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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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: 000-27066
PHARMACYCLICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-3148201
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
995 E. Arques Avenue, Sunnyvale, CA 94086-4521
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 774-0330
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____________.
As of September 30, 1996, there were 8,554,750 shares of the Registrant's
Common Stock outstanding, par value $0.0001.
This quarterly report on Form 10-Q consists of 24 pages of which this is
page 1. The Exhibit Index is located at page 23.
<PAGE> 2
PHARMACYCLICS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
<S> <C>
Item 1. Financial Statements (unaudited)
Condensed Balance Sheet as of September 30, 1996 and
June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statement of Operations for the three months ended September 30, 1996 and 1995 . . 4
Condensed Statement of Cash Flows for the three months ended September 30, 1996 and 1995 . . 5
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and
Factors that May Affect Future Operating Results . . . . . . . . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . 21
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHARMACYCLICS, INC.
(a development stage company)
CONDENSED BALANCE SHEET
(in thousands, unaudited)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,747 $13,950
Short-term investments 15,585 8,053
Prepaid expenses 34 241
----------- -----------
Total current assets 19,366 22,244
Property and equipment, net 2,607 2,622
Other assets 150 149
----------- -----------
$22,123 $25,015
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 87 $ 753
Accrued liabilities 318 300
Current portion of capital lease obligations 1,161 917
----------- -----------
Total current liabilities 2,266 1,970
Capital lease obligations 616 941
Deferred rent 109 113
----------- -----------
Total liabilities 2,991 3,024
----------- -----------
Stockholders' equity:
Convertible preferred stock - -
Common stock 1 1
Additional paid-in capital 49,969 49,948
Accumulated deficit (30,838) (27,958)
----------- -----------
Total stockholders' equity 19,132 21,991
----------- -----------
$22,123 $25,015
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
3
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PHARMACYCLICS, INC.
(a development stage company)
CONDENSED STATEMENT OF OPERATIONS
(in thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
License and grant revenues $ - $ 145
---------- ----------
Operating expenses:
Research and development 2,456 1,754
General and administrative 637 251
---------- ----------
Total operating expenses 3,093 2,005
---------- ----------
Loss from operations (3,093) (1,860)
Interest income/(expense), net 213 (81)
---------- ----------
Net loss $ (2,880) $ (1,941)
========== ==========
Net loss per share (Note 2) $ (0.34)
==========
Weighted average common and common equivalent
shares (Note 2) 8,552
==========
Pro forma net loss per share $(0.31)
==========
Weighted average common and common equivalent
shares 6,359
==========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
4
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PHARMACYCLICS, INC.
(a development stage company)
CONDENSED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($2,880) ($1,941)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 193 164
Changes in assets and liabilities:
Prepaid expenses and other assets 206 (272)
Accounts payable 34 104
Accrued liabilities 18 72
Deferred rent (4) 11
----------- -----------
Net cash used in operating activities (2,433) (1,862)
Cash flows from investing activities:
Purchase of short-term investments (11,571) -
Proceeds from the sale of short-term investments 4,039 -
----------- -----------
Net cash used for investing activities 7,532 -
Cash flows from financing activities:
Payments under capital lease obligations (259) (178)
Proceeds from notes payable - 1,000
Issuance of common stock, net of issuance costs 21 2,579
----------- -----------
Net cash provided by (used in) financing activities (238) 3,401
Net increase (decrease) in cash and cash equivalents (10,203) 1,539
Cash and cash equivalents at the beginning of the period 13,950 376
----------- -----------
Cash and cash equivalents at the end of the period $ 3,747 $ 1,915
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 67 $ 108
Equipment acquired under capital lease obligations $ 178 $ 6
Conversion of notes payable and accrued interest
into convertible preferred stock $ - $ 3,051
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
5
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PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Pharmacyclics,
Inc. (the "Company" or "Pharmacyclics") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited condensed financial
statements reflect all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation of the Company's interim financial
information. These financial statements should be read in conjunction with the
audited financial statements of the Company included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
September 30, 1996.
The results of operations for the three months ended September 30, 1996 are not
necessarily indicative of the operating results that may be reported for the
fiscal year ending June 30, 1997 or for any other future period.
NOTE 2 -NET LOSS PER SHARE
Net loss per share for the three months ended September 30, 1996 is computed
using the weighted average number of shares of common stock outstanding during
the period. In addition, the computation includes the effect of the conversion
of all shares of Series A, A1, B and C Convertible Preferred Stock into
5,156,971 shares of common stock upon the completion of the Company's initial
public offering completed October 1995 using the if-converted method. Common
stock equivalent shares arising from stock options and warrants are excluded
from the computation because their effect is antidilutive, except that common
stock equivalent shares arising from stock options and warrants (using the
treasury stock method and the initial public offering price) issued from July
1, 1994 through the effective date of the Company's initial public offering on
October 23, 1995 are included in the computation of net loss per share as if
they were outstanding for all periods prior to the initial public offering.
Net loss per share for the three months ended September 30, 1995 is presented
on a pro forma basis since it includes the antidilutive effect of common stock
equivalents.
NOTE 3 -ISSUANCE OF PREFERRED STOCK AND INITIAL PUBLIC OFFERING
On July 31, 1995, notes payable aggregating $3,000,000 ($2,000,000 outstanding
at June 30, 1995 plus additional borrowings of $1,000,000 entered into during
July 1995) plus accrued interest thereon were converted into 353,483 shares of
Series C Convertible Preferred Stock. The
6
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Company also issued an additional 295,649 shares of Series C Convertible
Preferred Stock on July 31, 1995 resulting in net proceeds of $2,550,000.
The Company completed an initial public offering on October 23, 1995, issuing
2,150,000 shares of its common stock at $12.00 per share. Upon the closing of
the offering, all outstanding shares of Convertible Preferred Stock were
automatically converted into 5,156,971 shares of common stock. On November 6,
1995, the underwriters of the initial public offering exercised their
over-allotment option with respect to an additional 233,450 shares of common
stock. The Company received, net of underwriters' commissions and other
offering expenses, approximately $26 million in proceeds from the initial
public offering.
NOTE 4 - ADOPTION OF NEW ACCOUNTING STANDARD ("FAS 123")
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation." Effective July 1, 1996, the Company adopted FAS 123
and elected to continue to measure compensation cost for its employee stock
compensation plans using the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and provide the required pro forma footnote
disclosures.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This Form 10-Q contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include
those discussed in this section as well as those discussed elsewhere in this
Form 10-Q.
RESULTS OF OPERATIONS
Revenues
To date, Pharmacyclics has received only limited revenues and no revenues from
product sales. For the quarter ended September 30, 1996, no revenues were
recognized. During the same quarter of the prior fiscal year, $145,000 was
recognized. This included $125,000 pursuant to an August 1995 product
distribution agreement with E-Z-EM, Inc. ("E-Z-EM") (net of licensing fees paid
to the University of Texas) and $20,000 under a Small Business Innovation
Research ("SBIR") grant from the National Cancer institute.
Research and Development
Research and Development expenses totaled $2.5 million for the three months
ended September 30, 1996, compared to $1.8 during the same period of the prior
fiscal year. In September 1996, the Company finalized a definitive agreement
with Hoechst Celanese Corporation ("HCC"), a manufacturer of chemicals and
pharmaceutical intermediates for the process optimization, scale up, and
clinical and commercial supply of gadolinium texaphyrin ("Gd-Tex") and lutetium
texaphyrin ("Lu-Tex"). Over half of the 40% increase in research and
development expenses represents costs related to the texaphyrin production scale
up at HCC under this agreement. This includes drug supply for on-going clinical
trials plus the development required prior to manufacturing commercial product.
The remaining increase in research and development expenses relate to clinical
trials and patent costs. During the three month period ended September 30,
1996, the Company completed its Gd-Tex phase I trial while continuing to treat
patients in its Gd-Tex phase II trial and its Lu- Tex phase I trial. During the
same three months in 1995, clinical expenses were related to the completion of
the GADOLITE(R) Oral Suspension phase III trials. In addition, there was an
increase in patent costs as the Company continues to pursue both US and
international filing of applications. There will continue to be significant
period-to-period variations in research and development expenses related to the
timing of clinical and preclinical trials and other research activities. The
Company currently expects its research and development expenses to increase in
future periods due to planned expansion in clinical trials and research
activities.
8
<PAGE> 9
General and Administrative
General and administrative expenses totaled $637,000 compared to $251,000 for
the first three months of fiscal 1997 and 1996 respectively. Since the
Company's initial public offering occurred in October 1995, there are no
expenses related to being a public company included in the three months ended
September 30, 1995. In addition the Company expensed approximately $300,000 of
financing costs during the first quarter. The Company expects that costs
related to being a public company will result in higher levels of general and
administrative expenditures in future years.
Interest Income/(Expenses) Net
Interest income, net of interest expense, totaled $213,000 for the three months
ended September 30, 1996 compared to net interest expense of $81,000 for the
same period in the prior fiscal year. Net interest income is primarily the
result of interest earned on the proceeds from the Company's initial public
offering completed in October 1995. Net interest expense during the three
months ended September 30, 1995 relates to borrowings associated with the
outstanding notes payable and capital lease financing which offset interest
income from cash and cash equivalent balances.
Future Possible Compensation Expense
In May 1996, the Company granted to certain employees options to purchase
approximately 211,000 shares of Common Stock at $17.75 per share (the then fair
market value of such shares). All such option grants are subject to
stockholder approval at the Annual Meeting. As a result, in the event the fair
market value of the Company's Common Stock on the date of the Annual Meeting
exceeds the exercise price of the respective stock options, the Company will be
required to record compensation expense at an amount equal to such difference
multiplied by the number of shares subject to such options and recognized on a
straight-line basis over the vesting period of the option, generally five
years.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through September 30,
1996 primarily through the sale of private and public equity securities,
payments under third party agreements and proceeds from lease line financing.
On September 30, 1996, the Company had approximately $19.3 million in cash,
cash equivalents and short-term investments. Net cash used in operating
activities of $2.4 million during the three months resulted primarily from the
net loss incurred during the period.
The Company expects to incur ongoing levels of expenditures which may not only
fluctuate from quarter to quarter but which are expected to increase as the
levels of clinical activity for the Company's products under development
increase. Additional expenditures may occur in
9
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commercializing the Company's first product, GADOLITE(R). As a result of both
these factors, the Company expects to report increased expenses for research
and development and general and administrative for at least the next several
years. The Company's future liquidity and capital requirements will depend
upon numerous factors, including the progress of the Company's product
development efforts, the progress of the Company's clinical trials, actions
relating to regulatory matters, the costs and timing of expansion of product
development, manufacturing, marketing and sales activities, future third-party
collaborations, the extent to which the Company's products gain market
acceptance, and competitive developments. The Company currently anticipates
that its cash and cash equivalents will provide funding for the Company's
operations through at least calendar 1997. There can be no assurance that the
Company will not require additional financing within this time frame.
The Company's forecast of the period of time through which its financial
resources will be adequate to support its operations is a forward- looking
statement that involves risks and uncertainties, and actual results could vary
materially. The factors described above will impact the Company's future
capital requirements and the adequacy of its available funds. The Company may
be required to raise additional funds through public or private financing,
collaborative relationships or other arrangements. There can be no assurance
that such additional funding, if needed, will be available on terms attractive
to the Company, or at all. Furthermore, any additional equity financing may be
dilutive to existing stockholders, and debt financing, if available, may
involve restrictive covenants. Collaborative arrangements, if necessary to
raise additional funds, may require the Company to relinquish its rights to
certain of its technologies, products or marketing territories. The failure of
the Company to raise capital when needed could have a material adverse effect
on the Company's business, financial condition and results of operations.
10
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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT
To achieve profitable operations on a continuing basis, the Company must
successfully research, develop, test, obtain regulatory approval for,
manufacture, introduce, market and distribute its products. The time frame
necessary to achieve these goals for any individual product is long and
uncertain. Most of the products currently under development by the Company will
require significant additional research and development, preclinical and
clinical testing and regulatory approval prior to commercialization.
Additionally, any product the Company succeeds in developing and for which it
gains regulatory approval must then compete for market acceptance and market
share. There can be no assurance that the Company's products will prove to be
effective or that physicians, patients, or clinical or hospital laboratories
will accept the Company's products as readily as other forms of diagnosis and
treatment or as readily as other newly developed therapeutic products and
diagnostic imaging techniques. There can be no assurance that the Company's
research and development efforts will be successful or that any given product
will be safe or effective, capable of being manufactured economically in
commercial quantities, developed in a timely fashion or successfully marketed.
UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS
Pharmacyclics has conducted and plans to continue to undertake extensive and
costly clinical testing to assess the safety and efficacy of its potential
products. The rate of completion of the Company's clinical trials is dependent
upon, among other factors, the rate of patient enrollment. Patient enrollment is
a function of many factors, including the nature of the Company's clinical trial
protocols, existence of competing protocols, size of the patient population,
proximity of patients to clinical sites and eligibility criteria for the study.
Delays in patient enrollment will result in increased costs and delays, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the Food and Drug
Administration (the "FDA") may suspend clinical trials at any time if it
concludes that the subjects or patients participating in such trials are being
exposed to unacceptable health risks. Success in preclinical or early stage
clinical trials does not assure success in later stage clinical trials. Data
obtained from preclinical and clinical activities are susceptible to varying
interpretations which could delay, limit or prevent regulatory approval.
Further, there can be no assurance that clinical testing will show any current
or future product candidate to be safe and effective for use in humans.
NO ASSURANCE OF PRODUCT APPROVAL
To date, none of the Company's products has been approved for sale in the U.S.
or any international market. Satisfaction of regulatory requirements of the
FDA, or similar requirements by foreign regulatory agencies, typically takes
several years, and the time needed to satisfy them may vary substantially based
upon the type, complexity and novelty of the pharmaceutical product. There
11
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can be no assurance that the FDA or any other regulatory agency will grant
approval for any products being developed by the Company on a timely basis, if
at all. The Company submitted a New Drug Application ("NDA") for GADOLITE in
September 1995. There can be no assurance that the FDA will decide that the NDA
satisfies the criteria for approval. In addition, in June 1996 the Company filed
a Market Authorization Application ("MAA") with the Medicines Control Agency in
the United Kingdom for authorization to market GADOLITE. Although the process
for regulatory approval in Western Europe is similar to that in the United
States, there are numerous and sometimes unique risks associated with the
approval of an MAA. There can be no assurance that such authorization will be
granted or, even if granted in the United Kingdom, that authorization to market
GADOLITE in other member states would be granted under the European Union's
mutual recognition procedure.
Delay in obtaining or failure to obtain regulatory approvals would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the policies of the FDA and foreign
regulatory bodies may change, and additional regulations may be promulgated
which could prevent or delay regulatory approval of the Company's potential
products. Even if regulatory approval of a product is granted, such approval
may impose limitations on the indicated uses for which a product may be
marketed. Further, later discovery of previously unknown problems with a
product may result in restrictions on the product, including withdrawal of the
product from the market.
In addition to the drug approval requirements applicable to the Company's
Lu-Tex product for photosensitization of certain cancers and atherosclerosis,
the Company will also need to obtain the approval of the FDA and other foreign
regulatory authorities for the laser, light emitting diode ("LED") or
associated light delivery devices used in such treatments. Such device approval
requires additional regulatory submissions both by the Company and by the
manufacturers of such devices that must include clinical data obtained from the
use of such light delivery devices with Lu-Tex for photodynamic therapy, and
may result in additional delays or difficulties in obtaining approval for the
use of Lu-Tex as a photosensitizer. Such light delivery device manufacturers
currently are under no obligation to the Company to file or pursue such
applications.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred operating losses since its inception in 1991 and, as of
September 30, 1996, had an accumulated deficit of approximately $30.8 million.
The Company anticipates that such operating losses will continue over the next
several years, as it continues to incur increasing costs of research and
development, clinical and manufacturing activities. To date, the Company has not
generated revenue from the commercial sale of its products and does not expect
to receive any such revenue until calendar year 1997 at the earliest. All
revenues to date have resulted from license and milestone payments and funding
from a government research grant.
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LIMITED MANUFACTURING AND MARKETING EXPERIENCE
The Company must manufacture its products in commercial quantities either
directly or through third parties, in compliance with regulatory requirements
and at an acceptable cost. Except for Gd-Tex and Lu-Tex bulk drug substance,
which are the subject of a manufacturing and supply agreement with HCC, and
GADOLITE, which is the subject of a manufacturing and supply agreement with
Glaxo Wellcome ("Glaxo"), the Company does not have access to the manufacturing
capacity necessary to provide clinical and commercial quantities of the
Company's products. Access to such manufacturing capacity is necessary for the
Company to conduct clinical trials, obtain regulatory approval and commercialize
its products. The Company is engaged in preliminary discussions with a number of
manufacturers of parenteral products regarding process development and
validation, filling, labeling and packaging of the finished dosage form of
Gd-Tex and Lu-Tex. A failure to successfully complete such agreement would, if
the Company could not locate alternate manufacturing capabilities, have a
material adverse impact on the Company's business, financial condition and
results of operations. Prior to any regulatory approval of the Company's other
products under development, the Company intends to negotiate supply agreements
with manufacturers who will have the ability to manufacture, fill, label and
package such materials prior to commercial introduction of such products. There
are, however, a limited number of contract manufacturers that operate under
current federal and state Good Manufacturing Practices ("GMP") regulations and
are capable of manufacturing the Company's products. Accordingly, there can be
no assurance that the Company will be able to enter into supply agreements on
commercially acceptable terms or with manufacturers who will be able to deliver
supplies in appropriate quantity and quality to develop and commercialize its
products. Any interruption of supply of its products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company also has entered into a sales and distribution agreement with
E-Z-EM for North American sales, marketing and distribution of GADOLITE. The
Company plans to enter into similar agreements to market GADOLITE in Europe and
Asia. To date, however, no such arrangements have been established, and there
can be no assurance that any such agreements will be entered into. To the
extent that the Company determines not to, or is unable to, enter into
co-promotion agreements or to arrange for third party distribution of its other
products or to the extent that the agreement with E-Z-EM is terminated without
a replacement agreement, significant additional resources will be required to
develop a sales force. There can be no assurance that the Company will be able
to establish such a sales force or enter into such co-promotion or distribution
agreements. In addition, the Company currently has no arrangement for the sale
and distribution of any of its other products under development.
The Company has no expertise in the development of light sources and associated
light delivery devices required for the Company's Lu-Tex photosensitizer
program. Successful development,
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<PAGE> 14
manufacturing, approval and distribution of the Company's photosensitization
products will require third party arrangements for the required light sources,
associated light delivery devices and other equipment. The Company currently
obtains lasers from Coherent, Inc ("Coherent") and LEDs from Quantum Devices,
Inc ("Quantum") on a purchase order basis, and such entities are under no
obligation to continue to deliver light devices on an ongoing basis. Failure to
maintain such relationships may require the Company to develop additional
sources which may require additional regulatory approvals and could delay
commercialization of the Company's Lu-Tex products under development. There can
be no assurance that the Company will be able to establish or maintain
relationships with other sources on a commercially reasonable basis, if at all,
or that such devices will receive regulatory approval for use in photodynamic
therapy.
RELIANCE ON THIRD PARTY RELATIONSHIPS
The Company has no manufacturing facilities for commercial production of its
products under development, nor does the Company have experience in sales,
marketing or distribution. The Company's strategy for commercialization of its
products requires entering into various arrangements with corporate and other
collaborators to conduct clinical trials and to manufacture, distribute and
market its products. The Company will be dependent upon the success of these
outside parties performing their responsibilities. There can be no assurance
that such parties will perform their obligations as expected or that the
Company's reliance on others for the clinical development, manufacturing,
distribution and marketing of its products will not result in unforeseen
problems. The Company does not have the ability to conduct these development
activities in house. If one or more of these relationships were terminated or
the organizations did not perform up to expectations, the clinical development
of the Company's product candidates would likely be delayed and could be
substantially impaired depending on the availability and quality of substitute
development capabilities.
RAPID TECHNOLOGICAL CHANGE AND SUBSTANTIAL COMPETITION
The pharmaceutical industry is subject to rapid and substantial technological
change. Technological competition in the industry from pharmaceutical and
biotechnology companies, universities, governmental entities and others
diversifying into the field is intense and is expected to increase. Many of
these entities have significantly greater research and development capabilities
than the Company, as well as substantially more marketing, manufacturing,
financial and managerial resources, and represent significant competition for
the Company. Acquisitions of, or investments in, competing pharmaceutical
companies by large collaborating partners could increase such competitors'
financial, marketing, manufacturing and other resources. There can be no
assurance that developments by others will not render the Company's products or
technologies noncompetitive or obsolete, or that the Company will be able to
keep pace with technological developments or other market factors. Competitors
have developed or are in the process of developing technologies that
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are, or in the future may be, the basis for competitive products. Some of these
products may have an entirely different approach or means of accomplishing
similar diagnostic, imaging and/or therapeutic effects than products being
developed by the Company. The Company is aware that one of its competitors in
the market for photodynamic therapy drugs has received marketing approval for
certain indications in the U.S., Canada, The Netherlands, France and Japan for
Photofrin(R). There can be no assurance that the Company's competitors will not
develop products that are safer, more effective and less costly than the
products developed by the Company and, therefore, present a serious competitive
threat to the Company's product offerings.
Further, the medical indications for which the Company is developing its
therapeutic products also can be treated, in the case of cancer, by surgery,
radiation and chemotherapy, and in the case of atherosclerosis, by surgery
(e.g., bypass), angioplasty, atherectomy, the use of stents and drug therapy.
These treatments are widely accepted in the medical community and have a long
history of use. In addition, technological advances with other therapies for
cancer and atherosclerosis could make such other therapies more efficacious or
cost-effective than Lu-Tex and could render the Company's technology
noncompetitive or obsolete. Also, there can be no assurance that physicians
will use either Gd-Tex as a radiation sensitizer or chemosensitizer in the case
of cancer or Lu-Tex as a photosensitizer in the case of cancer or
atherosclerosis to replace or supplement established treatments for such
diseases or that the therapeutic products the Company is developing will become
competitive with current or future treatments. Further, some companies
developing photodynamic therapy products are developing specialized light
delivery devices for such products, which when integrated with their product
offering may afford them a competitive advantage relative to the Company's
strategy of sourcing such devices from third parties.
REQUIREMENTS FOR ADDITIONAL FINANCING AND ACCESS TO CAPITAL MARKETS
The Company has expended and will continue to expend substantial funds to
complete the research, development and clinical testing of its products. The
Company will require additional funds for these purposes, to establish
additional clinical and commercial-scale manufacturing arrangements and to
provide for the marketing and distribution of its products. The Company
believes that its cash, cash equivalents and short- term investments and
amounts available under a capital lease agreement will be adequate to satisfy
its capital needs through calendar 1997. However, the actual amount of the
Company's capital requirements will depend on many factors, including the
status of the development of products, the time and costs involved in
conducting clinical trials, obtaining regulatory approvals, and filing,
prosecuting and enforcing patent claims; competing technological and market
developments; and the ability of the Company to market and distribute its
products and establish new collaborative and licensing arrangements. The
Company will attempt to raise any necessary additional funds through equity or
debt financings, collaborative arrangements with corporate partners or from
other sources. No assurance can be given that such
15
<PAGE> 16
additional funds will be available on acceptable terms, if at all. If adequate
funds are not available from operations or additional sources of financing, the
Company's business, financial condition and results of operations, will be
materially and adversely affected.
DEPENDENCE UPON QUALIFIED AND KEY PERSONNEL
The Company's ability to maintain its competitive position depends on its
ability to attract and retain qualified management and scientific personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to continue to attract or retain such persons. The
loss of key personnel or the failure to recruit additional personnel or to
develop needed expertise could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the
Company relies on consultants and advisors to assist in formulating its
research and development strategy. All of the Company's consultants and
advisors are employed by entities other than the Company and may have
commitments to or consulting or advisory contracts with other entities that may
affect their ability to contribute to the Company.
UNCERTAINTIES REGARDING PATENTS AND PROPRIETARY RIGHTS
The Company's success depends in part on its ability to obtain patent
protection for its products and preserve its trade secrets. In the U.S., the
Company owns or has exclusive rights to 30 issued patents, 18 allowed, and 39
pending patent applications. Outside the U.S., the Company is the owner or
exclusive licensee of five counterpart patents, and 47 pending counterpart
patent applications. There can be no assurance that the Company's patent
applications will result in additional patents being issued or that issued
patents will afford protection against competitors with similar technology, nor
can there be any assurance that any patents issued to the Company will not be
infringed by or designed around by others. Even issued patents may later be
modified or revoked by the U.S. Patent and Trademark Office in proceedings
instituted by third parties or otherwise found to be invalid or unenforceable.
Moreover, the Company believes that obtaining foreign patents may be more
difficult than obtaining domestic patents because of differences in patent
laws, and believes the protection provided by foreign patents, if obtained, may
be weaker than that provided by domestic patents.
The Company has not conducted an extensive search of patents issued to other
companies, research or academic institutions or others, and no assurance can be
given that such patents do not exist, have not been filed or could not be filed
or issued which contain claims relating to the Company's technology, products
or processes. Because of the number of patents issued and patent applications
filed relating to biometallic and expanded porphyrin chemistries, Pharmacyclics
believes there is a significant risk that current and potential competitors and
other third parties have filed or in the future will file applications for, or
have received or in the future will receive, patents and will obtain additional
proprietary rights relating to materials or processes used or proposed to
16
<PAGE> 17
be used by the Company. If such patents have been or become issued, the holders
of such patents may bring claims against the Company for infringement which may
have a material adverse effect on the Company's business, financial condition
and results of operations. As a result, the Company may be required to obtain
licenses from others to develop, manufacture or market its products. There can
be no assurance that the Company will be able to obtain any such licenses on
commercially reasonable terms, if at all.
The Company is aware of several U.S. patents owned by or licensed to Schering AG
that relate to MRI contrast agents. Schering AG has sent communications to the
Company suggesting that GADOLITE may infringe certain of such Schering AG
patents. There can be no assurance that Schering AG will not seek to assert such
patent rights against the Company, which would result in significant legal costs
and require substantial management resources. The Company is aware that Schering
AG has asserted such rights against at least one other company in the contrast
agent imaging market and that a number of companies have entered into licensing
arrangements with Schering AG with respect to one or more such patents. There
can be no assurance that the Company would be able to obtain a license from
Schering AG, if required, on commercially reasonable terms, if at all.
The Company also relies on trade secrets and proprietary know-how that it seeks
to protect, in part, by confidentiality agreements with its employees,
consultants, suppliers and licensees. No assurance can be given that others
will not independently develop substantially equivalent proprietary information
and techniques, that others will not otherwise gain access to the Company's
proprietary technology, or disclose such technology, or that the Company can
meaningfully protect its rights in such unpatented proprietary technology.
UNCERTAINTIES REGARDING HEALTH CARE REIMBURSEMENT AND REFORM
The future revenues and profitability of pharmaceutical and related companies
as well as the availability of capital to such companies may be affected by the
continuing efforts of government and third party payors to contain or reduce
costs of health care through various means. For example, in certain foreign
markets pricing or profitability of prescription pharmaceuticals is subject to
government control. In the U.S., given recent federal and state government
initiatives directed at lowering the total cost of health care, it is likely
that the U.S. Congress and state legislatures will continue to focus on health
care reform and the cost of prescription pharmaceuticals and on the reform of
the Medicare and Medicaid systems. While the Company cannot predict whether any
such legislative or regulatory proposals will be adopted, the announcement or
adoption of such proposals
17
<PAGE> 18
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's ability to commercialize its products successfully will depend in
part on the extent to which appropriate reimbursement levels for the cost of
such products and related treatment are obtained by governmental authorities,
private health insurers and other organizations, such as health maintenance
organizations ("HMOs"). Third party payors are increasingly challenging the
prices charged for medical products and services. Also, the trend toward
managed health care in the U.S. and the concurrent growth of organizations such
as HMOs, which could control or significantly influence the purchase of health
care services and products, as well as legislative proposals to reform health
care or reduce government insurance programs, may all result in lower prices
for the Company's products. The cost containment measures that health care
payors and providers are instituting and the effect of any health care reform
could materially adversely affect the Company's ability to operate profitably.
PRODUCT LIABILITY EXPOSURE
The testing, manufacturing, marketing and sale of the products under
development by the Company entail an inherent risk that product liability
claims will be asserted against the Company. Although the Company is insured
against such risks up to a $3 million annual aggregate limit in connection with
human clinical trials and commercial sales of its products under development,
there can be no assurance that the Company's present product liability
insurance is adequate. A successful product liability claim in excess of the
Company's insurance coverage could have a material adverse effect on the
Company's business, financial condition and results of operations and may
prevent the Company from obtaining adequate product liability insurance in the
future on commercially reasonable terms. In addition, there can be no assurance
that product liability coverage will continue to be available in sufficient
amounts or at an acceptable cost. An inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise protect against potential product
liability claims could prevent or inhibit the commercialization of
pharmaceutical products developed by the Company. A product liability claim or
recall would have a material adverse effect on the Company's business,
financial condition and results of operations.
18
<PAGE> 19
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's products and its research and
development activities are subject to extensive regulation for safety, efficacy
and quality by numerous government authorities in the U.S. and other countries.
Clinical trials, manufacturing and marketing of products are subject to the
rigorous testing and approval process of the FDA and equivalent foreign
regulatory authorities. As a result, clinical trials and regulatory approval
can take a number of years to accomplish and require the expenditure of
substantial resources. To date, the Company has not received regulatory
approval in the U.S. or any foreign jurisdiction for the commercial sale of any
of its products. There can be no assurance that requisite FDA approvals or
those of foreign regulatory authorities will be obtained on a timely basis, if
at all, or that any approvals granted will cover the clinical indications for
which the Company may seek approval. The manufacture and marketing of drugs are
subject to continuing FDA and foreign regulatory review and later discovery of
previously unknown problems with a product, manufacturer or facility may result
in restrictions, including withdrawal of the product from the market. Failure
to obtain or maintain requisite governmental approvals, failure to obtain
approvals of the clinically intended uses or the identification of adverse side
effects of the Company's products under development could delay or preclude the
Company from further developing a particular product or from marketing its
products, or could limit the commercial use of its products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
ENVIRONMENTAL REGULATION
In connection with its research and development activities and its
manufacturing materials and products, the Company is subject to federal, state
and local laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal
of certain materials, biological specimens and wastes. Although the Company
believes that it has complied with these laws, regulations and policies in all
material respects and has not been required to take any significant action to
correct any material noncompliance, there can be no assurance that the Company
will not be required to incur significant costs to comply with environmental
and health and safety regulations in the future. The Company's research and
development involves the controlled use of hazardous materials, including but
not limited to certain hazardous chemicals and radioactive materials. Although
the Company believes that its safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these
materials cannot be eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability could
exceed the resources of the Company.
19
<PAGE> 20
CONTROL BY EXISTING STOCKHOLDERS
The Company's officers, directors and principal stockholders, and certain of
their affiliates beneficially own approximately 57% of the Company's
outstanding Common Stock. Such concentration of ownership may have the effect
of delaying or preventing a change in control of the Company. Additionally,
these stockholders will have significant influence over major corporate
transactions as well as the election of directors of the Company and control
over board decisions.
VOLATILITY OF STOCK PRICE; NO DIVIDENDS
The market prices for securities of pharmaceutical and biotechnology companies
(including the Company) have historically been highly volatile, and the market
has from time to time experienced significant price and volume fluctuations
that are unrelated to the operating performance of particular companies. Future
announcements concerning the Company, its competitors or other pharmaceutical
and biotechnology companies including the results of testing and clinical
trials, technological innovations or new therapeutic products, governmental
regulation, developments in patent or other proprietary rights, litigation or
public concern as to the safety of products developed by the Company or others
and general market conditions may have a significant effect on the market price
of the Common Stock. The Company has not paid any cash dividends on its Common
Stock and does not anticipate paying any dividends in the foreseeable future.
20
<PAGE> 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities. None
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to Vote of Security holders. None
Item 5. Other information. None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Exhibit 11.1 - "Computation of Net Loss and Pro Forma Net Loss
Per Share" is attached hereto.
Exhibit 27 - Financial Data Schedule.
b. Reports on Form 8-K. None
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACYCLICS, INC.
(Registrant)
Date: November 14, 1996 By: /s/ RICHARD A. MILLER
------------------------------------------
Dr. Richard A. Miller
President and Chief Executive Officer
Date: November 14, 1996 By: /s/ CHERYL B. JASZEWSKI
------------------------------------------
Cheryl B. Jaszewski
Vice President, Finance and Administration
22
<PAGE> 23
EXHIBIT INDEX
Exhibit
11.1 Computation of Net Loss and Pro Forma Net Loss Per Share
27 Financial Data Schedule
23
<PAGE> 1
EXHIBIT 11.1
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
COMPUTATION OF NET LOSS AND PRO FORMA NET LOSS PER SHARE
(in thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
September 30,
1996 1995
---- ----
<S> <C> <C>
Weighted average common shares outstanding 8,552 888
Convertible preferred stock (1) - 5,157
Common stock equivalent arising from options and warrants
issued subsequent to June 30, 1994 through October 23, 1995 (2)
- 314
------- -------
Weighted average common and
common equivalent shares 8,552
=======
Pro forma weighted average common and common equivalent shares
6,359
=======
Net Loss $(2,880) $(1,941)
======= =======
Net loss per share $(0.34)
=======
Pro forma net loss per share $(0.31)
=======
</TABLE>
(1) Shares of convertible preferred stock issued from July 1, 1994
through the effective date of the Company's initial public offering
on October 23, 1995 have been included in the calculation of net loss
per share as if they were outstanding for all periods prior to the
initial public offering (using the if-converted method).
(2) Stock options and warrants granted from July 1, 1994 through the
effective date of the Company's initial public offering on October
23, 1995 have been included in the computation of pro forma net loss
per share as if they were outstanding for all periods prior to the
initial public offering (using the treasury stock method and the
initial public offering price).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEET AND UNAUDITED CONDENSED STATEMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,747
<SECURITIES> 15,585
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,366
<PP&E> 4,441
<DEPRECIATION> (1,834)
<TOTAL-ASSETS> 22,123
<CURRENT-LIABILITIES> 2,266
<BONDS> 616
0
0
<COMMON> 1
<OTHER-SE> 19,131
<TOTAL-LIABILITY-AND-EQUITY> 22,123
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,456
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,880)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,880)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> 0
</TABLE>
