000 60,000
---------- ----------
$1,975,000 $2,398,000
========== ==========
</TABLE>
Product rights acquired are being amortized over six years beginning in
September 1998 (See Note 5). 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.
In July 1998 the Company acquired the worldwide rights to ZADAXIN from
Alpha 1 Biomedicals, Inc. ("A1B"), the original developer of ZADAXIN for
approximately $1,800,000. The transaction eliminated the Company's royalty
obligation to A1B with respect to all sales of ZADAXIN after the acquisition
date. The A1B transaction allowed SciClone to market ZADAXIN worldwide, except
in Italy, Spain and Portugal, where Sclavo S.p.A. ("Sclavo"), an international
pharmaceutical entity, owned exclusive marketing rights. In April 1998, the
Company acquired ZADAXIN rights for Italy, Spain and Portugal from Sclavo S.p.A.
for approximately $1,400,000.
In connection with the foregoing transactions, the Company estimated the
fair market value of the intangible assets purchased to be approximately
$2,500,000 and wrote off the remaining $700,000.
37
<PAGE> 38
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Although the Company has a history of operating and cash flow losses, the
Company believes that there is no impairment to the intangible assets because
ZADAXIN was approved for sale in 16 countries as of December 31, 1999,
principally as a treatment for hepatitis B or hepatitis C. Based on the
Company's anticipated financial results for ZADAXIN sales from 2000 to 2004, the
Company expects to be able to achieve operating profitability by the end of the
fourth quarter of the year 2000 and, based on these projections, it has
determined that the net present value of the future cash flows exceed the
carrying amount of the asset.
Foreign Currency Translation
The Company has determined the U.S. dollar to be the functional currency
for its wholly owned subsidiary. Adjustments resulting from translation are
included in results of operations and have not been significant.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment
and recognizes contract/ grant revenue when services have been performed. Sales
to distributors are recognized at time of shipment when titles to the products
are transferred to them. The distributors do not have contractual right of
return. In March 1999, the Company received a non-refundable $200,000 FDA Orphan
Drug Grant for initial 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. 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. The first installment of $107,000 was received in June 1999 and was
recognized as revenue in 1999.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). This summarizes certain areas of the staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is currently evaluating the impact of SAB 101 on its results of
operations and financial position.
Research and Development
Research and development expenditures are charged to operations as
incurred.
Income Taxes
Income tax expense is based on reported results of operations before
extraordinary items and income taxes. Deferred income taxes reflect the impact
of temporary differences between the amount of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes.
These deferred taxes are measured by applying current tax laws. Based on the
Company's lack of earnings history, deferred tax assets have been fully offset
by a valuation allowance.
Retirement Benefits
The Company has a pre-tax savings plan covering substantially all U.S.
employees, which qualifies under Section 401(k) of the Internal Revenue Code.
Under the plan, eligible employees may contribute a portion of their pre-tax
salary, subject to certain limitations. The Company contributes and matches 50%
of the employee contributions, up to 15% of the employee's salary. Company
contributions, which can be terminated at the Company's discretion, were
$17,000, $24,000 and $26,000 for the years ended December 31, 1999, 1998, and
1997, respectively. The plan commenced on January 1, 1991.
38
<PAGE> 39
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Net Loss Per Share
The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented. In
accordance with SFAS 128, basic net loss per share has been computed using the
weighted average number of shares of common stock outstanding during the period.
The weighted average number of shares excludes shares held as collateral against
a former officer's loan (see Note 8). Diluted net loss per share has not been
presented as the result would be antidilutive given the Company's history of net
losses.
Had the Company been in a net income position, diluted earnings per share
would have included the shares used in the computation of basic net loss per
share as well as an additional 9,822,008, 4,223,978 and 3,058,734 shares in
1999, 1998 and 1997, respectively, related to outstanding options and warrants
not included in the calculation of basic net loss per share.
Accounting for Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company accounts for
its stock option and employee stock purchase plans under the provisions of
Accounting Principles Board Opinion 25 ("APB 25") and related Interpretations.
Accordingly, the Company does not recognize compensation expense in accounting
for its stock option and employee stock purchase plans for awards which have an
exercise price equal to the fair value of the Company's common stock on the date
of the grant.
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 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.
Reporting Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, be included in comprehensive income (loss). For the year periods
ended December 31, 1999, 1998 and 1997, total comprehensive loss attributable to
common shareholders amounted to $5,474,000, $21,044,000 and $13,844,000
respectively.
Segment Information
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers.
39
<PAGE> 40
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Concentration of Credit Risk
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. In 1997, the Company sold to one principal importer/agent who then
resold to four distributors inside the People's Republic of China. Reflecting
the expansion and stability of the Company's sales to the People's Republic of
China in 1998, the Company began working extensively with a second importing
agent in addition to the agent used in 1997. This enabled the expansion of sales
to the four distributors. For the year ended December 31, 1999, four
distributors in China accounted for 87% of the Company's product sales. The
Company performs on-going credit evaluations of its customers' financial
condition, and generally does not require collaterals from its customers. The
Company maintains reserves for credit losses, and such losses have been within
management's expectation.
Recent Accounting Pronouncement
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.
The Company does not anticipate that the adoption of SFAS 133 will have a
significant effect on results of operations or the financial position of the
Company.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
NOTE 2 -- INVESTMENTS
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
-------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999:
Corporate obligations.................... $1,791,000 $ -- $ -- 1,791,000
Corporate equity securities.............. -- 2,000 -- 2,000
---------- ------- ------- ----------
$1,791,000 $ 2,000 $ 0 $1,793,000
========== ======= ======= ==========
DECEMBER 31, 1998:
U.S. government & agency obligations..... $ 399,000 $ 9,000 $ -- $ 408,000
Corporate obligations.................... 1,512,000 -- (1,000) 1,511,000
Corporate equity securities.............. -- 1,000 -- 1,000
---------- ------- ------- ----------
$1,911,000 $10,000 $(1,000) $1,920,000
========== ======= ======= ==========
</TABLE>
As of December 31, 1999, the average portfolio duration was less than one
year.
40
<PAGE> 41
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
NOTE 3 -- INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Raw materials....................................... $1,035,000 $1,298,000
Finished goods...................................... 46,000 55,000
---------- ----------
$1,081,000 $1,353,000
========== ==========
</TABLE>
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Office furniture and fixtures....................... $ 331,000 $ 318,000
Office equipment.................................... 823,000 871,000
Leasehold improvements.............................. 239,000 213,000
---------- ----------
1,393,000 1,402,000
Less accumulated depreciation....................... 1,158,000 1,011,000
---------- ----------
Net property and equipment.......................... $ 235,000 $ 391,000
========== ==========
</TABLE>
NOTE 5 -- LICENSE AGREEMENTS
In April 1999, the Company licensed to Sigma-Tau semi-exclusive ZADAXIN
development and marketing rights in Italy and Spain, and exclusive rights in
Switzerland.
In September 1998, the Company acquired all rights of Sclavo S.p.A. to
ZADAXIN in Italy, Spain and Portugal, including Sclavo's marketing approval for
ZADAXIN in Italy as an influenza vaccine adjuvant. The purchase price consisted
of $297,000 in cash, 375,000 shares of the Company's common stock, and warrants
to purchase 375,000 shares of common stock at an exercise price of $4.125 per
share, which warrants were exercised in January 2000.
Pursuant to its 1994 license agreement with A1B, the Company obtained
worldwide marketing, development and manufacturing rights to ZADAXIN, with the
exception of Italy, Spain and Portugal. In April 1997, SciClone entered into an
arrangement with A1B to administer the sublicense activities of the A1B licensee
for Italy, Spain and Portugal. Under this 1997 agreement, the Company also
acquired control of A1B's patent portfolio for ZADAXIN. In December 1997,
SciClone and A1B entered into an Asset Purchase Agreement pursuant to which the
Company acquired A1B's worldwide rights to ZADAXIN, which rights A1B licensed
from Hoffmann-LaRoche, Inc. and F. Hoffmann-LaRoche AG, and eliminated the
Company's and its current and future sublicensee's royalty obligations to A1B
with respect to future sales of ZADAXIN. In July 1998, the Company and A1B
closed the Asset Purchase Agreement. In accordance with the agreement, the
Company issued to A1B 600,000 shares of common stock and loaned to A1B $210,000
in exchange for the assets described above.
In connection with the foregoing transactions with Sclavo and A1B, the
Company estimated the fair market value of the intangible assets purchased to be
approximately $2,500,000 and wrote off the remaining $700,000.
41
<PAGE> 42
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
In October 1996, the Company entered into an expanded and amended license
and supply agreement with Schering-Plough K.K., giving Schering-Plough K.K.
exclusive development and marketing rights to ZADAXIN in Japan. Under the
amended agreement, the Company expects Schering-Plough K.K. to continue
development of ZADAXIN monotherapy for the treatment of hepatitis B and
hepatitis C and to initiate investigation of the combination ZADAXIN plus
Schering-Plough K.K.'s INTRON(R) A (interferon alfa-2b) for the treatment of
hepatitis C, with the parties sharing certain development expenses. Schering-
Plough K.K. will undertake the development, registration and marketing of
ZADAXIN in Japan. Contingent upon product approval, SciClone will receive
milestone payments. To date, there has been no license fee revenue recognized by
the Company.
In April 1996, the Company acquired an exclusive license to CPX, a
synthetic compound, from the National Institutes of Health ("NIH"). The NIH
developed CPX as a potential treatment for cystic fibrosis. Under this license
agreement, the Company is obligated to pay the NIH a minimum annual royalty
payment and, upon product approval, the NIH will receive a milestone payment in
addition to royalties based on a percentage of CPX net sales revenue.
NOTE 6 -- INCOME TAXES
The Company uses the liability method to account for income taxes as
required by FASB Statement No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities. Deferred
tax assets and liabilities are measured using enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
The domestic and foreign components of loss before income tax are as
follows at December 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Domestic.................................. $(4,968,000) $(19,384,000) $ (8,516,000)
Foreign................................... (499,000) (4,830,000) (5,481,000)
----------- ------------ ------------
Loss before income tax expense............ $(5,467,000) $(24,214,000) $(13,997,000)
=========== ============ ============
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
at December 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Net operating loss carryforwards........................ $ 16,685,000 $ 16,170,000
R&D credit carryforwards................................ 2,270,000 1,280,000
Note receivable written off for financial reporting..... 1,230,000 2,150,000
Other................................................... 1,755,000 1,140,000
------------ ------------
Gross deferred tax assets............................... 21,940,000 20,740,000
Valuation allowance..................................... (21,940,000) (20,740,000)
------------ ------------
Total deferred tax asset...................... $ -- $ --
------------ ------------
LIABILITIES
Net unrealized gains on available-for-sale securities... $ -- $ --
Other................................................... -- --
------------ ------------
Total deferred tax liability.................. -- --
------------ ------------
Net deferred tax assets................................. $ -- $ --
============ ============
</TABLE>
The valuation allowance increased by approximately $5,670,000 and
$3,600,000 in the years ended December 31, 1998 and 1997, respectively. Deferred
tax assets relating to carryforwards as of December 31,
42
<PAGE> 43
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
1999 include approximately $3,400,000 associated with stock option activity for
which any subsequently recognized tax benefits will be credited directly to
shareholders' equity.
At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $47,700,000 which expire in the
years 2006 through 2019. The difference between the cumulative losses for
financial reporting purposes and federal income tax purposes is primarily
attributable to losses incurred by the Company's foreign subsidiaries. At
December 31, 1999, the Company has federal tax credit carryforwards of
approximately $2,100,000 which expire in the years 2009 through 2019.
Because of the "change in ownership" provisions of the Internal Revenue
Code, a portion of the Company's net operating loss carryforwards and tax credit
carryforwards may be subject to an annual limitation regarding their utilization
against taxable income in future periods. As a result of the annual limitation,
a portion of these carryforwards may expire before ultimately becoming available
to reduce future income tax liabilities.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its main office facility under a non-cancelable lease
agreement which expires in August 2005. The lease is for a period of five years
and requires the Company to pay insurance and taxes and its pro-rata share of
operating expenses. The Company also leases various office facilities abroad
under non-cancelable lease agreements, expiring in 2001. Rental expense in 1999,
1998, and 1997 was $398,000, $461,000, and $462,000 respectively. Minimum future
rental commitments amount to $395,000 in 2000, and $399,000 in 2001 and $358,000
in 2002 and $338,000 in 2003 and $346,000 in 2004 and $234,000 in 2005.
Royalties
Under the August 1997 ZADAXIN Patent License Agreement with The Fitzsimons
Army Medical Center of the U.S. Army ("Army"), the Company is obligated to pay
the Army a minimum annual royalty, and upon commercialization of ZADAXIN, the
Company will be obligated to pay to Army a royalty based on a percentage of
ZADAXIN net sales revenue.
Under the April 1996 CPX license agreement with the NIH, the Company is
obligated to pay the NIH a minimum annual royalty and, upon commercialization of
CPX, the Company will be obligated to pay to NIH a royalty based on a percentage
of CPX net sales revenue. During 1999, 1998, and 1997 the Company paid $10,000
related to the minimum annual royalty.
In October 1992, the Company amended its service agreement with a Japanese
trading company. Upon receipt by SciClone of any revenues in Japan for ZADAXIN,
the Japanese trading company will receive a royalty as a percentage of such
revenues for a specified period of time. To date, no royalty amounts have been
paid or are due to the Japanese trading company with respect to this agreement.
NOTE 8 -- SHAREHOLDERS' EQUITY
Common Stock, Preferred Stock and Warrants
On July 21, 1999, the Company completed a $3,620,000 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 was priced at $1.59 and consisted of one share of common
stock and one five-year redeemable warrant to purchase one share of common stock
at an exercise price of $1.72 per share. In connection with this private
placement, the Company's placement agents received five-year
43
<PAGE> 44
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
redeemable warrants to purchase 345,933 shares of common stock at an exercise
price of $1.83 per share. As of December 31, 1999, none of the foregoing
redeemable warrants had been exercised.
On July 2, 1999, the Company completed a $1,810,000 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 was priced at $1.46 and consisted of
one share of common stock and one five-year redeemable warrant to purchase one
share of common stock, at an exercise price of $ 1.33 per share. In connection
with this private placement, the Company's placement agents received five-year
redeemable warrants to purchase 183,179 shares of common stock, at an exercise
price of $1.66 per share. As of December 31, 1999, 265,000 of the 1,370,145
investor warrants had been exercised for aggregate proceeds to the Company of
approximately $352,000.
In May 1999, the Company issued 411,330 shares of common stock to the
Company's employees in lieu of cash bonuses.
In April 1999, Sigma-Tau 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.
In June 1998, the Company entered into an agreement with an institutional
investor for an equity line which allowed the Company to access up to $32
million through sales of its common stock over a two-year period, subject to
certain limitations. The decision to draw any funds and the timing for any such
draw was solely at the Company's discretion. The Company was not obligated to
draw any minimum amount under the equity line and did not draw any amounts under
the equity line. As a commitment fee to the investor, the Company issued
five-year warrants to purchase 300,000 shares of its common stock at an exercise
price of $3.50 per share and five-year warrants to purchase 200,000 shares of
its common stock at an exercise price of $5.53 per share. The Company cancelled
the equity line in November 1999. As of December 31, 1999, none of the foregoing
warrants had been exercised.
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 offering. In
the second quarter ended June 30, 1998, the Company recognized a deemed dividend
in the amount of $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. This amount increased net loss per share
attributable to common shareholders and was calculated as required by the SEC.
As of December 31, 1998 all but 58,356 shares of Series C preferred stock were
converted into 3,168,404 shares of common stock. In January 1999, 46,922 of the
remaining 58,536 shares were converted into 299,483 shares of common stock and
11,434 of such remaining shares of Series C preferred stock were redeemed at a
conversion price of approximately $0.95 per common share. As a result, there are
no shares of Series C preferred stock outstanding. In conjunction with the
offering, the Company granted to the investors five-year warrants to purchase
100,000 shares of common stock at an exercise price of $5.67 per share.
On July 23, 1997, The Company loaned to Thomas E. Moore, its former
Chairman and Chief Executive Officer, $5,944,000 in exchange for a promise to
repay the loan on demand and the pledge of 1,882,500 shares of SciClone Common
Stock owned by Mr. Moore as collateral for such loan. During 1998 it was
determined that the value of the collateral underlying the loan made to Mr.
Moore was more than temporarily impaired and that a writedown of the book value
of the note would be required. Upon further investigation relative to the
collectibility of the demand note, and repeated attempts to obtain full
repayment of the note receivable it was determined that repayment of the
$5,944,000 million loan, plus accumulated interest of approximately
44
<PAGE> 45
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
$689,000, was in substantial doubt. As a result of this determination the
Company elected to cancel the 1,882,500 shares of SciClone common stock held as
collateral and write off the entire remaining book value in a non-cash charge to
earnings in the fourth quarter of 1998. As of March 23, 2000, such shares would
have had a market value of approximately $28,708,000. Under a new agreement in
1999, Mr. Moore received credit against his total indebtedness of approximately
$6,633,000 million equal to the value at that date, of his 1,882,500 shares of
SciClone common stock. After calculating and applying the appropriate credit of
$3,142,000, Mr. Moore agreed to pay the balance of the remaining debt,
$3,615,000 million, in five installments according to a schedule beginning on
October 1, 1999 at $20,000 and increasing by a factor of 4 each six month
anniversary thereafter with final payment due no later than October 1, 2001. The
first $20,000 payment was paid in October 1999.
Repurchase of Common Stock
In 1995 and 1994, the Company's Board of Directors authorized the
repurchase of up to 1.0 million and 1.5 million shares of the Company's common
stock, respectively. In the years ended December 31, 1999 and 1998 the Company
repurchased no shares of its common stock. In the years ended December 31, 1997,
and 1996, the Company repurchased 684,500 shares of its common stock for an
aggregate cost of $4,267,000.
Stock Award Plans
In August 1991, the Board of Directors and shareholders of the Company
approved the 1991 Stock Plan (the "1991 Plan") and reserved 1,300,000 shares for
issuance thereunder. In May 1993, the Board of Directors and shareholders of the
Company approved a 2,150,000 share increase in the shares reserved under the
1991 Plan. The 1991 Plan permits the award of incentive or nonqualified stock
options and shares of common stock under restricted stock purchase agreements.
In January 1992, the Board of Directors and shareholders of the Company approved
the 1992 Stock Plan (the "1992 Plan") and reserved 240,000 shares for issuance
thereunder. The 1992 Plan permits the award of incentive or nonqualified stock
options which must be exercised in cash. In June 1995, the Board of Directors
and the shareholders of the Company approved the 1995 Equity Incentive Plan (the
"1995 Plan") and reserved 1,250,000 shares for issuance thereunder. The 1995
Plan permits the award of incentive or nonqualified stock options and shares of
common stock under restricted stock awards. In May 1997, the Board of Directors
and Shareholders of the Company approved a 750,000 share increase in the shares
reserved under the 1995 Plan. In June 1998, the Board of Directors and
shareholders of the Company approved a 1,500,000 share increase in the shares
reserved under the 1995 Plan.
Under the 1991, 1992 and 1995 Plans, options are exercisable upon
conditions determined by the Board of Directors and expire ten years from the
date of grant. Options are generally granted at fair market value on the date of
grant and vest over time, generally four years.
In June 1995, the Board of Directors and the shareholders of the Company
approved the Nonemployee Director Stock Option Plan (the "Nonemployee Director
Plan") and reserved 250,000 shares for issuance thereunder. The Nonemployee
Director Plan automatically grants nonqualified stock options to nonemployee
directors upon their appointment or first election to the Company's Board of
Directors ("Initial Grant") and annually upon their reelection to the Board of
Directors at the Company's Annual Meeting of Shareholders ("Annual Grant"). The
options are granted at fair market value on the date of grant. Initial Grants
vest annually over a period of three years. Annual Grants vest monthly over a
period of one year.
In July 1996, the Board of Directors and shareholders of the Company
approved the 1996 Employee Stock Purchase Plan (the "ESPP") and reserved 500,000
shares for issuance thereunder. All full-time employees are eligible to
participate in the ESPP. Under the terms of the ESPP, employees can choose to
have up to 15% of their salary withheld to purchase the Company's common stock.
The purchase price of the stock is the lower of 85% of the fair market value as
of the first trading day of each quarterly participation
45
<PAGE> 46
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
period, or as of the last trading day of each quarterly participation period.
Under the ESPP, the Company sold 47,038, 46,738, and 20,432 shares to employees
in 1999, 1998 and 1997 respectively.
The following table summarizes the stock option activity under the 1991,
1992 and 1995 plans and the Nonemployee Director Plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES AVAILABLE SHARES UNDER OF SHARES
FOR GRANT OPTION UNDER PLAN
---------------- ------------ ----------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996............. 3,383,682 2,526,265 $6.11
Options canceled....................... 232,595 (232,595) 7.03
Options granted........................ (775,300) 775,300 5.12
Options exercised...................... -- (10,236) 3.14
---------- ----------
BALANCE AT DECEMBER 31, 1997............. 2,840,977 3,058,734 5.80
Options canceled....................... 478,456 (478,456) 5.60
Options granted........................ (1,018,500) 1,018,500 2.51
Options exercised...................... -- (49,800) 3.00
---------- ----------
BALANCE AT DECEMBER 31, 1998............. 2,300,933 3,548,978 4.92
---------- ----------
Options canceled....................... 1,195,985 (1,195,985) 4.43
Options granted........................ (2,243,062) 2,243,062 1.38
Options exercised...................... -- (34,238) 1.03
---------- ----------
BALANCE AT DECEMBER 31, 1999............. 1,253,856 4,561,817 $3.34
========== ==========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.22 - $ 1.22..................... 1,243,712 9.50 $ 1.22 964,976 $1.22
$ 1.44 - $ 2.38..................... 1,263,217 9.03 1.87 593,420 1.80
$ 2.47 - $ 5.38..................... 1,212,296 6.69 4.40 963,959 4.61
$ 5.50 - $10.50..................... 741,592 5.90 6.39 673,635 6.44
$12.50 - $12.50..................... 101,000 3.29 12.50 101,000 12.50
--------- ---------
4,561,817 7.90 3.34 3,296,990 3.73
========= =========
</TABLE>
Pro forma information regarding net loss and net loss per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
stock awards under the fair value method of that Statement. The fair value for
the options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1999, 1998 and
1997: risk-free interest rates of 6.00%, 4.73% and 6.16% respectively; dividend
yields of 0%; volatility factors of the expected market price of the Company's
stock of 0.91 for 1999 and 0.87 for 1998 and 0.83 for 1997, and a weighted
average expected life of the option of 3.92 years for 1999 and 4.30 years for
1998 and 4.31 years for 1997. The fair value for the employee stock purchases
was also estimated using the Black-Scholes model with the following assumptions
for 1999, 1998 and 1997: risk-free interest rate of 6.00%, 4.73% and 5.23%
respectively; dividend yield of 0%; expected volatility of 0.91, 0.80 and 0.74
respectively, and expected life of 0.25 years.
46
<PAGE> 47
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock awards have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
the Company's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and stock
purchases.
Had compensation expense for the Company's option and employee purchase
plans been determined based on the fair value at the grant date for awards in
1999, 1998 and 1997 consistent with the provisions of SFAS 123, the Company's
net loss and net loss per share would have been adjusted to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Net loss -- as reported................... $(5,467,000) $(24,214,000) $(13,997,000)
=========== ============ ============
Net loss -- pro forma..................... $(7,896,000) $(26,142,000) $(15,726,000)
=========== ============ ============
Net loss per share -- as reported......... $ (0.26) $ (1.48) $ (0.85)
=========== ============ ============
Net loss per share -- pro forma........... $ (0.37) $ (1.60) $ (0.95)
=========== ============ ============
</TABLE>
The effects of applying SFAS 123 for pro forma disclosures are not likely
to be representative of the effects on reported net loss for future years. Pro
forma net loss for the year ended December 31, 1997 reflects compensation
expense for three years' vesting while the year ended December 31, 1998 and
December 31, 1999 will reflect compensation expense for four years' vesting of
outstanding stock awards.
Reserved Shares
As of December 31, 1999,the Company has reserved shares of common stock for
future issuance as follows:
<TABLE>
<S> <C>
Options outstanding....................................... 4,561,817
Warrants outstanding...................................... 5,260,191
---------
9,822,008
=========
</TABLE>
NOTE 9 -- SIGNIFICANT GEOGRAPHIC INFORMATION
The Company operates in one business segment, the development and
commercialization of specialist-oriented proprietary drugs for the treatment of
chronic and life threatening diseases. Currently, the Company's principal focus
has been the development and commercialization of ZADAXIN and the development of
CPX.
The Chief Executive Officer has been identified as the Chief Operating
Decision Maker ("CODM") because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about the individual components.
The Company's domestic operations primarily consist of product development.
The Company's wholly owned international subsidiary, SciClone Pharmaceuticals
International Ltd., is based in Hong Kong and is in engaged sales and marketing
and product distribution worldwide.
47
<PAGE> 48
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Information regarding geographic areas is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ---------------------
LONG LONG LONG
PRODUCT LIVED PRODUCT LIVED PRODUCT LIVED
SALES ASSETS SALES ASSETS SALES ASSETS
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
U.S........................... $ -- $153,000 $ -- $243,000 $ -- $359,000
China......................... 7,906,000 14,000 3,118,000 82,000 1,867,000 84,000
Others........................ 1,185,000 68,000 507,000 66,000 356,000 82,000
---------- -------- ---------- -------- ---------- --------
Total......................... $9,091,000 $235,000 $3,625,000 $391,000 $2,223,000 $525,000
========== ======== ========== ======== ========== ========
</TABLE>
NOTE 10 -- SUBSEQUENT EVENTS
In January 2000, the Company completed a $5,720,000 private placement to
Brown Simpson Asset Management, a strategic institutional investor. Brown
Simpson purchased 1,000,000 shares of newly issued common stock at a slight
premium to market and warrants to purchase 800,000 additional shares at $7.00
per share. The warrants, if exercised, cannot be sold at less than $10.00 per
share or until 9 months have passed.
NOTE 11 -- SUBSEQUENT EVENTS (UNAUDITED)
In March 2000, the Company licensed to Sigma-Tau exclusive development and
marketing rights to ZADAXIN in Europe. SciClone retains all rights to ZADAXIN in
the U.S. Under the agreement, Sigma-Tau will fund the pan-European pivotal phase
3 hepatitis C trial of ZADAXIN and also fund more than one-third of the
Company's clinical expenses for a complementary pivotal phase 3 hepatitis C
trial in the U.S. Both the U.S. and European ZADAXIN pivotal phase 3 hepatitis C
trials are planned to start this year.
In March 2000, the Company completed a $3,100,000 million self-placed
private placement to Sigma-Tau consisting of 198,072 shares of common stock,
five-year warrants to purchase 200,000 shares of common stock at $15.67 per
share and five-year warrants to purchase 200,000 shares of common stock at
$31.33 per share. Sigma Tau has no registration rights with respect to the
shares purchased or issuable upon exercise of the warrants.
From January 29, 2000 to March 23, 2000, the Company received approximately
$3,213,000 in connection with exercises of outstanding options and warrants to
purchase common stock.
48
<PAGE> 49
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company, their ages as of March
15, 2000 and certain other information about them are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Donald R. Sellers.......................... 55 President, Chief Executive Officer and Director
Alfred R. Rudolph, M.D..................... 52 Chief Operating Officer
Shawn K. Singh, J.D........................ 36 Chief Business Officer and Secretary
Jere E. Goyan, Ph.D. ...................... 69 Chairman of the Board of Directors
John D. Baxter, M.D........................ 59 Director
Edwin C. Cadman, M.D....................... 54 Director
Rolf H. Henel.............................. 62 Director
</TABLE>
Donald R. Sellers has served as the Company's Chief Executive Officer since
April 1996 and as President and Director since January 1996. From May 1993 to
present, he has also served as Managing Director, SciClone Pharmaceuticals
International Ltd., the international arm of the Company. From 1990 to 1993, Mr.
Sellers was Corporate Vice President of Getz Bros., a U.S.-based international
trading company, as well as President of one of their Japanese operations. From
1983 to 1990, Mr. Sellers was employed by Sterling Drug International, initially
as Vice President of Marketing and Operations in Asia and later as President of
their Latin American Andina Group. Mr. Sellers began his pharmaceutical career
in 1973 with Pfizer as Country Manager, Vietnam and Hong Kong, and he later
worked with the Revlon Healthcare Group as Director of Worldwide Exports and
Pacific Area Director. Mr. Sellers spent five years in Military Intelligence
serving with Special Forces and as a Counter-Intelligence Special Agent. He has
an AB degree from Lafayette College and a Masters of International Management
degree with honors from the American Graduate School of International
Management.
Alfred R. Rudolph, M.D. joined the Company in April 1997 as Chief Technical
Officer and was promoted to Chief Operating Officer in August 1997 with
responsibility for clinical, scientific, and manufacturing affairs and quality
assurance. From January 1995 to September 1995, Dr. Rudolph was President and
Chief Operating Officer of Neptune Pharmaceuticals, Inc., a marine-based natural
product screening company. Dr. Rudolph was Senior Vice President of T Cell
Sciences, Inc., a biotechnology company, from December 1991 to September 1994
and was Vice President, Medical Affairs from March 1990 to December 1991. Dr.
Rudolph was Director of Clinical Operations at Cetus Corporation from 1984 to
1989, and Clinical Assistant Professor of Medicine at UCSF during this period.
Prior to that, he worked at Bristol Myers in cancer drug development. Dr.
Rudolph holds a B.S. in Electrical Engineering from the University of Rochester,
and his fellowship training in Hemotology-Oncology was done at Syracuse
University.
Shawn K. Singh, J.D. has served as the Company's Chief Business Officer
since March 1999, with responsibility for corporate finance and administration,
business development, investor and public relations, intellectual property and
legal affairs, and human resources and as Secretary since December 1998. From
January 1998 to March 1999, Mr. Singh was SciClone's Senior Vice President,
Corporate Development. From October 1997 to January 1998, Mr. Singh was
SciClone's Vice President of Corporate Development and Communications. From
August 1995 to October 1997, Mr. Singh served as the Company's Vice President of
Business Development. He joined SciClone in November 1993 as Director of
Business Development. Prior to SciClone, Mr. Singh was a corporate finance
associate in the Silicon Valley office of Morrison & Foerster, an international
law firm, where he specialized in consulting start-up and emerging high
technology and life sciences companies. Mr. Singh earned a BA degree, with
honors, from the University of California, Berkeley and received a J.D. degree
from the University of Maryland School of Law. He is a member of the California
49
<PAGE> 50
State Bar and serves as a director of TeamStream, Inc. a private Internet
infrastructure company, and VistaGen, Inc., a private biotechnology company.
Jere E. Goyan, Ph.D. has been a Chairman of the Board of Directors of the
Company since July 1997 and has been a director of the Company since January
1992. Currently, Dr. Goyan is President of Goyan and Hart Associates, a private
consulting firm. From May 1993 until December 1998, Dr. Goyan was President,
Chief Operating Officer, and a director of Alteon, Inc., a biotechnology
company. He also served Alteon as Acting Chief Executive Officer from July 1993
until May 1994 and as Senior Vice President for Research and Development from
January 1993 to May 1993. Dr. Goyan was the Commissioner of the U.S. Food and
Drug Administration from October 1979 to January 1981. He was Dean of the School
of Pharmacy University of California, San Francisco and Professor of Pharmacy
and Pharmaceutical Chemistry from 1967 through 1992. He joined the faculty of
UCSF in 1963 as an associate professor after serving on the faculty of the
University of Michigan, College of Pharmacy from 1956 to 1963. Dr. Goyan also
currently serves as a director of Atrix Laboratories, Emisphere Technologies,
Inc., PenWest Pharmaceuticals and of Boehringer Ingelheim Pharmaceuticals
Corporation. Dr. Goyan also serves as a consultant to various companies and
corporations.
John D. Baxter, M.D. has been a director of the Company and the Chairman of
its Scientific Advisory Board since June 1991. Dr. Baxter has been associated
with the University of California, San Francisco ("UCSF") since 1970. He has
been Professor of Medicine since 1979, Chief of the Endocrinology Section,
Parnassus Campus from 1980 to 1997 and Director of UCSF's Metabolic Research
Unit since 1981. Dr. Baxter was a founder and served as a director of California
Biotechnology, Inc. (now Scios Nova, Inc.), and of Kao Bio A.B., both
biotechnology companies.
Edwin C. Cadman, M.D. has been a director of the Company and a member of
its Scientific Advisory Board since November 1991. Since November 1, 1999, Dr.
Cadman has been Dean of the John A. Burns School of Medicine at the University
of Hawaii. From January 1994 to October 31, 1999, Dr. Cadman was Senior Vice
President of Medical Affairs and Chief of Staff at Yale New Haven Hospital,
where he was Chief of the Medical Service from 1987 through December 1993. From
1987 to October 31, 1999, Dr. Cadman was Professor of Medicine at Yale
University, where he was Chairman of the Department of Medicine from 1987
through December 1993. Prior to these positions, he was Director of the Cancer
Research Institute at UCSF.
Rolf H. Henel joined the Company as a director in June 1997. Mr. Henel is a
partner in Naimark & Associates, Inc., a healthcare consulting firm, since
September 1994. Mr. Henel has been Executive Director of Performance
Effectiveness Corporation, Inc., a pharmaceutical consulting and education
company, since April 1993. From 1978 to 1993, Mr. Henel was with American
Cyanamid Company, most recently as President of the Cyanamid International
Lederele Division. Mr. Henel is also a director of Penwest Pharmaceuticals, a
pharmaceutical company, based in Patterson, New York.
Directors serve one year terms or until their successors are elected and
qualified. Executive officers serve at the discretion of the Board of Directors.
There are no family relationships among any of the directors or executive
officers of the Company.
The information required by Item 405 of Regulation S-K is incorporated by
reference from the definitive proxy statement for the Company's 1999 Annual
Meeting of Shareholders to be filed with the Commission pursuant to Regulation
14A not later than 120 days after the end of the fiscal year covered by this
Form (the "Proxy Statement") under the caption "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
Proxy Statement under the caption "EXECUTIVE COMPENSATION."
50
<PAGE> 51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
Proxy Statement under the caption "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
Proxy Statement under the captions "TRANSACTIONS WITH MANAGEMENT" and "EXECUTIVE
COMPENSATION -- Compensation Committee Interlocks and Insider Participation."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements. The following financial statements of the
Company are contained on pages (30 - 47) of this Report on Form 10-K:
Consolidated Balance Sheets at December 31, 1999 and 1998.
Consolidated Statements of Operations for each of the three years
ended December 31, 1999, 1998 and 1997.
Consolidated Statement of Shareholders' Equity for the three years
ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
(2) Financial Statement Schedules
The following schedule is filed as part of this Report:
Schedule II -- Valuation and Qualifying Accounts for each of the
three years ended December 31, 1999, 1998 and 1997.
All other schedules have been omitted because they are either
inapplicable or the required information has been given in the
consolidated financial statements or the notes hereto.
(3) Exhibits.
Refer to Item 14(c) below.
(b) REPORTS ON FORM 8-K.
None
51
<PAGE> 52
(c) EXHIBITS. [not yet revised]
Exhibits (numbered in accordance with Item 601 of Regulation S-K):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3(i).1(1) Restated Articles of Incorporation.
3(i).2(2) Certificate of Amendment of Restated Articles of
Incorporation.
3(i).3(14) Certificate of Determination.
3(i).4 Certificate of Determination Regarding the terms of the
Series C Preferred Stock.
3(ii).1(1) Bylaws.
3(ii).2(2) Certificate of Amendment of Bylaws.
4.2(14) Rights Agreement dated as of July 25, 1997 between the
Registrant and Chase Mellon Shareholder Services, L.L.C.
10.2(3) License, Development and Supply Agreement, dated January 12,
1993, between the Registrant and Schering-Plough K.K.
10.4(4)** Manufacturing Services Agreement dated as of July 27, 1993
by and between SciClone Pharmaceuticals International
Limited and Sclavo S.p.A.
10.5(1) Services Agreement, dated August 28, 1991, between the
Registrant and Nichimen Corporation (the "Nichimen Services
Agreement").
10.6(3) Restated Nichimen Services Agreement, dated October 5, 1992.
10.7(2)** Registrant's 1991 Stock Plan, together with forms of
agreements thereunder.
10.8(1)** Registrant's 1992 Stock Plan, together with forms of
agreements thereunder.
10.10(1) Lease, dated September 10, 1991, between the Registrant and
Spieker-Singleton68 concerning property, located at 901
Mariners Island Boulevard, San Mateo, California, as amended
(the "Spieker Lease").
10.11(7) Amendment No. 4 to Spieker Lease, dated October 4, 1994.
10.12(9) Amendment No. 7 to Spieker Lease, dated November 14, 1995.
10.13(8)** Registrant's 1995 Equity Incentive Plan, together with forms
of agreement thereunder.
10.14(8)** Registrant's 1995 Nonemployee Director Stock Option Plan,
together with forms of agreement thereunder.
10.16(9) Employment Agreement dated February 1, 1996 between the
Registrant and Donald R. Sellers.
10.17(10) License Agreement effective April 19, 1996 between the
Registrant and the National Institute of Health Office of
Technology Transfer.
10.18(11) Form of Promissory Note secured by Deed of Trust between
Registrant and Donald R. Sellers.
10.19(11) Amendment No. 8 to Spieker Lease, dated August 26, 1996.
10.20(13)* Expanded and Amended License, Development and Supply
Agreement dated October 28, 1996 by and between the
Registrant and Schering-Plough K.K., a Japanese corporation.
10.21(15) Alpha Rights Acquisition Agreement by and between the
Registrant and Alpha 1 Biomedicals, Inc., dated December 17,
1997.
10.22(16) Purchase and Sale, Pledge and Security Agreement; Release
dated as of July 23, 1997 by Thomas Moore, in favor of
SciClone Pharmaceuticals, Inc.
10.23(17) Preferred Stock Investment Agreement by and among the
Company, Halifax Fund, L.P., Themis Partners L.P. and
Heracles Fund dated as of March 27, 1998.
</TABLE>
52
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.24(17) Registration Rights Agreement by and among Registrant,
Halifax Fund, L.P., Themis Partners L.P. and Heracles Fund
dated as of April 1, 1998.
10.25(18) Structured Equity Line Flexible Financing(SM) Agreement by
and between the Company and Cheyenne LLC dated as of June
30, 1998.
10.26(18) Warrant to purchase up to 200,000 shares of Common Stock of
the Company issued to Cheyenne LLC dated as of June 30,
1998.
10.27(18) Registration Rights Agreement by and between the Company and
Cheyenne LLC dated as of June 30, 1998.
10.28(19) Acquisition Agreement between the Company and Sclavo S.p.A.
dated April 20,1998.
10.29(19) First Amendment to Acquisition Agreement between the Company
and Sclavo S.p.A., dated April 20, 1998.
10.30(19) Stock Purchase Warrant dated September 3, 1998.
10.31(20) Letter Agreement dated as of March 5, 1999 between SciClone
Pharmaceuticals, Inc. and Thomas Moore.
10.32(20) Promissory Note dated as of March 5, 1999 by Thomas Moore in
favor of SciClone Pharmaceuticals, Inc.
21.1 Subsidiaries of Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Powers of Attorney. See page 53.
27 Financial Data Schedule.
</TABLE>
- ---------------
* Confidential treatment requested.
** Management compensatory plan or arrangement.
(1) Incorporated by reference from the Company's Registration Statement on Form
S-l (No. 33-45446), declared effective by the Commission on March 17, 1992.
(2) 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) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993.
(5) Incorporated by reference from the Company's Report on Form 8-K dated
August 19, 1994.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994.
(7) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(8) Incorporated by reference from the Company's Registration Statement on Form
S-8 (No. 33-80911) filed with the Commission on December 28, 1995.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.
53
<PAGE> 54
(12) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(13) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(14) Incorporated by reference from the Company's Current Report on Form 8-K
filed on October 14, 1997.
(15) Incorporated by reference from the Company's Current Report on Form 8-K
filed on January 26, 1998.
(16) Incorporated by reference from the Company's Amendment No. 3 to its
Registration Statement on Form S-3 (No. 333-38773) filed with the
Commission December 2, 1997.
(17) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(18) Incorporated by reference to the Company's Current Report on Form 8-K filed
on July 23, 1998.
(19) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
on November 17, 1998.
(20) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
54
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SCICLONE PHARMACEUTICALS, INC.
By: /s/ DONALD R. SELLERS
------------------------------------
Donald R. Sellers,
President and Chief Executive
Officer
Date: March 30, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Donald R. Sellers and Shawn K. Singh, and
each of them, his attorneys-in-fact and agents, each with the power of
substitution and resubstitution, for him in any and all capacities, to sign any
and all amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary, to be done in connection therewith,
as fully as to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
either of them, or their or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <C> <S>
/s/ DONALD R. SELLERS President, Chief Executive March 30, 2000
- --------------------------------------------------- Officer and Interim Chief
Donald R. Sellers Financial Officer,
Director (Principal Executive
Officer and Principal
Financial and Accounting
Officer)
/s/ JOHN D. BAXTER, M.D. Director March 30, 2000
- ---------------------------------------------------
(John D. Baxter, M.D.)
/s/ EDWIN C. CADMAN, M.D. Director March 30, 2000
- ---------------------------------------------------
(Edwin C. Cadman, M.D.)
/s/ JERE E. GOYAN, PH.D. Chairman of Board of March 30, 2000
- --------------------------------------------------- Directors
(Jere E. Goyan, Ph.D.)
/s/ ROLF H. HENEL Director March 30, 2000
- ---------------------------------------------------
(Rolf H. Henel)
</TABLE>
55
<PAGE> 56
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
SCICLONE PHARMACEUTICALS INC.
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
----------- ------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Reserves and allowances
deducted from asset
accounts:
Allowance for uncollectable
accounts................. $ 76,000 -- -- 2,000 $ 74,000
Inventory Reserve.......... 129,000 -- -- 48,000 81,000
YEAR ENDED DECEMBER 31, 1998
Reserves and allowances
deducted from asset
accounts:
Allowance for uncollectable
accounts................. $250,000 -- -- 174,000 $ 76,000
Inventory Reserve.......... 325,000 -- -- 196,000 129,000
YEAR ENDED DECEMBER 31, 1997
Reserves and allowances
deducted from asset
accounts:
Allowance for uncollectable
accounts................. $ 7,000 43,000 200,000(1) -- $250,000
Inventory Reserve.......... 175,000 -- 225,000(1) 75,000(2) 325,000
</TABLE>
- ---------------
(1) Transfer from General Reserve
(2) Adjustment to Reserve
56
<PAGE> 57
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<S> <C> <C>
3(i).1(1) Restated Articles of Incorporation..........................
3(i).2(2) Certificate of Amendment of Restated Articles of
Incorporation...............................................
3(i).3(14) Certificate of Determination................................
3(i).4 Certificate of Determination Regarding the terms of the
Series C Preferred Stock....................................
3(ii).1(1) Bylaws......................................................
3(ii).2(2) Certificate of Amendment of Bylaws..........................
4.2(14) Rights Agreement dated as of July 25, 1997 between the
Registrant and Chase Mellon Shareholder Services, L.L.C.....
10.2(3) License, Development and Supply Agreement, dated January 12,
1993, between the Registrant and Schering-Plough K.K........
10.4(4)** Manufacturing Services Agreement dated as of July 27, 1993
by and between SciClone Pharmaceuticals International
Limited and Sclavo S.p.A....................................
10.5(1) Services Agreement, dated August 28, 1991, between the
Registrant and Nichimen Corporation (the "Nichimen Services
Agreement").................................................
10.6(3) Restated Nichimen Services Agreement, dated October 5,
1992........................................................
10.7(2)** Registrant's 1991 Stock Plan, together with forms of
agreements thereunder.......................................
10.8(1)** Registrant's 1992 Stock Plan, together with forms of
agreements thereunder.......................................
10.10(1) Lease, dated September 10, 1991, between the Registrant and
Spieker-Singleton68 concerning property, located at 901
Mariners Island Boulevard, San Mateo, California, as amended
(the "Spieker Lease").......................................
10.11(7) Amendment No. 4 to Spieker Lease, dated October 4, 1994.....
10.12(9) Amendment No. 7 to Spieker Lease, dated November 14, 1995...
10.13(8)** Registrant's 1995 Equity Incentive Plan, together with forms
of agreement thereunder.....................................
10.14(8)** Registrant's 1995 Nonemployee Director Stock Option Plan,
together with forms of agreement thereunder.................
10.16(9) Employment Agreement dated February 1, 1996 between the
Registrant and Donald R. Sellers............................
10.17(10) License Agreement effective April 19, 1996 between the
Registrant and the National Institute of Health Office of
Technology Transfer.........................................
10.18(11) Form of Promissory Note secured by Deed of Trust between
Registrant and Donald R. Sellers............................
10.19(11) Amendment No. 8 to Spieker Lease, dated August 26, 1996.....
10.20(13)* Expanded and Amended License, Development and Supply
Agreement dated October 28, 1996 by and between the
Registrant and Schering-Plough K.K., a Japanese
corporation.................................................
10.21(15) Alpha Rights Acquisition Agreement by and between the
Registrant and Alpha 1 Biomedicals, Inc., dated December 17,
1997........................................................
10.22(16) Purchase and Sale, Pledge and Security Agreement; Release
dated as of July 23, 1997 by Thomas Moore, in favor of
SciClone Pharmaceuticals, Inc. .............................
</TABLE>
57
<PAGE> 58
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<S> <C> <C>
10.23(17) Preferred Stock Investment Agreement by and among the
Company, Halifax Fund, L.P., Themis Partners L.P. and
Heracles Fund dated as of March 27, 1998....................
10.24(17) Registration Rights Agreement by and among Registrant,
Halifax Fund, L.P., Themis Partners L.P. and Heracles Fund
dated as of April 1, 1998...................................
10.25(18) Structured Equity Line Flexible Financing(SM) Agreement by
and between the Company and Cheyenne LLC dated as of June
30, 1998....................................................
10.26(18) Warrant to purchase up to 200,000 shares of Common Stock of
the Company issued to Cheyenne LLC dated as of June 30,
1998........................................................
10.27(18) Registration Rights Agreement by and between the Company and
Cheyenne LLC dated as of June 30, 1998......................
10.28(19) Acquisition Agreement between the Company and Sclavo S.p.A.
dated April 20,1998.........................................
10.29(19) First Amendment to Acquisition Agreement between the Company
and Sclavo S.p.A., dated April 20, 1998.....................
10.30(19) Stock Purchase Warrant dated September 3, 1998..............
10.31(20) Letter Agreement dated as of March 5, 1999 between SciClone
Pharmaceuticals, Inc. and Thomas Moore......................
10.32(20) Promissory Note dated as of March 5, 1999 by Thomas Moore in
favor of SciClone Pharmaceuticals, Inc. ....................
21.1 Subsidiaries of Registrant..................................
23.1 Consent of Ernst & Young LLP, Independent Auditors..........
24.1 Powers of Attorney. See page 53.............................
27 Financial Data Schedule.....................................
</TABLE>
- ---------------
* Confidential treatment requested.
** Management compensatory plan or arrangement.
(1) Incorporated by reference from the Company's Registration Statement on Form
S-l (No. 33-45446), declared effective by the Commission on March 17, 1992.
(2) 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) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30. 1993.
(5) Incorporated by reference from the Company's Report on Form 8-K dated
August 19, 1994.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994.
(7) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(8) Incorporated by reference from the Company's Registration Statement on Form
S-8 (No. 33-80911) filed with the Commission on December 28, 1995.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
58
<PAGE> 59
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.
(12) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(13) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(14) Incorporated by reference from the Company's Current Report on Form 8-K
filed on October 14, 1997
(15) Incorporated by reference from the Company's Current Report on Form 8-K
filed on January 26, 1998
(16) Incorporated by reference from the Company's Amendment No. 3 to its
Registration Statement on Form S-3 (No. 333-38773) filed with the
Commission December 2, 1997.
(17) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(18) Incorporated by reference to the Company's Current Report on Form 8-K filed
on July 23, 1998.
(19) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
on November 17, 1998.
(20) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
59
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
SCICLONE PHARMACEUTICALS INTERNATIONAL LIMITED
SCICLONE PHARMACEUTICALS ITALY SRL
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8, No. 33-66832, 33-52820, 33-80911, 333-12169 and 333-62059)
pertaining to the 1991 Stock Plan, the 1992 Stock Plan, the 1995 Equity
Incentive Plan, the 1995 Non-Employee Director Stock Option Plan, and the
Employee Stock Purchase Plan and in the Registration Statements (Forms S-3, No.
33-60526, 333-52471, 333-62309, 333-77543, 333-81481, 333-84487, 333-85673, and
333-30938) of SciClone Pharmaceuticals, Inc. of our report dated January 28,
2000, with respect to the consolidated financial statements of SciClone
Pharmaceuticals, Inc. included in this Annual Report (Form 10-K) for the year
ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 28, 2000
60
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,828
<SECURITIES> 1,793
<RECEIVABLES> 4,343
<ALLOWANCES> 0
<INVENTORY> 1,081
<CURRENT-ASSETS> 10,914
<PP&E> 1,393
<DEPRECIATION> 1,158
<TOTAL-ASSETS> 13,124
<CURRENT-LIABILITIES> 3,823
<BONDS> 0
0
0
<COMMON> 124,328
<OTHER-SE> (115,029)
<TOTAL-LIABILITY-AND-EQUITY> 13,124
<SALES> 9,091
<TOTAL-REVENUES> 9,398
<CGS> 1,761
<TOTAL-COSTS> 1,761
<OTHER-EXPENSES> 13,493
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,467)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,467)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,467)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
