<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-27066
PHARMACYCLICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3148201
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
995 E. ARQUES AVENUE, SUNNYVALE, CALIFORNIA 94086-4521
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 774-0330
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<S> <C>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- --------------------------------------------------------------------------------------------
NONE NONE
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.0001 PAR VALUE
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 report(s), 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 Form 10-K or any amendments to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of July 31, 1997, was approximately $98,202,672 based on the
closing price of the Common Stock of the Registrant as reported on the NASDAQ
National Market on such date. The number of outstanding shares of the
Registrant's Common Stock as of July 31, 1997 was 10,109,850.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference into Part
III of this Form 10-K: the Proxy Statement for the Registrant's 1997 Annual
Meeting of Stockholders scheduled to be held on December 17, 1997.
================================================================================
<PAGE> 2
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C> <C>
PART I
Item 1. Business................................................................... 2
Item 2. Properties................................................................. 26
Item 3. Legal Proceedings.......................................................... 26
Item 4. Submission of Matters to a Vote of Security-Holders........................ 26
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 27
Item 6. Selected Financial Data.................................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 28
Item 8. Financial Statements and Supplementary Data................................ 32
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure................................................................. 48
PART III
Item 10. Directors and Executive Officers of the Registrant......................... 49
Item 11. Executive Compensation..................................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and Management............. 49
Item 13. Certain Relationships and Related Transactions............................. 49
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K............. 50
</TABLE>
1
<PAGE> 3
PART I
ITEM 1. BUSINESS
Pharmacyclics, Inc. ("Pharmacyclics" or the "Company") is developing
patented pharmaceutical products designed to improve radiation and chemotherapy
of cancer, and to enable or improve the photodynamic therapy of certain cancers
and atherosclerotic cardiovascular disease. These products address significant
market opportunities and are intended to enhance existing medical procedures and
improve the ability of physicians to treat or manage life-threatening and
serious conditions. Such products are derived primarily from Pharmacyclics'
platform technology [for] designing and synthesizing energy-potentiating drugs,
which capture and focus energy to achieve specific therapeutic effects.
The Company's proprietary agents, called "texaphyrins," are small,
ring-shaped molecules that localize in cancer cells and atherosclerotic plaque
where they can be exposed to forms of energy that activate the molecules to
eliminate diseased tissue. The physical and chemical characteristics of the
texaphyrin molecules are determined both by insertion of a metal ion into the
ring and the form of energy applied to activate the molecule. For example,
texaphyrins can be synthesized to focus and transform X-ray, chemical or light
energy into other forms of energy capable of producing localized destruction of
diseased tissue. This forms the basis for the use of texaphyrins as radiation
sensitizers, chemosensitizers and photosensitizers. One such molecule,
Gadolinium Texaphyrin ("Gd-Tex"), is being developed for use as a radiation
sensitizer and chemosensitizer, while a second, Lutetium Texaphyrin ("Lu-Tex"),
is being developed as a photosensitizing agent for use in photodynamic therapy.
Gd-Tex has completed Phase I testing and is now in a multicenter Phase I/II
clinical trial as a radiation sensitizer to improve the efficacy and safety of
radiation therapy of certain cancers. Gd-Tex is also being developed to
potentiate the activity of certain cancer chemotherapy drugs. Lu-Tex is in
multicenter Phase II clinical testing to evaluate its safety and efficacy in the
treatment of recurrent breast cancers that are accessible to illumination by
externally applied light. The Company has filed an Investigational New Drug
application ("IND") for ANTRIN(TM), a lutetium texaphyrin drug used in the
photoangioplasty of atherosclerotic cardiovascular disease, and plans to
initiate a Phase I study in patients with peripheral vascular disease.
The Company's strategy is to apply its energy-potentiating drug technology
to develop a diverse product portfolio. Pharmacyclics is leveraging its core
technology and products by establishing relationships with third parties
intended to augment its research and development activities and to provide
manufacturing capacity and sales and marketing capabilities. To date, the
Company has retained worldwide marketing rights for its therapeutic products.
The Company also dedicates significant resources to build and protect its
intellectual property rights in the United States ("U.S.") and abroad.
ACHIEVEMENTS DURING FISCAL 1997
- Continued multicenter Phase I/II clinical trial with Gd-Tex
radiosensitizer for brain metastases and reported interim results at
American Society of Clinical Oncology ("ASCO").
- Completed Phase I clinical trial with Lu-Tex for treatment of cancer and
reported results at ASCO.
- Initiated Phase II clinical trials of Lu-Tex for photodynamic treatment
of recurrent breast cancer.
- Selection of Gd-Tex and Lu-Tex for cooperative research and clinical
development for multiple cancer indications by the National Cancer
Institute ("NCI").
- Filed IND for ANTRIN(TM), a lutetium texaphyrin drug, used in the
photoangioplasty of atherosclerosis.
- Strengthened financial position by completing two private placements of
Common Stock totaling $24.4 million.
2
<PAGE> 4
MARKET OVERVIEW
Cancer
Cancers result from the uncontrolled proliferation of cells that invade
adjacent normal tissues and organs and interfere with their function. In some
cases, cancer cells become dislodged from their primary site and spread, or
metastasize, to other anatomic sites. Cancers can arise in almost any location
in the body. In the U.S., there are approximately 1.3 million new cases of
cancer per year and the incidence of cancer is increasing. Over seven million
people in the U.S. today have been diagnosed with cancer, resulting in estimated
annual direct and indirect medical costs of over $50 billion associated with the
management of cancer. Selection of appropriate therapy depends on careful
assessment of the size, location and existence of metastases of the tumor using
diagnostic imaging procedures such as computerized tomography ("CT") and
magnetic resonance imaging ("MRI").
Once the extent of disease has been determined, cancer therapy typically
includes some combination of surgery, radiation therapy and chemotherapy.
Unfortunately, many tumors are not controlled with surgery because of their
size, location or the presence of metastases. In these cases, radiation therapy
or chemotherapy are frequently used. Radiation therapy is applied by physicians
specializing in radiation oncology. There are approximately 3,000 such
physicians based in 1,300 radiation treatment centers in the U.S. Chemotherapy
is usually prescribed by one of the approximately 6,000 U.S. physicians who
specialize in medical oncology.
Chemotherapy and radiation therapy destroy both healthy and diseased cells
and cause serious side effects because their cytotoxic effects are not
adequately selective. In addition to searching for new treatment approaches,
substantial research in cancer treatment has been directed toward improving the
efficacy of existing therapy while reducing toxicity.
Radiation Therapy for Cancer. Radiation therapy is administered to the
anatomic site where the tumor is located, known as the treatment field, while
adjacent normal tissues are shielded to minimize radiation toxicity, and is
usually given several times per week over a period of two to six weeks.
Irradiation of tissues generates free radicals and electrons (highly reactive
and short-lived molecules and particles) that attack intracellular molecules
such as DNA and lead to cell death. Treatment planning and definition of the
treatment field is highly dependent on imaging procedures which are required to
determine the location and size of the tumor and its relationship to adjacent
normal tissues.
Of the more than one million newly-diagnosed cancer patients each year in
the U.S., an estimated 50% will be treated with radiation therapy as part of
their initial disease management. This includes patients with cancers of the
lung, breast, prostate, head and neck region and other anatomic sites. In
addition, approximately 150,000 patients with persistent or recurrent disease
also will receive radiation therapy. In total, approximately 700,000 patients
receive radiation therapy for cancer each year in the U.S. Depending on the
complexity and duration of treatment, a course of radiation therapy for cancer
can cost between $10,000 and $25,000. While there currently are no approved
radiation sensitizers, certain chemotherapy agents are frequently used off-label
to increase the effectiveness of radiation therapy. However, the use of
chemotherapy agents as radiation sensitizers is typically limited by lack of
tumor localization and by systemic toxicity. Optimally, a radiation sensitizer
should be safe, simple to administer to the patient and potentiate the effect of
radiation at the tumor site and not the adjacent normal tissue.
Chemotherapy of Cancer. In the U.S., more than 350,000 patients per year
receive cytotoxic chemotherapy for treatment of many types of cancer. The
effectiveness of chemotherapy agents usually is limited by their serious or life
threatening side effects. These side effects often include nausea and vomiting,
suppression of white blood cell and platelet counts, renal toxicity, pulmonary
toxicity, neurotoxicity and cardiac toxicity. Chemotherapy drugs distribute
throughout the body in normal tissues as well as in the tumor. The cytotoxic
effect to normal tissues is dose-limiting for most of these drugs, resulting in
a very narrow therapeutic margin. Many recent advances in medical oncology have
resulted from the discovery of drugs that ameliorate the side effects of
chemotherapy agents, such as anti-emetics and blood cell growth factors which
allow for use of higher doses of chemotherapy. Chemosensitizers are drugs which
potentiate the anti-tumor activity of cancer
3
<PAGE> 5
chemotherapy agents. Although certain chemosensitizers have been tested
experimentally, no such agents are yet approved. Ideally, a chemosensitizer
should be safe, simple to administer to the patient and potentiate the activity
of the cytotoxic chemotherapy agent in the tumor but not in any normal tissues
or organs, thereby increasing the therapeutic margin.
Photodynamic Therapy ("PDT") for Cancer. Photodynamic therapy is an
emerging cancer treatment based on the combined effects of visible light and a
photosensitizing drug. Photosensitizers are activated by exposure to light of a
specific wavelength. In this procedure, a photosensitizing agent which
accumulates in tumors is injected into the patient. The tumor site is then
illuminated with visible light of a particular energy and wavelength that is
absorbed by the photosensitizer, creating excited-state oxygen molecules in
those tissues in which the drug has localized. These molecules are highly
reactive with cellular components and cause tumor cell death. Recently, the
first photosensitizing agent was approved by the U.S. Food and Drug
Administration ("FDA") for treatment of obstructing cancers of the esophagus.
To date, photodynamic therapy has been restricted to treatment of
superficial or small lesions because existing photosensitizers have been unable
to absorb light of a wavelength capable of penetrating deeply into tissues.
Other limitations of photosensitizers have included unfavorable biolocalization,
prolonged retention in the body, skin phototoxicity and insolubility in water,
complicating intravenous administration. In addition, some tumors, including
malignant melanoma, contain pigments that have not allowed adequate penetration
of light for photodynamic therapy.
Optimally, a photosensitizer should accumulate selectively in tumors and be
capable of activation by a wavelength of light that is able to penetrate through
tissue, blood and darkly pigmented skin in order to treat larger or more deeply
situated tumors. Ideally the treatment should be accomplished in a single
outpatient visit. Other important features include safety, lack of skin
phototoxicity and ease of administration of the agent to the patient.
Atherosclerosis
Atherosclerosis is a progressive and degenerative vascular disease in which
cholesterol and other fatty materials are deposited in the walls of blood
vessels, forming a build-up known as plaque. The accumulation of plaque narrows
the interior of the blood vessels, thereby reducing blood flow. Atherosclerosis
in the coronary arteries can lead to heart attack and death. In peripheral
vessels, atherosclerosis can lead to decreased mobility, loss of function and
other complications such as strokes. Current treatments for atherosclerosis
include surgery and other techniques aimed at removing or relieving the plaque.
Procedures utilizing intravascular devices to mechanically remove or compress
the obstructing lesion include atherectomy and angioplasty, often with stent
placement. These procedures are currently performed in the coronary arteries of
more than 400,000 patients per year and in the peripheral vessels of more than
200,000 patients per year in the U.S. These procedures require the use of
anticoagulant drugs and, although the use of stents has reduced the incidence of
restenosis, have generally been limited to localized sections of the diseased
vessel.
The optimal interventional treatment for atherosclerosis should effectively
eliminate atherosclerotic plaque without restenosis and without the need for
anticoagulant drugs or stent placement. Because atherosclerosis is a diffuse
disease, therapies which can be used over long segments of the affected vessel
offer significant advantages over treatments limited to short segments of the
vessel.
Photoangioplasty of Atherosclerosis. Photoangioplasty to eliminate
atherosclerotic plaque involves administration of a photosensitizing agent which
accumulates in the plaque. The diseased site is then exposed to light delivered
by an intravascular catheter containing an optical fiber. This approach may
eliminate plaque without damage to the blood vessel lining, thereby potentially
eliminating the need for anticoagulants and reducing the frequency of
restenosis. The Company believes that the use of photoangioplasty for
atherosclerosis has previously been limited because current photosensitizers
lack both adequate tissue selectivity and the ability to absorb light that is
capable of penetrating through blood. The ideal photosensitizer should localize
in atherosclerotic plaque and be readily activated by light capable of
penetrating through blood to reach the drug.
4
<PAGE> 6
Diagnostic Imaging Agents
Because the most common cancers originate and spread within the chest,
abdomen or pelvis, the greatest need for MRI contrast agents is for imaging of
these areas. These sites are generally difficult to image because of the
presence of juxtaposed or overlapping organs. The tortuous pathway and
unpredictable position of the stomach, small intestine and large intestine, in
addition to their being fluid-filled, often makes it difficult to distinguish
such organs from cancers, abscesses or other inflammatory processes in an MRI
scan. Thus, the development of oral MRI contrast agents capable of definitively
marking the gastrointestinal tract could improve the diagnostic quality of scans
of the abdomen and pelvis. Just as oral X-ray contrast agents currently are used
in nearly all CT scans of the abdomen and pelvis, the Company believes that, as
they become available, oral MRI contrast agents will be increasingly used in MRI
scans of those areas. Improvements in diagnostic certainty resulting from image
enhancement may reduce the need for repeat scanning of patients or other
diagnostic tests, and, by permitting faster scanning and increased patient
throughput, reduce the cost of an MRI scan.
Other Markets
The Company is also evaluating a lutetium texaphyrin drug for photodynamic
therapy of age-related macular degeneration, an eye disease affecting the retina
that is a leading cause of blindness in the U.S. The Company also has prepared
and tested topical formulations of lutetium texaphyrins for various applications
in dermatology. These applications are currently being studied in animal models.
PHARMACYCLICS' BUSINESS STRATEGY
Pharmacyclics' products are designed to address significant market
opportunities in the treatment of certain cancers and atherosclerosis. The key
elements of the Company's business strategy include:
Developing therapeutic products that address large markets for the treatment of
cancer and atherosclerosis.
The Company's therapeutic products under development are designed to
improve radiation therapy, chemotherapy and photodynamic therapy for the
treatment of certain cancers and atherosclerosis. The Company's initial
therapeutic product focus has been on treatments for life-threatening cancers,
where the Company believes its products may offer measurable improvements in
patient outcomes. This strategy is intended to reduce the time required to
achieve regulatory approval, and achieve both substantial market penetration and
favorable pricing of these products.
Applying platform technology for energy-potentiating drugs to develop a diverse
product portfolio.
Each of the Company's therapeutic products under development incorporates
one of a series of metal ions within a proprietary ring-shaped molecule called a
texaphyrin. These molecules selectively localize in the body and are capable of
harnessing forms of energy used in a variety of medical applications. The
Company has leveraged its expertise and proprietary position in
energy-potentiating drugs to develop a diverse product portfolio. Using a series
of different metals which may be incorporated into texaphyrins to enable the
molecule to capture and focus different types of energy, the Company has created
several product opportunities based on similar chemical synthesis, manufacturing
and product development activities.
Designing products that enhance existing medical procedures and are simple and
practical to use.
The Company's products under development are designed to improve the
ability of physicians to treat or manage life-threatening or serious conditions.
These products are designed to enhance existing procedures and should result in
accelerated product adoption. For example, the Gd-Tex radiation sensitizer and
chemosensitizer are each designed to be used in conjunction with standard
radiation therapy and chemotherapy procedures; and the Lu-Tex photosensitizer
for cancer therapy is designed to be given by rapid intravenous infusion,
whereupon tumors can be exposed to light within a few hours.
5
<PAGE> 7
Leveraging core technology through collaborative relationships.
The Company is leveraging its proprietary core technology through
collaborative relationships that strengthen its basic research capabilities and
provide manufacturing and marketing capacity, enabling the Company to focus on
the development of new products addressing substantial markets in the areas of
therapeutics for cancer and atherosclerosis. Consistent with this strategy, the
Company is building a series of relationships with third parties to augment its
research and development activities and to provide manufacturing, sales and
marketing capabilities. The Company has utilized a Sponsored Research Agreement
with The University of Texas ("UT") at Austin for continued research and
development of its texaphyrin technology. The NCI has selected Gd-Tex and Lu-Tex
for clinical development under a cooperative research and development agreement
with the Company. NCI will sponsor clinical studies with Gd-Tex and Lu-Tex at
leading medical centers. For production of its texaphyrin products, the Company
has entered into a process development and supply agreement with Hoechst
Celanese Corporation ("Celanese"), a manufacturer of chemicals and
pharmaceutical intermediates. To date, the Company has retained worldwide
marketing rights for its therapeutic products. For its oral MRI contrast agent,
GADOLITE(R) Oral Suspension ("GADOLITE"), the Company has entered into a
manufacturing and supply agreement with Glaxo Wellcome ("Glaxo") and a sales and
distribution agreement with E-Z-EM, Inc. ("E-Z-EM"), a leading worldwide
distributor of oral contrast agents.
Expanding and protecting proprietary technology and products.
Since its inception, the Company has dedicated significant resources to
protect its intellectual property. In the U.S., the Company owns or has
exclusive rights to 46 issued patents, six allowed patent applications and 24
pending patent applications covering various aspects of its core technology and
products under development. Outside the U.S., the Company is the owner or
exclusive licensee of five corresponding patents and 63 pending counterpart
patent applications. The Company intends to continue to protect its intellectual
property through additional patent filings and maintenance and enforcement of
its existing portfolio.
PHARMACYCLICS' TECHNOLOGY
The Company's energy-potentiating drugs under development are derived from
its expertise in biometallic chemistry and expanded porphyrins, such as the
proprietary texaphyrin molecules developed by the Company and its academic
collaborators. In nature, porphyrins such as heme or chlorophyll bind metals,
transport ions and transform energy. In living organisms, porphyrins localize
primarily to tissues or organs responsible for energy production, metabolism or
transport functions. Based on their ability to capture and focus medically
useful forms of energy, Pharmacyclics and its collaborators have designed and
synthesized porphyrins to perform specific functions in a number of medical
applications. The expanded porphyrins being developed by the Company consist
primarily of its proprietary texaphyrin molecules. Texaphyrins can be
synthesized to focus and transform X-ray, chemical or light energy into other
forms of energy capable of producing localized destruction of diseased tissue.
This forms the basis for the use of texaphyrins as radiation sensitizers,
chemosensitizers and photosensitizers.
In contrast to naturally occurring porphyrins, synthetic texaphyrins have a
larger central binding ring, which makes possible the stable binding of a
variety of lanthanide metals such as gadolinium, lutetium, europium and
dysprosium. The physical and chemical characteristics and product application of
the texaphyrin molecules are determined by the type of metal inserted into the
ring and the form of energy applied to activate the molecule.
Metal ions act as natural catalysts for a number of biochemical processes.
The binding of metal ions by texaphyrins is unique in that the metal is held
near or within the plane of the molecule. This type of binding allows the metal
to interact freely with adjacent molecules while still being retained within the
texaphyrin structure. As a result of this metal binding configuration,
texaphyrins can be engineered to capture and focus a variety of energy forms,
including capture of high energy chemical species such as free radicals.
As is the case for naturally occurring porphyrins, texaphyrins accumulate
in those areas of the body where substantial energy usage or metabolism occurs,
such as in cancer cells and the tissues of atherosclerotic
6
<PAGE> 8
plaque. This selectivity for particular cell types provides the basis for the
Company's approach to the treatment of certain cancers and atherosclerosis. Once
localized, these small molecules can be excited with the appropriate energy form
to activate their therapeutic effects.
PRODUCTS UNDER DEVELOPMENT
Pharmaceutics is pursuing the development of products based on its platform
technology for designing and synthesizing energy-potentiating drugs, and the
ability of its proprietary texaphyrin molecules to localize in diseased tissues
such as cancer and atherosclerosis. The Company is developing the following
product candidates:
<TABLE>
<CAPTION>
PRODUCT INDICATION STATUS(1) COLLABORATORS(2)
- -------------------- ----------------------------- ------------------------------- -----------------
<S> <C> <C> <C>
CANCER THERAPY
Gd-Tex Radiation sensitizer Phase I/II for brain Marketing rights
for radiation therapy of a metastases retained
variety of cancers
Gd-Tex Chemosensitizer for Preclinical Marketing rights
chemotherapy of a variety retained
of cancers
Lu-Tex Photosensitizer for Multicenter Phase II for breast Marketing rights
photodynamic therapy of a cancer retained
variety of cancers
ATHEROSCLEROSIS
THERAPY
ANTRIN(TM) Photosensitizer for IND Filed Marketing rights
photoangioplasty of retained
atherosclerosis
DIAGNOSTIC IMAGING
GADOLITE Oral MRI contrast FDA Approvable letter received E-Z-EM holds
agent for abdomen and 12/96 European and
pelvis North American
marketing rights
</TABLE>
- ---------------
(1) "Phase I" means initial human studies designed to establish the safety, dose
tolerance and sometimes pharmacokinetics of a compound. "Phase I/II" means
initial human studies designed to establish the safety, dose tolerance and,
sometimes, pharmacokinetics of a compound and are, in contrast to Phase I
studies, performed with patients with the targeted disease. "Phase II" means
human studies designed to establish safety, optimal dosage and preliminary
activity of a compound. "Phase III" means human studies designed to lead to
accumulation of data sufficient to support an NDA, including data as to
efficacy.
(2) The Company has entered into a process development and supply agreement with
Celanese for the clinical and commercial supply of its texaphyrin products.
There can be no assurance that the Company will not in the future enter into
licensing agreements with third parties for the marketing of its products
under development. The Company has entered into a process development and
supply agreement with Glaxo for the commercial supply of GADOLITE.
CANCER THERAPY
Gd-Tex for Radiation Sensitization of Cancer
Radiation therapy is based upon the sensitivity of cancer cells exposed to
relatively high dosages of externally applied radiation. Generally, however,
such radiation has toxic effects on healthy tissues surrounding the tumor
because the energy is not adequately targeted. Radiation sensitizers are agents
that increase the cytotoxic effects of radiation. The Company's preclinical
studies indicate that texaphyrins can increase the effect of radiation therapy
by absorbing free electrons generated during irradiation of tissues. Free
electron absorption by Gd-Tex results in formation of relatively long-lived
texaphyrin and other free radicals capable of destroying intracellular DNA
molecules. In addition to these physicochemical properties of Gd-Tex, its
propensity to localize selectively in cancer cells confers additional advantages
as a radiation sensitizer since this effect is localized to the tumor. Gd-Tex
uptake in tumors occurs within minutes and persists for hours. Preclinical
studies also indicate that Gd-Tex enhances radiation-induced killing of various
human and animal
7
<PAGE> 9
cancer cells. Animals receiving Gd-Tex in conjunction with radiation therapy had
enhanced tumor response and survival rates as compared to the control group
receiving equivalent dosages of radiation therapy alone. Preclinical studies
further indicate that Gd-Tex increases the effect of radiation therapy at the
tumor site but does not increase radiation damage to normal tissues. Another
advantage of the Gd-Tex molecule is that its unique properties allow it to be
detected by MRI, thereby facilitating assessment of its biolocalization in
patients.
The Company initially intends to seek FDA approval of Gd-Tex for treatment
of patients with brain metastases. Brain metastases occur in up to 20% of all
cancer patients and are typically treated with radiation therapy. Radiation
therapy for treatment of brain metastases is performed on approximately 200,000
patients per year in the U.S. The Company believes that Gd-Tex could be used in
many other tumor types and clinical situations requiring radiation therapy.
Clinical Status. The Company has completed Phase I testing of Gd-Tex in 41
patients with advanced cancer receiving radiation therapy in a study designed to
determine the maximally-tolerated single dose ("MTD") of the drug. Reversible
renal toxicity was observed at 25 umol/kg, a dose significantly exceeding that
which is expected to produce a radiation sensitization effect. Biolocalization
of Gd-Tex in lung cancer, breast cancer and sarcomas has been confirmed using
MRI. The Company is conducting an international multicenter Phase I/II clinical
trial to evaluate the safety and efficacy of Gd-Tex in cancer patients receiving
radiation therapy for treatment of brain metastases. In this dose escalation
study, an intravenous dose of Gd-Tex is administered prior to each radiation
treatment. Interim study results on the initial 28 patients enrolled in the
study were presented in May 1997 at the meeting of ASCO. The majority of
patients (86%) had lung or breast cancer primary tumors with multiple metastases
to the brain. No serious drug-related toxicities were recorded in any of the 28
patients. MRI scanning was used to confirm that Gd-Tex accumulated selectively
in the tumors and not in adjacent normal brain. The study is continuing to
enroll patients.
Gd-Tex for Chemosensitization of Cancer
The Company is conducting preclinical studies with Gd-Tex as a
chemosensitizer for use in conjunction with certain cytotoxic chemotherapy
agents. Cytotoxic chemotherapy destroys cancer cells by interfering with their
metabolism, protein synthesis or cell division. Generally, however, the damaging
effects of cancer chemotherapy agents are not restricted to the tumor. Because
these agents are not tissue-selective, cancer chemotherapy agents produce
serious or life-threatening side effects which compromise quality of life and
increase the cost of management of patients with cancer. Preclinical studies
conducted by the Company and its collaborators indicate that Gd-Tex increases
the activity of certain chemotherapy agents in tumors. This effect is believed
to be related to Gd-Tex's ability to stabilize cytotoxic free radicals produced
by certain chemotherapy agents, such as doxorubicin and bleomycin. Gd-Tex's
selective uptake in tumors potentiates the activity of cancer chemotherapy
agents in tumor cells but not in normal tissues, thereby increasing the
therapeutic margin. In preclinical studies, animals receiving Gd-Tex and
chemotherapy with either bleomycin or doxorubicin had enhanced tumor responses
and survival rates as compared to control groups receiving equivalent doses of
chemotherapy alone.
Lu-Tex for Photodynamic Therapy of Cancer
Photodynamic therapy is a minimally invasive treatment modality in which a
photosensitizing drug that localizes to diseased tissue is injected into the
body and then activated with light. To date, photodynamic therapy has been
restricted to the treatment of superficial or small lesions because existing
photosensitizers have been unable to absorb light capable of penetrating deeply
into tissues. Lu-Tex is activated by light of 720-760 nanometers, wavelengths
that are optimal for penetrating through tissue, blood and skin pigmentation
such as melanin. After absorbing light of this wavelength, Lu-Tex becomes
activated to a higher energy state capable of generating cytotoxic singlet
oxygen molecules. Preclinical studies conducted by the Company indicate that
Lu-Tex localizes to a variety of cancers. Lu-Tex is a synthetic,
well-characterized molecule that is water soluble and is relatively rapidly
cleared from the body, reducing potential toxicity. Because of its relatively
rapid clearance from normal tissue, it is possible to illuminate the tumors
within a few hours of drug administration, providing an advantage over current
photodynamic therapies.
8
<PAGE> 10
The Company intends to seek initial FDA approval for the use of Lu-Tex in
photodynamic therapy for patients with invasive surface cancers that are
accessible to externally applied light, such as recurrent breast cancer
(involving the skin or subcutaneous tissue) and melanoma. These diseases may
affect more than 50,000 patients per year in the U.S. Additional indications for
the use of Lu-Tex include internal cancers such as cancer of the lung, breast,
esophagus, colon, rectum, prostate, head and neck region and genitourinary
tract.
Clinical Status. The Company presented results from its completed Phase I
clinical trial of the photosensitizer Lu-Tex for the photodynamic treatment of
advanced local or metastatic cancer at the meeting of ASCO in May 1997. Lu-Tex
was administered to patients with tumors accessible to externally applied light.
Of the 35 patients enrolled in the dose escalation study, 16 had breast cancer,
seven had melanoma, and 12 had other types of tumors. Patients received a rapid
intravenous injection of Lu-Tex, followed three to eight hours later by
illumination of the tumors with light. Within the treated group, 73 breast
cancer lesions were evaluated, with a total response rate of 64%, comprised of a
46% complete response (defined as complete disappearance of the tumor), and 18%
partial response (defined as greater than 50% reduction in tumor size). Among
melanoma patients, 45 lesions were evaluated; a complete response was achieved
in 29% and a partial response was achieved in 20%, for a total response rate of
49%. A drug dose response effect was noted. Nineteen lesions were evaluated in
six patients treated at the MTD. Fifteen of the lesions underwent a complete
response and two achieved a partial response. The overall patient response rate,
determined by evaluating the response of all the treated lesions in each
patient, was 50% with 17% complete and 33% partial responses. Of the six
patients treated at the MTD, four had a complete response and one had a partial
response. The dose-limiting toxicity was evidenced by pain at the treatment site
during light illumination, which occurred at the highest doses administered.
Also, at the highest dosage some patients experienced dysesthesia (burning or
numbness) in areas exposed to light, such as the fingertips. There were no
systemic toxicities and no significant skin phototoxicities. The responses
observed in melanoma patients are of particular interest because other
photosensitizers have failed to be effective in that tumor. Melanoma cells
contain the pigment melanin, which, except for light of 720-760 nanometers,
prevents light from penetrating into tissue where it can activate the
photosensitizer. Furthermore, Lu-Tex's ability to be activated by light of such
wavelengths suggests that it could be possible to treat people with darkly
pigmented skin. Lu-Tex is currently undergoing testing in Phase II trials in
patients with recurrent breast cancer to the chest wall. It is expected that
Phase II trials in recurrent melanoma will begin in 1997.
ATHEROSCLEROSIS THERAPY
ANTRIN(TM) for Photoangioplasty of Atherosclerosis
Animal studies conducted by the Company and its collaborators have
demonstrated that texaphyrins localize to atherosclerotic plaque. During the
Company's Phase I clinical study with Gd-Tex, localization in atherosclerosis in
human aortas was confirmed using MRI. Animal studies have also indicated that
following intravenous administration of ANTRIN(TM), a lutetium texaphyrin drug,
intravascular exposure of atherosclerotic plaque to 732-nanometer light
delivered through a catheter resulted in elimination of the lesions without
damage to the endothelium using a technique called photoangioplasty. The Company
believes that these results suggest that photoangioplasty of atherosclerosis
with ANTRIN(TM) has the potential to eliminate plaque without complications such
as thrombosis and restenosis, which are associated with balloon angioplasty,
atherectomy and other traditional techniques. These animal studies have also
shown that photoangioplasty of atherosclerosis with ANTRIN(TM) could be used to
treat diffuse atherosclerosis over long segments of blood vessels, which is not
possible with other techniques. These results further confirm that ANTRIN(TM) is
activated by light capable of penetrating through blood, circumventing a barrier
that has prevented the successful use of other photosensitizers for
cardiovascular applications. ANTRIN(TM) selectivity for plaque and relatively
rapid clearance from blood provide advantages for its application in the
treatment of atherosclerosis. The Company has filed an IND with the cardio/renal
division of the FDA for the use of ANTRIN(TM) in the photoangioplasty of
peripheral arterial disease.
9
<PAGE> 11
DIAGNOSTIC IMAGING AGENT
The Company's oral MRI contrast agent, GADOLITE, is based on a patented
compound and is used for imaging the gastrointestinal tract in patients
undergoing MRI procedures of the abdomen or the pelvis. GADOLITE contains
gadolinium sodium aluminosilicate suspended in an aqueous, orange-flavored oral
formulation designed to fill the bowel uniformly. The Company's clinical studies
indicate that orally administered GADOLITE is nontoxic and is not systemically
absorbed.
Clinical Status. The Company's Phase I and II human clinical trials
indicate that GADOLITE is well tolerated, safe and not absorbed from the human
gastrointestinal tract. The Company has conducted two pivotal multicenter
controlled Phase III studies in patients receiving MRI scans for known or
suspected diseases of the abdomen or pelvis. A total of 284 patients received
GADOLITE in those studies, which were completed in March 1995. The Company's
analysis of data from these studies confirmed the safety, tolerability and lack
of absorption of GADOLITE, and indicated that it significantly reduced
diagnostic uncertainty when comparing MRI scans performed with GADOLITE to those
without GADOLITE. The Company believes that these trials establish that GADOLITE
improves the ability to distinguish the gastrointestinal tract from adjacent
anatomic or pathologic structures and thereby assists in the detection or
diagnosis of abnormalities in the abdomen or pelvis. The Company believes that
by reducing diagnostic uncertainty, GADOLITE will lessen the need for repeated
exams and other more invasive diagnostic tests, thereby reducing costs. The
Company submitted a New Drug Application ("NDA") to the FDA in September 1995 to
market this product in the U.S. and received an "approvable" letter in December
1996 requiring the Company to conduct additional product manufacturing and
stability studies. The studies are underway. In 1996, the Company received
approval from the Medicines Control Agency to market GADOLITE in the United
Kingdom ("UK"). Product launch in the UK has not yet occurred, however.
OTHER PHOTODYNAMIC THERAPY APPLICATIONS
The Company is evaluating other lutetium texaphyrin drugs for photodynamic
therapy of age-related macular degeneration, a retinal eye disease that is a
leading cause of blindness in the U.S. The Company has also prepared topical
formulations of lutetium texaphyrin drugs for various applications in
dermatology. These applications are being studied in animal models.
COLLABORATIVE RELATIONSHIPS
The Company has maintained a focus on its core technology in
energy-potentiating drugs and has utilized relationships with third parties for
research, clinical development, process development, manufacturing, sales and
marketing. In the photodynamic therapy field, the Company has used outside
collaborations for development of light production and delivery devices for use
in preclinical and clinical trials while focusing on development of its
proprietary photosensitizing drug. The Company has established alliances and
intends to pursue additional alliances, with companies for late stage product
development, manufacturing, sales, marketing and distribution of certain of its
products. To date, the Company has retained worldwide marketing rights to its
therapeutic products.
The University of Texas Agreements. The Company collaborates with and
sponsors research and development programs at a number of academic institutions,
including UT at Austin, through a group under the direction of Jonathan Sessler,
Ph.D., Professor of Chemistry at UT, to extend its research capabilities in the
field of expanded porphyrin chemistry. The Company has entered into two license
agreements with UT that grant the Company the worldwide, exclusive right to
patents or patent applications that relate to or result from (i) research
conducted at UT Austin on the use, development and syntheses of expanded
porphyrin molecules, and (ii) research conducted at UT Dallas on the
incorporation of paramagnetic metals into zeolites for use as MRI contrast
agents. These agreements require the Company to pay royalties as a percentage of
net sales to UT for products incorporating the licensed technology, including
each of the Company's current product candidates. In addition, the Company and
UT have entered into sponsored research agreements which expand the products,
inventions and discoveries developed by UT to which the Company's license rights
apply.
10
<PAGE> 12
In connection with the UT license agreements, the Company also entered into
a license agreement with Stuart W. Young, M.D., a co-inventor of GADOLITE,
pursuant to which the Company has been granted an exclusive royalty-bearing
license to manufacture, use and sell certain products that fall within the scope
of the UT Dallas license agreement.
National Cancer Institute Collaboration. The Decision Network Committee of
the NCI Division of Cancer Treatment, Diagnosis and Centers voted unanimously to
sponsor and fund clinical development of both Gd-Tex as a radiation sensitizer
and Lu-Tex as a photosensitizer for cancer treatment. This cooperative research
and development agreement ("CRADA") provides for NCI and the Company to jointly
select clinical trials which will be conducted at leading medical centers for
various types of cancer. For Gd-Tex, several clinical trials are planned for
treatment of brain tumors, head and neck cancers, and cancers involving the
lung, pancreas and prostate. Solicitation letters requesting clinical proposals
have been distributed by NCI and responses to these proposals are under review
by the Company and NCI. For Lu-Tex, clinical trials for treatment of bladder
cancer and ovarian cancer are now under consideration. The Company believes that
these NCI-sponsored trials will supplement its own clinical development efforts
for both Gd-Tex and Lu-Tex.
Hoechst Celanese Agreement. In October 1995, the Company entered into a
memorandum of understanding and in September 1996 finalized a definitive
agreement with Celanese, a manufacturer of chemicals and pharmaceutical
intermediates, for the process optimization, scale-up and clinical and worldwide
commercial supply of Gd-Tex and Lu-Tex. Under the terms of the agreement,
Celanese is obligated to supply drug substance for clinical and commercial use.
There can be no assurance that Celanese will deliver bulk-drug substance for
Gd-Tex or Lu-Tex on a timely or commercially attractive basis to the Company.
Photodynamic Therapy Light Production and Delivery Devices. The Company has
collaborated with Coherent, Inc. ("Coherent") and Laserscope, Inc.
("Laserscope") for the development of lasers that produce 732 nanometer light
for use in photodynamic therapy studies. These lasers and light delivery devices
have been acquired and are used in ongoing studies. Coherent participated with
the Company in the filing of regulatory documents required for conducting the
Company's Phase I clinical trials. The Company has purchased from Quantum
Devices, Inc. ("Quantum") light-emitting diode ("LED") devices capable of
producing the required wavelength of light for use in photodynamic therapy with
Lu-Tex. The Company has used LED devices in preclinical animal studies and Phase
II trials. In addition, the Company has acquired from Rare Earth Medical, Inc.
("REM") cylindrically diffusing light fibers for animal studies and for use in
Phase I studies in cardiovascular disease. In fiscal 1997, the Company entered
into an Initial Development Agreement under which Pharmacyclics engaged Applied
Optronics Corporation ("AO") to develop a 732 nanometer diode laser. This type
of development is expected to provide a basis for the development of a laser
diode medical system, which will supplant the more complex and costly dye laser
systems currently used in photodynamic therapy programs. Devices from other
diode laser companies will be evaluated and further strategic collaborations for
the actual manufacture of laser diode medical systems may be entered into by
Pharmacyclics.
Glaxo Wellcome Supply Agreement. The Company entered into a supply
agreement with Glaxo under which Glaxo has agreed to manufacture clinical and
commercial quantities of GADOLITE. Pursuant to the agreement, Glaxo agreed to
manufacture and the Company agreed to purchase certain minimum annual quantities
of GADOLITE. In addition, the Company is obligated to make certain payments upon
Glaxo's achievement of certain process development, quality assurance and supply
validation milestones. The agreement has a five-year term and is subject to
earlier termination in the event of breach, if the NDA for GADOLITE is not
approved by the FDA on or prior to January 1, 1998 or if GADOLITE is otherwise
not commercialized. See Note 6 of "Notes to Financial Statements."
E-Z-EM Marketing, Sales and Distribution Arrangement. The Company has
entered into an agreement with E-Z-EM, a leading manufacturer and worldwide
distributor of oral contrast agents and other products for use in
gastrointestinal radiology, for the exclusive marketing and sale of GADOLITE in
the U.S., Canada and Mexico. During fiscal 1997, an additional agreement was
signed with E-Z-EM's affiliate, E-Z-EM, Ltd., for marketing, sales and
distribution in Europe. The Company and E-Z-EM will share equally in the
operating profits from the sale of GADOLITE, and the Company may also receive
premium payments based upon
11
<PAGE> 13
product sales if certain unit sales levels are achieved. During the term of the
agreement, E-Z-EM is prohibited from distributing products that are directly
competitive with GADOLITE, except for products that have been or currently are
being developed by E-Z-EM and contain certain specified chemical compounds. The
agreement may be terminated by E-Z-EM at any time upon six months' notice.
Cook Agreement. The Company has non-exclusively licensed to Cook, Inc.
("Cook"), a leading provider of catheter products, technology to produce
MRI-detectable materials for catheters. Under the terms of this agreement, the
Company will receive royalties based on a percentage of net sales of products
utilizing its proprietary technology. The Company intends to license this
technology to additional catheter and medical device companies.
PATENTS AND PROPRIETARY TECHNOLOGY
The Company seeks to protect its proprietary position by, among other
methods, continuing to file U.S. and foreign patent applications with respect to
technology that is important to the development of its business. The Company
plans to aggressively prosecute and defend its patent applications, issued
patents and proprietary information. The Company owns or has exclusive rights to
46 issued U.S. patents (many of which include composition of matter claims
relating to a number of Pharmacyclics' compounds), six allowed patent
applications and 24 pending patent applications. The Company is also the owner
or the exclusive licensee of two counterpart patents issued in Australia, two
counterpart patents issued in Europe, one counterpart patent issued in New
Zealand and 63 pending counterpart patent applications in Europe, Japan and
certain other countries. Many of these applications were filed through the
Patent Cooperation Treaty and the European Patent Office and preserve for the
Company the right to file applications in individual countries. The issued U.S.
patents expire between 2009 and 2014. All of the patents and patent applications
not owned by the Company have been licensed to it pursuant to its agreements
with UT or the agreement with Dr. Young.
Patent applications in the U.S. are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a period of time after filing. Publication of discoveries in the scientific
or patent literature tend to lag behind actual discoveries and related patent
applications, and the large number of patents and applications and the fluid
state of the Company's development activities make comprehensive patent searches
and analysis impractical or not cost-effective. As a result, the Company has not
made patent or publication searches in the U.S. or in foreign countries to
determine whether materials, processes or designs used by it or its potential
products infringe or will infringe existing patents or foreign patent
applications available to the public. 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 be used by the Company. In the event that any relevant
claims of third party patents are upheld as valid and enforceable, the Company
could be prevented from practicing the subject matter claimed in such patents,
or would be required to obtain licenses from the patent owners of each of such
patents or to redesign its products or processes to avoid infringement. There
can be no assurance that such licenses would be available or, if available,
would be on terms acceptable to the Company, or that the Company would be
successful in any attempt to redesign its products or processes to avoid
infringement. Litigation may be necessary to defend against claims of
infringement, to enforce patents issued to the Company or to protect trade
secrets and could result in substantial cost to, and diversion of effort by, the
Company.
The Company is aware of several U.S. patents owned by or licensed to
Schering AG ("Schering") that relate to the use of agents that enhance MRI
scans. The Company has obtained advice of special patent counsel that the
technologies employed by the Company for its imaging product under development
do not infringe the claims of such patents. A determination of the infringement
of any such patents by any Company product having image-enhancing properties
could have a material adverse effect on the Company's business. There can be no
assurance that Schering will not seek to assert such patent rights against the
Company, which would result in significant legal costs and require substantial
management resources. Schering has sent communications to the Company suggesting
that GADOLITE may infringe certain of such Schering patents. The Company is
aware that Schering has asserted such rights against at least one other company
in the
12
<PAGE> 14
contrast agent imaging market and that a number of companies have entered into
licensing arrangements with Schering 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, if required, on commercially reasonable terms, if at all.
The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. It is the Company's policy to require its employees, consultants and
advisors to execute appropriate confidentiality and assignment-of-inventions
agreements in connection with their employment, consulting or advisory
relationships with the Company. These agreements provide that all confidential
information developed or made known to the individual during the course of the
individual's relationship with the Company is to be kept confidential and not
disclosed to third parties except in specific circumstances, and in the case of
employees, provide that all inventions attributable to the individual during
such employment shall be the exclusive property of the Company. There can be no
assurance, however, that these agreements will not be breached or that the
Company will have adequate remedies for any breach. Furthermore, no assurance
can be given that competitors will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's proprietary technology, or that the Company can meaningfully
protect its rights in unpatented proprietary technology.
MANUFACTURING
Pharmacyclics currently uses third-party manufacturers for producing
various components of the products being developed by the Company. Except for
the components covered in the agreements with Celanese and Glaxo described
above, manufacturers supplying materials to the Company do not currently have
the ability to provide commercial quantities for the Company's intended
products. Prior to any regulatory approval of the Company's products, the
Company intends to negotiate supply agreements with additional manufacturers who
will have the ability to manufacture, fill, label and package such additional
necessary materials prior to commercial introduction of its products. There can
be no assurance that the Company will be able to enter into supply agreements
other than the Celanese and Glaxo agreements on commercially acceptable terms or
with manufacturers who will be able to deliver supplies in appropriate quantity
and quality to meet commercial demand. Any interruption of supply could have a
material adverse effect on the Company's ability to manufacture its products and
thus on the ability to commercialize products.
The Company is currently purchasing light delivery devices from Laserscope,
Quantum, AO and REM. In addition, the Company may seek other suppliers of light
delivery devices, although there can be no assurance that any agreements will be
reached with such suppliers on terms commercially reasonable to the Company, if
at all. There also can be no assurance that these devices will be available for
commercial use or that regulatory approval for such devices will be obtained.
COMPETITION
The development of therapeutic and diagnostic agents for human diseases is
intensely competitive. Many different approaches are being developed or have
already been adopted into routine use for the management of diseases targeted by
the Company.
Although there are currently no FDA-approved radiation sensitizers or
chemosensitizers, the Company expects significant competition in these fields,
as the Company believes that one or more companies may be developing and testing
products which compete directly with the products being developed by the
Company. There can be no assurance that these companies will not succeed in
developing technologies and products that are more effective than Gd-Tex or that
would render the Company's products or technologies obsolete. Moreover, certain
existing chemotherapy agents also are used as radiation sensitizers.
Photofrin(R), a photosensitizer developed by QLT Phototherapeutics, Inc.
("QLT"), has been approved by the FDA for treatment of obstructive cancer of the
esophagus. Photofrin has also received marketing approval in Japan, Canada and
certain European countries for various disease indications. The Company is aware
of several other photosensitizers in various stages of development for a number
of indications. In addition to
13
<PAGE> 15
QLT, other companies developing products in this area include Dusa
Pharmaceuticals, Inc., Nippon Petrochemical, Scotia and PDT, Inc. 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.
Competition in the treatment of atherosclerosis is also intense and
currently includes the use of pharmaceutical agents and interventional devices.
Various drugs also have been shown to reduce or prevent atherosclerosis by
reduction of lipids. Balloon angioplasty is a widely-used and generally accepted
technique to reduce the narrowing of vessels involved by atherosclerosis.
Restenosis following angioplasty has been reduced through the use of
intravascular stents. The Company believes that photoangioplasty with ANTRIN(TM)
may provide advantages over these techniques but there can be no assurance that
there will be greater acceptance of photoangioplasty over other approaches.
Other photosensitizers under development by other companies may prove to be
superior to ANTRIN(TM).
The Company expects competition in the development of improved oral MRI
contrast agents to increase substantially. Gastromark(TM), an iron
particle-based oral contrast agent developed by Advanced Magnetics and licensed
to Mallinckrodt, has received approval for commercial sale from the FDA. In
addition, there are several oral MRI contrast agents in various phases of human
testing in the U.S. Although the Company believes that GADOLITE may offer
advantages over competing oral MRI contrast agents, there can be no assurance
that there will be greater acceptance of GADOLITE over other agents. In
addition, to the extent that other diagnostic modalities such as CT and X-ray
may be perceived as providing greater value than MRI, any corresponding decrease
in the use of MRI would have an adverse effect on the demand for GADOLITE.
Competition in the industry from pharmaceutical 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 substantial 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 may be developing products that have an entirely different approach
or means of accomplishing similar diagnostic, imaging and/or therapeutic effects
than products being developed by the Company. These competing products may be
safer, more effective and less costly than the products developed by the Company
and, therefore, may represent a serious competitive threat to the Company's
product offerings.
GOVERNMENT REGULATION
FDA Regulation and Product Approval
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the manufacturing
and marketing of pharmaceutical products. These agencies and other federal,
state and local entities regulate, among other things, research and development
activities and the testing, manufacture, quality control, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of the
Company's products.
The process required by the FDA before the Company's products may be
marketed in the U.S. generally involves the following: (i) preclinical
laboratory and animal tests; (ii) submission of an IND application which must
become effective before clinical trials may begin; (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the proposed pharmaceutical in its intended indication; and (iv) FDA approval of
an NDA. If the pharmaceutical or compound utilized in the product has been
previously approved for use in another dosage form, then the approval process is
similar, except that certain preclinical toxicity tests normally required for
the IND may be avoidable. The testing and approval process
14
<PAGE> 16
requires substantial time, effort, and financial resources and there can be no
assurance that any approval will be granted on a timely basis, if at all.
Preclinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as animal studies to assess the
potential safety and efficacy of the product. The results of the preclinical
tests, together with manufacturing information and analytical data, are
submitted to the FDA as part of an IND, which must become effective before human
clinical trials may be commenced. The IND will automatically become effective 30
days after receipt by the FDA, unless the FDA before that time raises concerns
or questions about the conduct of the trials as outlined in the IND. In such a
case, the IND sponsor and the FDA must resolve any outstanding concerns before
clinical trials can proceed. There can be no assurance that submission of an IND
will result in FDA authorization to commence clinical trials. Further, each
clinical study must be reviewed and approved by an independent Institutional
Review Board at the medical center proposing to conduct the clinical trials.
Human clinical trials are typically conducted in three sequential phases
which may overlap. Phase I involves the initial introduction of the
pharmaceutical into healthy human subjects or patients where the product is
tested for safety, dosage tolerance, absorption, metabolism, distribution and
excretion. Phase II involves studies in a limited patient population to (i)
identify possible adverse effects and safety risks, (ii) determine the efficacy
of the product for specific, targeted indications, and (iii) determine dosage
tolerance and optimal dosage. When Phase II evaluations demonstrate that the
product is effective and has an acceptable safety profile, Phase III trials are
undertaken to further evaluate dosage, clinical efficacy and to further test for
safety in an expanded patient population at geographically dispersed clinical
study sites.
In the case of products for severe or life-threatening diseases such as
cancer, the initial human testing is often conducted in patients rather than in
healthy volunteers. Since these patients are already afflicted with the target
disease, it is possible that such studies may provide evidence of efficacy
traditionally obtained in Phase II trials. These trials are frequently referred
to as "Phase I/II" trials. There can be no assurance that Phase I, Phase II or
Phase III testing will be completed successfully within any specific time
period, if at all, with respect to any of the Company's product candidates.
Furthermore, the FDA, or the sponsor, may suspend clinical trials at any time on
various grounds, including a finding that the subjects or patients are being
exposed to an unacceptable health risk.
The results of product development, preclinical studies and clinical
studies are submitted to the FDA as part of an NDA for approval of the marketing
and commercial shipment of the product. The FDA may deny an NDA if applicable
regulatory criteria are not satisfied, or may require additional clinical data.
Even if such data is submitted, the FDA may ultimately decide that the NDA does
not satisfy the criteria for approval. Once issued, a product approval may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the product reaches the market. In addition, the FDA may
require testing and surveillance programs to monitor the effect of approved
products which have been commercialized, and the agency has the power to prevent
or limit further marketing of a product based on the results of these post-
marketing programs.
In March 1996 the FDA announced a new policy intended to accelerate the
approval process for cancer therapies. Previously, cancer therapies have been
approved primarily on the basis of data regarding patient survival rates and/or
improved quality of life. Evidence of partial tumor shrinkage, while often part
of the data relied on for approval, was considered insufficient by itself to
warrant approval of a cancer therapy, except in limited situations. Under the
FDA's new policy, which became effective immediately, the FDA has broadened the
circumstances in which evidence of partial tumor shrinkage is considered
sufficient for approval. This policy is intended to make it easier to study
cancer therapies and shorten the total time for marketing approvals; however, it
is too early to tell what effect this policy may actually have on product
approvals.
In addition to the drug approval requirements applicable to the Company's
Lu-Tex product for photosensitization of certain cancers and ANTRIN(TM) for
photoangioplasty of atherosclerosis, the Company will also need to obtain FDA
approval for the laser and associated light delivery devices used in such
treatments. Such device approval requires additional submissions both by the
Company and by the manufacturers of such devices, must include clinical data
obtained from the use of such devices with Lu-Tex
15
<PAGE> 17
or ANTRIN, and may result in additional delays or difficulties in obtaining
approval for the use of these photosensitizers. Manufacturers of such light
delivery devices currently are under no obligation to the Company to file or
pursue such applications.
Satisfaction of the above FDA requirements, or similar requirements of
state, local, and 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. The effect of government
regulation may be to delay or to prevent marketing of potential products for a
considerable period of time and to impose costly procedures upon the Company's
activities. There 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. 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. 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, even if regulatory approval
is obtained, later discovery of previously unknown problems with a product may
result in restrictions on the product, including withdrawal of the product from
the market. Delay in obtaining, or failure to obtain, regulatory approvals would
have a material adverse effect on the Company's business. Marketing the
Company's products abroad will require similar regulatory approvals and is
subject to similar risks. In addition, the Company is unable to predict the
extent of adverse government regulations that might arise from future U.S. or
foreign governmental action.
Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including record-keeping requirements and reporting of adverse
experiences with the drug. Drug manufacturers and their subcontractors are
required to register their establishments with the FDA and certain state
agencies, and are subject to periodic inspections by the FDA and certain state
agencies for compliance with Good Manufacturing Practices ("GMP"), which impose
certain procedural and documentation requirements upon the Company and its third
party manufacturers.
Drug labeling and promotion activities are subject to scrutiny by the FDA
and, in certain instances, the Federal Trade Commission. The FDA actively
enforces regulations the prohibiting the marketing of products for unapproved
uses. The Company and its products are also subject to a variety of state laws
and regulations in those states or localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. The Company is
also subject to numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control, and disposal of hazardous or potentially hazardous
substances. There can be no assurance that the Company will not be required to
incur significant costs to comply with such laws and regulations now or in the
future.
The FDA's policies may change and additional government regulations may be
promulgated which could prevent or delay regulatory approval of the Company's
potential products. Moreover, increased attention to the containment of health
care costs in the U.S. and in foreign markets could result in new government
regulations which could have a material adverse effect on the Company's
business. The Company is unable to predict the likelihood, nature or extent of
adverse governmental regulation which might arise from future legislative or
administrative action, either in the U.S. or abroad.
International Regulation
In order for Pharmacyclics to market its products abroad, the Company must
obtain required regulatory approvals and clearances and otherwise comply with
extensive regulations regarding safety and manufacturing processes and quality.
These regulations, including the requirements for approvals or clearance to
market and the time required for regulatory review, vary from country to
country. There can be no assurance that the Company will obtain regulatory
approvals in foreign countries or that it will not be required to incur
significant costs in obtaining or maintaining its foreign regulatory approvals.
Delays in receipt of approvals to market the Company's products, failure to
receive these approvals or the future loss of previously received approvals
could
16
<PAGE> 18
have a material adverse effect on the Company's business, financial condition,
and results of operations. The time required to obtain approval for sale in
foreign countries may be longer or shorter than that required for FDA approval,
and the requirements may differ.
The European Community has promulgated rules requiring that medical device
products receive by mid-1998 the right to affix the "CE" mark, an international
symbol of adherence to quality assurance standards and compliance with
applicable European medical device directives. In order to market a laser or
other light delivery device for the Company's Lu-Tex or ANTRIN(TM) products in
Europe, such CE mark must be obtained, and there can be no assurance that the
Company or its suppliers will be successful in meeting the certification
requirements.
Third Party Reimbursement and Health Care Reform
The commercial success of the Company's development-stage products will be
substantially dependent upon the availability of government or private
third-party reimbursement for the use of such products. There can be no
assurance that Medicare, Medicaid, health maintenance organizations ("HMOs") and
other third-party payors will authorize or otherwise budget for such
reimbursement. Such governmental and third-party payors are increasingly
challenging the prices charged for medical products and services. If the Company
succeeds in bringing one or more products to market, there can be no assurance
that such products will be viewed as cost-effective or that reimbursement will
be available to consumers or will be sufficient to allow the Company's products
to be marketed on a competitive basis. Furthermore, federal and state
regulations govern or influence the reimbursement to health care providers of
fees and capital equipment costs in connection with medical treatment of certain
patients. In response to concerns about the rising costs of advanced medical
technologies, the current administration of the federal government has publicly
expressed its desire to reform health care, including the possibility of price
controls and revised reimbursement policies. There can be no assurance that
actions, if any, taken by the administration with regard to health care reform
will not have a material adverse effect on the Company. If any actions are taken
by the administration, such actions could adversely affect the prospects for
future sales of the Company's products. Further, to the extent that these or
other proposals or reforms have a material adverse effect on the Company's
ability to secure funding for its development or on the business, financial
condition and profitability of other companies that are prospective
collaborators for certain of the Company's product candidates, the Company's
ability to develop or commercialize its product candidates may be adversely
affected.
Given recent government initiatives directed at lowering the total cost of
health care throughout the U.S., 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. Pharmacyclics cannot predict the likelihood of passage of federal and
state legislation related to health care reform or lowering pharmaceutical
costs. In certain foreign markets, pricing of prescription pharmaceuticals is
already subject to government control. Continued significant changes in health
care systems in the U.S. and abroad could have a material adverse effect on the
Company's business.
Environmental Regulation
In connection with its research and development activities and its
manufacture of 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 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.
17
<PAGE> 19
In the event of such an occurrence, the Company could be held liable for any
damages that result and any such liability could exceed the resources of the
Company.
EMPLOYEES
As of July 31, 1997, the Company had 46 employees, six of whom are
part-time. Thirty-nine of its employees are dedicated to research, development,
manufacturing, quality assurance and quality control, regulatory affairs, or
preclinical and clinical testing. Thirteen of the Company's employees have an MD
or Ph.D. degree.
FACTORS THAT MAY EFFECT OPERATING RESULTS
This Form 10-K 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-K.
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.
The manufacture 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 abroad.
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. 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 issues 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, any of which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS
Pharmacyclics has conducted and plans to continue 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
18
<PAGE> 20
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 FDA may suspend clinical trials at any
time if, among other reasons, 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 or
effective for use in humans.
NO ASSURANCE OF PRODUCT APPROVAL
To date, none of the Company's products has been approved for sale, or
marketed, 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 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 an NDA for GADOLITE in September 1995
and received an "approvable" letter in December 1996 which included a number of
issues that must be addressed by the Company. The Company is in the process of
addressing these issues, which are expected to require at least 18 months to
resolve before GADOLITE can be successfully manufactured and marketed. 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 UK for
authorization to market GADOLITE. The Company will not market GADOLITE in Europe
until all issues with the product are resolved with the FDA. Although the
process for regulatory approval in western Europe is similar to that in the
U.S., there are numerous and sometimes unique risks associated with the approval
of an MAA. There can be no assurance 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 and ANTRIN(TM) products 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, 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 for photodynamic therapy, and may result in additional
delays or difficulties in obtaining approval for the use of Lu-Tex or ANTRIN(TM)
as photosensitizers. Manufacturers of such light delivery devices 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 June 30, 1997, had an accumulated deficit of approximately $38.2 million.
The Company anticipates that 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 1998 at the earliest. All
revenues to date have resulted from license and milestone payments and funding
from a government research grant.
19
<PAGE> 21
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, Lu-Tex and ANTRIN(TM) bulk drug
substances, which are the subject of a manufacturing and supply agreement with
Celanese, and GADOLITE, which is the subject of a manufacturing and supply
agreement with 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 , Lu-Tex and ANTRIN. 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 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, only a limited number of contract manufacturers that operate under
current federal and state 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, Ltd. and E-Z-EM, Inc., respectively, for European and North American
sales, marketing and distribution of GADOLITE. 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 other 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 photoangioplasty
and photodynamic therapy products under development. Successful development,
manufacturing, approval and distribution of the Company's photosensitization
products will require third party participation for the required light sources,
associated light delivery devices and other equipment. The Company currently
obtains lasers from Coherent and Laserscope, LEDs from Quantum, and
cylindrically diffusing light fibers from REM 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 and ANTRIN(TM) 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 the enabling devices will receive
regulatory approval for use in photoangioplasty or 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 product commercialization
requires arrangements with corporate and other collaborators to conduct clinical
trials and to manufacture, distribute and market the Company's products. The
Company will be dependent upon 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 difficulties. The Company does not have the
ability to conduct these development activities in-house. If one or more
collaborative relationships were terminated or the collaborators did not perform
up to expectations, the
20
<PAGE> 22
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 of 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
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
Photofrin for certain indications in the U.S. and other countries. There can be
no assurance that the Company's competitors will not develop products that are
safer, more effective or 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 can also 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 Gd-Tex, Lu-Tex or ANTRIN(TM)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
ANTRIN(TM) in the case of photoangioplasty of 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, short-term and long-term investments will be
adequate to satisfy its capital needs through the middle of calendar year 1999.
However, the Company's actual capital requirements will depend on many factors,
including the status of the product development; the time and cost involved in
conducting clinical trials; obtaining regulatory approvals; 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 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.
21
<PAGE> 23
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 46 issued patents, six allowed patents
and 24 pending patent applications. Outside the U.S., the Company is the owner
or exclusive licensee of five counterpart patents and 63 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. Issued patents may later be modified,
revoked or otherwise found to be invalid or unenforceable by the U.S. Patent and
Trademark Office or in proceedings instituted by third parties. Moreover, the
Company believes that obtaining foreign patents may be more difficult than
obtaining domestic patents because of differences in patent laws, and believes
that 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 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 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 that relate to the use of agents that enhance MRI scans. The Company
has obtained advice of special patent counsel that the technologies employed by
the Company for its imaging product under development do not infringe the claims
of such patents. A determination of the infringement of any such patents by any
Company product having image-enhancing properties could have a material adverse
effect on the Company's business. There can be no assurance that Schering will
not seek to assert such patent rights against the Company, which would result in
significant legal costs and require substantial management resources. Schering
has sent communications to the Company suggesting that GADOLITE may infringe
certain of such Schering patents. The Company is aware that Schering 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 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, 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, through 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
22
<PAGE> 24
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 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 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.
Consequently, 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, manufacture, 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 $5 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 desirable or 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.
GOVERNMENT REGULATION
The manufacture 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. 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 therapeutic
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,
23
<PAGE> 25
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
manufacture of 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 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 occurrence, the Company could be
held liable for any damages that result and any such liability could exceed the
resources of the Company.
CONTROL BY EXISTING STOCKHOLDERS
The Company's officers, directors, principal stockholders and certain of
their affiliates beneficially own approximately 39% 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 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 to date and does not anticipate paying any
dividends in the foreseeable future.
ANTI-TAKEOVER PROVISIONS
The ability of the Board of Directors of the Company to issue shares of
Preferred Stock without stockholder approval and a stockholder rights plan
adopted by the Company may alone or in combination, have certain anti-takeover
effects. The Company is also subject to provisions of the Delaware General
Corporation Law which may make certain business combinations more difficult.
24
<PAGE> 26
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ------------------------------------
<S> <C> <C>
Richard A. Miller, M.D........ 46 President, Chief Executive Officer
and Director
William C. Dow, Ph.D. ........ 42 Vice President, Chemical Research
and Development
Cheryl B. Jaszewski........... 51 Vice President, Finance and
Administration
Marc L. Steuer................ 50 Vice President, Business Development
and Chief Financial Officer
Thomas D. Kiley............... 54 Director
Joseph S. Lacob(1)............ 41 Director
Patrick F. Latterell(1)(2).... 39 Director
Joseph C. Scodari............. 44 Director
Craig C. Taylor(1)(2)......... 47 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Dr. Miller has served as President, Chief Executive Officer and a Director
since the Company was founded in April 1991. In 1984, Dr. Miller co-founded IDEC
Pharmaceuticals Corporation where he served as Vice President and a Director
until February 1992. In 1989, Dr. Miller co-founded CellPro, Inc. ("CellPro"), a
public biotechnology company, and served as a Director of CellPro from 1989 to
1991, and Chairman of CellPro's Scientific Advisory Board until 1993. Dr. Miller
also is a Clinical Professor of Medicine (Oncology) at Stanford University
Medical Center. Dr. Miller received his M.D., summa cum laude, from the State
University of New York Medical School and is board certified in both Internal
Medicine and Medical Oncology.
Dr. Dow has served as Vice President, Chemical Research and Development
since February 1993 and previously as Senior Director, Chemical Research and
Development from July 1992 to February 1993. From 1987 to 1992, he was employed
by Salutar, Inc., a pharmaceutical company involved in research and development
of MRI contrast agents, where he held positions of increasing responsibility in
discovery and chemical development of contrast agents, last serving as Director,
Chemical Development and Manufacturing. Dr. Dow holds a B.S. and M.S. in
Chemistry from Stanford University and a Ph.D. in Chemistry from the California
Institute of Technology.
Ms. Jaszewski has served as Vice President, Finance and Administration
since October 1992. From 1986 to 1991, she served as the Director, Planning and
Financial Analysis, which included strategic planning and mergers and
acquisitions, at Nellcor, Inc., a medical device company. From 1991 to 1992, Ms.
Jaszewski was a financial and administrative consultant to various private
companies. Ms. Jaszewski holds a B.A. in Economics and a M.B.A. from Stanford
University.
Mr. Steuer has served as Chief Financial Officer and Vice President,
Business Development since November 1994. From April 1992 to November 1994, he
was Executive Vice President, Business Development and Commercial Affairs for
SciClone Pharmaceuticals, Inc. and also served as its Chief Financial Officer.
From 1985 to 1992, Mr. Steuer served in a variety of roles in the Pilkington
Visioncare Group ("PVG"), which developed, manufactured and distributed medical
devices, pharmaceuticals and equipment for the ophthalmic field. His positions
at PVG included General Manager, Ventures and Licensing and Chief Financial
Officer. Mr. Steuer was a member of the Board of Directors of SciClone
Pharmaceuticals, Inc. from January 1993 through November 1994 and currently
serves as a member of the Board of Directors of a private
25
<PAGE> 27
company. Mr. Steuer received his M.S. and B.S. degrees in Electrical Engineering
from Columbia University and a M.B.A. from New York University.
Mr. Kiley was elected as a Director of the Company in June 1991. He has
been self-employed since 1988 as an attorney, consultant and investor. From 1980
to 1988, he was an officer of Genentech,Inc., serving variously as Vice
President and General Counsel, Vice President for Legal Affairs and Vice
President for Corporate Development. Mr. Kiley is also a Director of
Cardiogenesis Corporation, a medical device company, Geron, Inc. and Connective
Therapeutics, Inc., pharmaceutical companies, and certain private biotechnology
and other companies. Mr. Kiley received a B.S. in Chemical Engineering from
Pennsylvania State University and a JD from George Washington University.
Mr. Lacob was elected as a Director of the Company in June 1991. He is a
General Partner of Kleiner Perkins Caufield & Byers, a venture capital
investment firm, which he joined in 1987. Mr. Lacob is currently Chairman of the
Board of CellPro, Inc. and Microcide Pharmaceuticals, Inc. and a director of
Heartport, Inc., as well as several private life science companies. Mr. Lacob
holds a B.S. in Biochemistry from the University of California, Irvine, a M.S.
in Public Health from the University of California, Los Angeles and a M.B.A.
from Stanford University.
Mr. Latterell was elected as a Director of the Company in June 1991. He is
a General Partner of Venrock Associates and Venrock Associates II, L.P., venture
capital investment groups, which he joined in April 1989. Mr. Latterell is
currently a Director of Biocircuits Corporation, Vical, Inc. and several private
biomedical companies. Mr. Latterell holds S.B. degrees in Biological Sciences
and Economics from the Massachusetts Institute of Technology and a M.B.A. from
Stanford University.
Mr. Scodari was elected as a Director of the Company in December 1994. He
is Corporate Executive Vice President and President, Pharmaceutical Division of
Centocor, Inc. Prior to joining Centocor, he was Senior Vice President and
General Manager, North American Ethicals for Rhone-Poulenc Rorer
Pharmaceuticals, Inc., where he held various positions from 1989. From 1987 to
1989, Mr. Scodari was Executive Vice President of Sterling Drug's US Diagnostic
Imaging Division, where he held responsibilities for all marketing and sales and
business development activities for Sterling's imaging agent business. Mr.
Scodari received a B.S. in Political Science from Youngstown State University.
Mr. Taylor was elected as a Director of the Company in June 1991. He is a
General Partner of AMC Partners 89, L.P., the general partner of Asset
Management Associates 1989, L.P., a private venture capital partnership. Mr.
Taylor has been with Asset Management Company, a venture management group, since
1977. Mr. Taylor is a Director of Metra BioSystems, Inc., Lynx Therapeutics,
Inc. and several private companies. Mr. Taylor holds B.S. and M.S. degrees in
Physics from Brown University and a M.B.A. from Stanford University.
ITEM 2. PROPERTIES
In 1993, the Company entered into an eight-year lease agreement which began
in February 1994 for a 32,500 square foot facility in Sunnyvale, California.
That facility includes administrative space and research and development space.
The lease is a non-cancelable operating lease which expires in 2002. Rental
payments are based upon a gradual scale.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
26
<PAGE> 28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of Pharmacyclics, Inc. is listed on the NASDAQ National
Market tier of the NASDAQ Stock Market under the symbol "PCYC." The following
table presents quarterly information on the high and low sales prices of the
Company's Common Stock since the Company's Initial Public Offering ("IPO") in
October 1995:
<TABLE>
<CAPTION>
FISCAL YEAR HIGH LOW
----------------------------------------------- ----- ---
<S> <C> <C>
1996
2nd Quarter.................................. $16 3/4 $12
3rd Quarter.................................. 15 12 3/4
4th Quarter.................................. 20 1/4 13 3/4
1997
1st Quarter.................................. $18 1/2 $10 1/2
2nd Quarter.................................. 17 1/4 12 3/4
3rd Quarter.................................. 24 15
4th Quarter.................................. 20 1/2 14 1/4
</TABLE>
As of July 31, 1997, the Company's Common Stock was held by approximately
533 stockholders of record. The Company has never declared or paid dividends on
its capital stock and does not anticipate paying any dividends in the
foreseeable future.
27
<PAGE> 29
ITEM 6. SELECTED FINANCIAL DATA
The data set forth below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
PERIOD
FROM
INCEPTION
STATEMENT OF OPERATIONS YEAR ENDED JUNE 30, (APRIL 1991)
------------------------------------------------- THROUGH
(in thousands, except per share amounts) 1993 1994 1995 1996 1997 JUNE 30, 1997
------- ------- -------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License and grant revenues................. $ -- $ 3,000 $ 79 $ 301 $ 25 $ 3,405
Operating expenses:
Research and development................... 3,161 6,909 9,330 7,641 9,632 37,160
General and administrative................. 559 1,042 996 1,515 1,905 6,075
------- ------- -------- ------- -------- --------
Total operating expenses............ 3,720 7,951 10,326 9,156 11,537 43,235
------- ------- -------- ------- -------- --------
Loss from operations......................... (3,720) (4,951) (10,247) (8,855) (11,512) (39,830)
Interest income.............................. 148 164 187 940 1480 2,941
Interest expense............................. (8) (253) (419) (320) (226) (1,226)
------- ------- -------- ------- -------- --------
Loss before income taxes..................... (3,580) (5,040) (10,479) (8,235) (10,258) (38,115)
Provision for income taxes................... -- (101) -- -- -- (101)
------- ------- -------- ------- -------- --------
Net loss..................................... $(3,580) $ (5,141) $(10,479) $ (8,235) $ (10,258)
======= ======= ======== ======= ======== ========
Net loss per share........................... $ (1.65) $ (1.05) $ (1.11)
======== ======= ========
Weighted average common and common equivalent
shares..................................... 6,353 7,815 9,264
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET JUNE 30,
--------------------------------------------------
(in thousands) 1993 1994 1995 1996 1997
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............................... $ 6,196 $ 8,690 $ 376 $ 13,950 $ 15,869
Short-term investments.................................. -- -- -- 8,053 14,958
Long-term investments................................... -- -- -- -- 6,103
Total assets............................................ 6,880 12,050 3,539 25,015 39,707
Long-term obligations, excluding current installments... 228 1,880 1,429 941 530
Deficit accumulated during development stage............ (4,103) (9,244) (19,723) (27,958) (38,216)
Total stockholders' equity (deficit).................... 6,249 8,769 (1,652) 21,991 36,696
</TABLE>
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains certain statements of a forward-looking
nature relating to future events or the future performance of the Company. Such
statements are only predictions and the actual events or results may differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include those discussed in
"Factors That May Affect Future Operating Results" elsewhere in this report.
OVERVIEW
During the period from its inception in April 1991 through the fiscal year
ended June 30, 1992, the Company was engaged in organizational activities,
including the negotiation of agreements with UT with respect to licensing of
certain aspects of the Company's core technology in biometallic chemistry and
recruiting scientific and management personnel. Since June 1992, the Company has
devoted substantially all of its resources to the research and development of
proprietary pharmaceutical products to facilitate and improve treatments for
cancer and atherosclerosis and to improve certain diagnostic imaging procedures.
As
28
<PAGE> 30
these products are still under development, no revenues have been derived from
their sale and the Company does not expect to receive revenues from the sale of
any of its products until calendar year 1998 at the earliest.
The Company has financed its operations primarily through the sale of
equity securities and, in October 1995, completed its IPO, issuing 2,383,450
shares of its Common Stock and resulting in net proceeds of approximately $26.3
million. During the most recent fiscal year, the Company completed two private
placements of its Common Stock, issuing 1,442,190 shares. The net proceeds to
the Company totaled approximately $24.4 million. In addition, cash has been
received in connection with certain product licenses and license option
agreements. The Company is pursuing additional collaborative agreements for the
financing of its research and development efforts and for the commercialization
of its products. However, no assurance can be given that these efforts will
result in any such agreements or that the Company will obtain significant
revenues therefrom.
The Company has been unprofitable since inception and had an accumulated
deficit of $38.2 million at June 30, 1997. Successful future operations depend
upon the Company's ability to develop, obtain regulatory approval for and to
commercialize its products, of which there can be no assurance. The Company will
require additional funds to complete the development of its products and to fund
operating losses that are expected to be incurred in the next several years.
RESULTS OF OPERATIONS
Revenues
To date, Pharmacyclics has received only limited revenues and no revenues
from product sales. For the year ended June 30, 1997, $25,000 in revenues were
recognized. This was the result of milestone payments from E-Z-EM, Ltd. related
to the signing of a European sales and distribution agreement and receipt of
marketing approval in the UK. The total recognized is net of royalty payments to
UT required because the products covered by the E-Z-EM Ltd. agreement
incorporate the technology licensed by the Company from UT.
During the fiscal year ended June 30, 1996, $301,000 of revenue was
recognized. This included $250,000 from E-Z-EM pursuant to the August 1995
agreement, net of licensing fees paid to UT. In addition, $51,000 was received
under a Small Business Innovation Research grant from the NCI. All of the
revenue recognized in fiscal 1995 was from the NCI grant.
Research and Development
Research and development expenses increased to $9.6 million for the year
ended June 30, 1997, compared to $7.6 million in fiscal 1996. Most of the 26%
increase is related to supporting clinical trials for both Gd-Tex and Lu-Tex.
Such costs include clinical product supplies, payments to clinical sites,
purchase and lease of light sources and internal support of the trials. During
fiscal 1997 Gd-Tex Phase Ib/II trials continued enrolling patients in both the
US and France. The Lu-Tex Phase I trial was completed and preparation began for
the start of the Phase II trial in August 1997.
The increase in the cost of product supplies was also impacted by the
signing of a definitive agreement with Celanese, a manufacturer of chemicals and
pharmaceutical intermediates. Celanese is providing the process optimization and
scale-up to provide clinical and commercial supplies of Gd-Tex and Lu-Tex. Drug
substance from this agreement is expected to be available for clinical trials in
calendar 1998.
Research and development expenses totaled $7.6 million during fiscal 1996
compared to $9.3 million during fiscal 1995, a decrease of 18%. The decrease was
due to fluctuations in the level of clinical activity relating to the Company's
products. During fiscal 1995, the Company was conducting multi-center Phase III
studies of GADOLITE and completing the preclinical studies required for an IND
filing for Gd-Tex. By comparison, fiscal 1996 included a Phase I trial for
Lu-Tex and Phase I and Ib/II trials for Gd-Tex, each of which required a smaller
number of patients.
During the first half of fiscal 1996, the Company was primarily focused on
filing an NDA for GADOLITE. For the remainder of fiscal 1996, the Company
conducted a Phase I trial for Gd-Tex at one site
29
<PAGE> 31
and the Phase I trial for Lu-Tex at three sites. 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.
General and Administrative
General and administrative expenses for the year ended June 30, 1997 were
$1.9 million compared to $1.5 million in fiscal 1996, an increase of 27%. The
increase was primarily a result of approximately $300,000 of financing costs
incurred during 1997.
For the year ended June 30, 1996, general and administrative expenses
totaled $1.5 million compared to $1.0 million during fiscal 1995, and increase
of 52%. The increase was primarily the result of insurance, professional
services and other expenses related to conducting business as a public company.
Interest and Other Income
Interest income, net of interest expense, totaled $1.3 million for the year
ended June 30, 1997, compared to $620,000 in fiscal 1996. Interest income from
investments exceeded interest expense on borrowings under the Company's lease
lines. Interest income increased over the course of fiscal 1997 as the private
financings were completed.
Interest income, net of interest expense, totaled $620,000 for fiscal 1996
compared to net interest expense of $232,000 in fiscal 1995. This increase in
interest income is the result of interest earned on the proceeds from the
Company's IPO completed in October 1995. The expenses in the prior year were
related to borrowings associated with capital lease financing and notes payable
which offset interest on cash.
INCOME TAXES
At June 30, 1997, the Company had net operating loss carryforwards of
approximately $33.0 million for federal and state income tax reporting purposes
and tax credit carryforwards of approximately $1.5 million for federal reporting
purposes, . These amounts expire at various times through 2012. A change of
ownership, as defined under Section 382 of the Internal Revenue Code, occurred
as a result of the Company's IPO. Accordingly, utilization of approximately
$17.0 million of the Company's net operating loss carryforwards will be subject
to an annual limitation of approximately $4.0 million. See Note 5 of "Notes to
Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through June 30,
1997 primarily through the private and public sale of equity securities,
payments under third party agreements, and proceeds from lease lines of credit.
From inception through June 30, 1997, the Company has used approximately $34.1
million of cash for operating activities and approximately $3.9 million of cash
for the purchase of laboratory and office equipment and payments under capital
lease agreements.
Net cash of $8.7 million used in operating activities for the fiscal year
ended June 30, 1997 resulted primarily from the net loss incurred during that
period offset by increases in accounts payable and accrued liabilities. On June
30, 1997, the Company has approximately $36.9 million in cash, cash equivalents
and investments.
In February 1997, the Company completed a private placement of 862,190
shares of unregistered Common Stock to four purchasers. The shares were sold at
$19.05 per share and no commission was paid on the transaction. Proceeds
received by the Company totaled $16.5 million. In November 1996, the Company
completed a private placement of 580,000 shares of Common Stock at $14.00 per
share. Proceeds received by the Company totaled $8.1 million. The Company filed
and had declared effective a registration statement on Form S-3 for both private
placements on April 22, 1997.
30
<PAGE> 32
The Company completed an IPO in October 1995, issuing 2,150,000 shares of
Common Stock at $12.00 per share. As a result of such offering, all outstanding
shares of Convertible Preferred Stock were automatically converted into
5,156,971 shares of Common Stock. In November 1995, the underwriters of such
offering exercised an option to acquire an additional 233,450 shares of Common
Stock at the IPO price to cover over-allotments. Proceeds received by the
Company, net of underwriters' commissions and expenses payable by the Company,
totaled approximately $26.3 million.
The Company expects to incur ongoing expenditures which may not only
fluctuate from quarter to quarter but which are expected to increase as the
levels of clinical development activity for the Company's products increase. As
a result, the Company expects to report increased expenses for research and
development and general and administrative activities for at least the next
several fiscal years. The Company currently anticipates, based upon the current
status of its product development and commercialization plans, that its cash,
cash equivalents and investments will provide funding for the Company's
operations through at least mid-calendar 1999; however, 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 financings,
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 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. See "Factors That May
Affect Future Operating Results."
31
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................................................ 33
Balance Sheet -- June 30, 1997 and 1996.................................................. 34
Statement of Operations -- Years ended June 30, 1997, 1996 and 1995 and Period from
Inception (April 1991) to June 30, 1997................................................ 35
Statement of Cash Flows -- Years ended June 30, 1997, 1996 and 1995 and Period from
Inception (April 1991) to June 30, 1997................................................ 36
Statement of Stockholders' Equity -- Period from Inception (April 1991) to June 30,
1997................................................................................... 37
Notes to Financial Statements............................................................ 38
</TABLE>
32
<PAGE> 34
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Pharmacyclics, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in all
material respects, the financial position of Pharmacyclics, Inc. (a development
stage company) at June 30, 1997 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 1997,
and for the period from inception (April 1991) through June 30, 1997 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Jose, California
August 22, 1997
33
<PAGE> 35
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------
1997 1996
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................ $15,869 $13,950
Short-term investments............................................... 14,958 8,053
Prepaid expenses and other current assets............................ 216 241
------- -------
Total current assets......................................... 31,043 22,244
Long-term investments.................................................. 6,103 --
Property and equipment, net............................................ 2,504 2,622
Other assets........................................................... 57 149
------- -------
$39,707 $25,015
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 1,323 $ 753
Accrued liabilities.................................................. 311 300
Current portion of capital lease obligations......................... 768 917
------- -------
Total current liabilities.................................... 2,402 1,970
Capital lease obligations............................................ 530 941
Deferred rent........................................................ 79 113
------- -------
Total liabilities............................................ 3,011 3,024
------- -------
Commitments (Note 6)
Stockholders' equity:
Preferred stock, $0.0001 par value; authorized -- 1,000,000 shares at
June 30, 1997 and 1996; no shares issued and outstanding.......... -- --
Common stock, $0.0001 par value; authorized -- 24,000,000, at June
30, 1997 and 12,000,000 at June 30, 1996; shares issued and
outstanding -- 10,102,454 at June 30, 1997 and 8,549,424 at June
30, 1996 respectively............................................. 1 1
Additional paid-in capital........................................... 74,911 49,948
Deficit accumulated during development stage......................... (38,216) (27,958)
------- -------
Total stockholders' equity................................... 36,696 21,991
------- -------
$39,707 $25,015
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE> 36
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
YEAR ENDED JUNE 30, (APRIL 1991)
--------------------------------- THROUGH
1997 1996 1995 JUNE 30, 1997
-------- ------- -------- --------------
<S> <C> <C> <C> <C>
Revenues:
License and grant revenues.................. $ 25 $ 301 $ 79 $ 3,405
-------- ------- -------- --------
Operating expenses:
Research and development.................... 9,632 7,641 9,330 37,160
General and administrative.................. 1,905 1,515 996 6,075
-------- ------- -------- --------
Total operating expenses................. 11,537 9,156 10,326 43,235
-------- ------- -------- --------
Loss from operations.......................... (11,512) (8,855) (10,247) (39,830)
Interest income............................... 1,480 940 187 2,941
Interest expense.............................. (226) (320) (419) (1,226)
-------- ------- -------- --------
Loss before income taxes...................... (10,258) (8,235) (10,479) (38,115)
Provision for income taxes.................... -- -- -- (101)
-------- ------- -------- --------
Net loss...................................... $(10,258) $(8,235) $(10,479) $(38,216)
======== ======= ======== ========
Net loss per share (Note 1)................... $ (1.11) $ (1.05) $ (1.65)
======== ======= ========
Weighted average common and common
equivalent shares (Note 1).................. 9,264 7,815 6,353
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE> 37
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
YEAR ENDED JUNE 30, (APRIL 1991)
--------------------------------- THROUGH
1997 1996 1995 JUNE 30, 1997
-------- ------- -------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $(10,258) $(8,235) $(10,479) $(38,216)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 915 732 643 2,556
Write-down of fixed assets......................... -- -- 118 118
Other.............................................. -- -- 39 10
Gain on sale of short-term investments............. -- -- (22) (22)
Changes in assets and liabilities:
Prepaid expenses and other assets.................... 117 (77) (185) (273)
Accounts payable..................................... 570 64 47 1,323
Accrued liabilities.................................. 11 43 109 311
Deferred rent........................................ (34) 46 46 79
-------- -------- -------- --------
Net cash used in operating activities................ (8,679) (7,427) (9,684) (34,114)
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment................... (283) (16) (52) (1,172)
Proceeds from sale of property and equipment......... -- -- -- 112
Purchase of short-term investments................... (17,305) (8,053) (5,478) (21,307)
Purchase of long-term investments.................... (6,103) -- -- (6,103)
Proceeds from the sale of short-term investments..... 10,400 -- 5,500 6,349
-------- -------- -------- --------
Net cash used in investing activities.................. (13,291) (8,069) (30) (22,121)
-------- -------- -------- --------
Cash flows from financing activities:
Issuance of common stock, net of issuance costs...... 24,837 26,278 9 51,173
Proceeds from notes payable.......................... -- 1,000 2,000 3,000
Issuance of convertible preferred stock, net of
issuance costs..................................... -- 2,550 -- 20,514
Payments under capital lease obligations............. (948) (758) (609) (2,583)
-------- -------- -------- --------
Net cash provided by financing activities............ 23,889 29,070 1,400 72,104
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents....... 1,919 13,574 (8,314) 15,869
Cash and cash equivalents at beginning of period....... 13,950 376 8,690 --
-------- -------- -------- --------
Cash and cash equivalents at end of period............. $ 15,869 $13,950 $ 376 $ 15,869
======== ======== ======== ========
Supplemental disclosures of cash flows information:
Income taxes paid.................................... $ -- $ -- $ -- $ 101
======== ======== ======== ========
Interest paid........................................ $ 226 $ 320 $ 352 $ 1,144
======== ======== ======== ========
Supplemental disclosure of noncash investing and
financing activities:
Property and equipment acquired under capital lease
obligations........................................ $ 388 $ 437 $ 317 $ 3,880
======== ======== ======== ========
Warrants issued...................................... $ -- $ -- $ 49 $ 49
======== ======== ======== ========
Conversion of notes payable and accrued interest into
convertible preferred stock........................ $ -- $ 3,051 $ -- $ 3,051
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 38
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (APRIL 1991) THROUGH JUNE 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE DEFICIT
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED
--------------------- --------------------- PAID-IN DURING
SHARES AMOUNT SHARES AMOUNT CAPITAL DEVELOPMENT TOTAL
---------- -------- ---------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for cash at $0.02
per share................................. -- $ -- 400,000 $ -- $ 6 $ -- $ 6
---------- -------- ---------- -------- ------- -------- --------
Balance at June 30, 1991.................... -- -- 400,000 -- 6 -- 6
Issuance of common stock for cash at an
average price of $0.02 per share.......... -- -- 97,111 -- 2 -- 2
Issuance of convertible preferred stock for
cash, net of issuance costs, at an average
price of $1.32 per share.................. 2,040,784 -- -- -- 2,667 -- 2,667
Net loss.................................... -- -- -- -- -- (523) (523)
---------- -------- ---------- -------- ------- -------- --------
Balance at June 30, 1992.................... 2,040,784 -- 497,111 -- 2,675 (523) 2,152
Issuance of common stock for cash at an
average price of $0.06 per share.......... -- -- 49,000 -- 3 -- 3
Issuance of convertible preferred stock for
cash, net of issuance costs, at $4.88 per
share..................................... 1,580,095 -- -- -- 7,674 -- 7,674
Net loss.................................... -- -- -- -- -- (3,580) (3,580)
---------- -------- ---------- -------- ------- -------- --------
Balance at June 30, 1993.................... 3,620,879 -- 546,111 -- 10,352 (4,103) 6,249
Issuance of common stock upon exercise of
stock options at an average price of $0.12
per share................................. -- -- 324,188 -- 38 -- 38
Issuance of convertible preferred stock for
cash, net of issuance costs, at an average
price of $8.63 per share.................. 886,960 -- -- -- 7,623 -- 7,623
Net loss.................................... -- -- -- -- -- (5,141) (5,141)
---------- -------- ---------- -------- ------- -------- --------
Balance at June 30, 1994.................... 4,507,839 -- 870,299 -- 18,013 (9,244) 8,769
Issuance of common stock upon exercise of
stock options at an average price of $0.24
per share................................. -- -- 38,403 -- 9 -- 9
Issuance of warrants........................ -- -- -- -- 49 -- 49
Net loss.................................... -- -- -- -- -- (10,479) (10,479)
---------- -------- ---------- -------- ------- -------- --------
Balance at June 30, 1995.................... 4,507,839 -- 908,702 -- 18,071 (19,723) (1,652)
Issuance of convertible preferred stock for
notes payable and accrued interest at an
average of $8.63 per share................ 353,483 -- -- -- 3,051 -- 3,051
Issuance of convertible preferred stock for
cash, net of issuance costs, at an average
price of $8.63 per share.................. 295,649 -- -- -- 2,550 -- 2,550
Issuance of common stock upon initial public
offering, net of issuance costs, for cash
at $12 per share.......................... -- -- 2,383,450 1 26,042 -- 26,043
Conversion of convertible preferred stock
into common stock......................... (5,156,971) -- 5,156,971 -- -- -- --
Issuance of common stock upon exercise of
stock options at an average exercise price
of $1.33 per share........................ -- -- 91,922 -- 122 -- 122
Issuance of common stock upon exercise of
purchase rights at an exercise price of
$10.20 per share.......................... -- -- 8,379 -- 86 -- 86
Stock compensation expense.................. -- -- -- -- 26 -- 26
Net loss.................................... -- -- -- -- -- (8,235) (8,235)
---------- -------- ---------- -------- ------- -------- --------
Balance at June 30, 1996.................... -- -- 8,549,424 1 $ 49,948 (27,958) 21,991
Issuance of common stock, net of issuance
costs, for cash at an average price of
$16.93 per share.......................... -- -- 1,442,190 -- 24,420 -- 24,420
Issuance of common stock upon exercise of
stock options at an average price of $2.74
per share................................. -- -- 96,283 -- 264 -- 264
Issuance of common stock upon exercise of
purchase rights at an exercise price of
$10.51 per share.......................... -- -- 14,557 -- 153 -- 153
Stock compensation expense.................. -- -- -- -- 126 -- 126
Net loss.................................... -- -- -- -- -- (10,258) (10,258)
---------- -------- ---------- -------- ------- -------- --------
Balance at June 30, 1997.................... -- $ -- 10,102,454 $ 1 $ 74,911 $ (38,216) $ 36,696
========== ======== ========== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE> 39
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
Description of the Company
Pharmacyclics, Inc. was incorporated in Delaware in April 1991 and
commenced operations during 1992 to develop and market pharmaceutical products
derived from biometallic chemistry for the treatment of certain cancers and
atherosclerosis diseases. Since inception the Company has been in the
development stage, principally involved in research and development and other
business planning activities, with no revenues from product sales. Successful
future operations depend upon the Company's ability to develop, to obtain
regulatory approval for and to commercialize its products. The Company expects
that additional funds will be required to complete the development of its
products and to fund operating losses that are expected to be incurred in the
next several years.
Initial public offering and private placements
In October 1995 the Company effected a 2 for 3 reverse stock split. All
share and per share amounts have been adjusted to retroactively reflect this
stock split.
The Company completed its initial public offering on October 23, 1995,
issuing 2,150,000 shares of its common stock. 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's initial public offering resulted in net proceeds of approximately
$26.3 million.
On November 11, 1996, Pharmacyclics sold 580,000 shares of unregistered
common stock to a single purchaser in a private placement. The shares were sold
at a price of $14.00 per share and no commissions were paid on the transaction.
On February 21, 1997, Pharmacyclics sold 862,190 shares of unregistered common
stock to four purchasers in a private placement. The shares were sold at $19.05
per share and no commission was paid on the transaction. The Company filed a
registration statement on Form S-3 related to these shares, which was declared
effective on April 22, 1997.
Management's use of estimates and assumptions
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
Net loss per share
Net loss per share is computed using the weighted average number of
outstanding shares of common stock. In addition, the computation for fiscal 1995
and 1996 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
concurrent with the closing of the Company's initial public offering as if they
were converted into shares of common stock on July 1, 1994. 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 during the twelve
month period prior to the initial public offering are included in the
computation of net loss per share as if they were outstanding for all periods
presented prior to the initial public offering.
38
<PAGE> 40
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Cash equivalents and investments
All highly liquid investments purchased with maturity at the date of
purchase of three months or less are considered to be cash equivalents. The
Company has classified its cash equivalents and investments as
"available-for-sale." For all periods presented, the cost of investments
approximates their fair market value.
The Company's cash, cash equivalents and investments consisted of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
INVESTMENT TYPE 1997 1996
------------------------------------------------- ------- -------
<S> <C> <C>
Cash in bank..................................... $ 287 $ 360
Money market..................................... 8,047 6,562
Debt (state or political subdivision)............ 2,021 4,014
Debt (corporate)................................. 5,514 3,014
------- -------
Cash and cash equivalents...................... $15,869 $13,950
======= =======
Debt (state or political subdivision)............ $ 2,003 $ 1,013
Debt (corporate)................................. 12,955 7,040
------- -------
Short-term investments......................... $14,958 $ 8,053
======= =======
Debt (corporate)................................. $ 6,103 $ --
------- -------
Long-term investments.......................... $ 6,103 $ --
======= =======
</TABLE>
Concentration of credit risk
The Company deposits its excess cash with financial institutions and
invests such excess cash in debt instruments of financial institutions,
corporations and government entities with strong credit ratings. Management of
the Company believes they have established guidelines relative to
diversification and maturities that maintain safety and liquidity.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the shorter of the estimated useful lives of the
assets, generally four to eight years, or the lease term of the respective
assets, if applicable. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of their estimated useful lives or
lease terms.
Research and development
Research and development costs are charged to expense as incurred.
Income taxes
The Company provides for income taxes using the liability method. This
method requires that deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the tax bases
of assets and liabilities and their financial statement reported amounts.
Fair value of financial instruments
The carrying value of capital lease obligations approximates fair value due
to the short maturities of those instruments.
39
<PAGE> 41
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stock-based compensation
The Company accounts for stock-based compensation using the intrinsic
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock issued to Employees," and related interpretations. The Company provides
additional proforma disclosures as required under Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation".
Recent accounting standards
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 is effective for the fiscal quarter ending December 31, 1997.
SFAS 128 redefines earnings per share under generally accepted accounting
principles. Under SFAS 128, primary earnings per share is replaced by basic
earnings per share and fully diluted earnings per share is replaced by diluted
earnings per share. Net loss per share as reported is equal to the unaudited pro
forma basic net loss per share based on SFAS 128 for all periods presented.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 establishes
standards for reporting comprehensive income and its components in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income as defined includes all changes in equity (net
assets) during a period from nonowner sources. Examples of items to be included
in comprehensive income, which are currently excluded from the results of
operations, include foreign currency translation adjustments and unrealized
gain/loss on available-for-sale securities. The Company has not yet determined
the impact, if any, of adopting this new standard. The disclosures prescribed by
SFAS 130 are effective for fiscal 1998.
Also, in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosure about Segments of an Enterprise and
Related Information". SFAS 131 establishes standards for the way companies
report information about operating segments in annual financial statements. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company has not yet determined the
impact, if any, of adopting SFAS 131. The disclosures prescribed by SFAS 131 are
effective for fiscal 1998.
NOTE 2 -- BALANCE SHEET COMPONENTS:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
Equipment........................................ $ 2,640 $ 2,250
Furniture and fixtures........................... 362 324
Leasehold improvements........................... 1,932 1,689
------- -------
4,934 4,263
Less accumulated depreciation and amortization... (2,430) (1,641)
------- -------
$ 2,504 $ 2,622
======= =======
</TABLE>
40
<PAGE> 42
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------
1997 1996
---- ----
<S> <C> <C>
Employee compensation................................. $240 $220
Other................................................. 71 80
---- ----
$311 $300
==== ====
</TABLE>
NOTE 3 -- NOTES RECEIVABLE FROM EMPLOYEE:
In September 1994, the Company loaned an employee approximately $65,000.
This note receivable bears interest at 5.86%, with interest payable annually and
principal due in full on August 31, 1997. In April 1995, the Company loaned the
same employee approximately $30,000. This note receivable bears interest at
7.19%, with principal and interest due in full on February 28, 1998. Both notes,
including accrued interest, were fully repaid during fiscal 1997.
NOTE 4 -- STOCKHOLDERS' EQUITY:
Common stock
The Company has issued certain shares of its common stock to employees and
consultants. Under the terms of the agreements related to issuance, the Company
has the right to repurchase, at the stockholder's original cost, a declining
percentage of the shares issued for a stipulated period from the date of
issuance. At June 30, 1997 12,361 shares were subject to such repurchase rights.
At the December 6, 1996 Annual Meeting stockholders voted to increase the
authorized common shares from 12,000,000 to 24,000,000.
Preferred stock
In September 1995, the Company amended its Certificate of Incorporation
effective upon the conversion of the Convertible Preferred Stock to authorize
1,000,000 shares of Preferred Stock, par value $0.0001 per share. The Board of
Directors is authorized to issue the Preferred Stock in one or more series and
to fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further vote
or action by the stockholders.
The ability of the Board of Directors of the Company to issue shares of
Preferred Stock without stockholder approval, and the adoption of a stockholder
rights plan, may alone or in combination have certain anti-takeover effects. The
Company is also subject to provisions of the Delaware General Corporation Law
which may make certain business combinations more difficult.
Warrants
In connection with entering into certain capital leases, the Company issued
to lessors warrants to purchase 73,042 shares of Convertible Preferred Stock at
a weighted average exercise price of $4.49 per share. The warrants are
exercisable at any time prior to their expiration in 2000.
In July 1995, in connection with certain short-term note agreements entered
into prior to the Company's IPO, the Company issued to the holders of such notes
warrants to purchase 57,976 shares of common stock at an exercise price of $8.63
per share.
41
<PAGE> 43
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Also in July 1995, the Company issued warrants to purchase 66,522 shares of
Series C Convertible Preferred Stock at an exercise price of $8.63 per share to
certain holders of such stock, in exchange for an agreement by the holders to
modify certain rights received in connection with the Series C financing which
occurred in June 1994.
Management ascribed a nominal value to these warrants and has reserved
197,540 shares of common stock for future issuance upon exercise of such
warrants. In connection with the Company's IPO, the above warrants were
converted into warrants to purchase shares of common stock.
Stock option plans
The 1992 Stock Option Plan (the "1992 Plan"), as amended, authorizes the
Board of Directors to grant incentive stock options and non-statutory stock
options to employees, directors and consultants to purchase up to 1,233,334
shares of common stock. Under the 1992 Plan, incentive stock options are granted
at a price not less than 100% of the estimated fair value of the stock on the
date of grant, as determined by the Board of Directors. Nonqualified stock
options are granted at a price not less than 85% of the estimated fair value of
the stock on the date of grant, as determined by the Board of Directors. To
date, all options granted under the 1992 Plan have been granted at 100% of the
estimated fair value of the common stock as determined by the Board of
Directors.
Generally, options granted under the 1992 Plan are exercisable on and after
the date of grant, subject to the Company's right to repurchase from the
optionee at the optionee's cost per share, any unvested shares which the
optionee has purchased and holds in the event the optionee attempts to dispose
of such shares or in the event of the optionee's termination of employment with
or without cause. The Company's right to repurchase lapses as the shares become
vested. Generally, shares subject to options granted under the 1992 Plan vest at
the rate of 1/4th of the shares on the first anniversary of the grant date of
the option, and an additional 1/48th of the shares upon completion of each
succeeding month of continuous employment thereafter. Options are exercisable
for a period of ten years.
1995 Stock Option Plan. The Company's 1995 Stock Option Plan (the "1995
Plan") was adopted by the Board of Directors on August 2, 1995 as the successor
to the 1992 Plan. The 1995 Plan authorizes for issuance 834,881 shares of common
stock, plus an additional number of shares on the first trading day of each
calendar year, commencing January 1, 1996, equal to 1% of the number of shares
of common stock outstanding on the last day of the preceding calendar year, not
to exceed 500,000 shares per year. Shares of common stock subject to outstanding
options, including options granted under the 1992 Plan, that expire or terminate
prior to exercise will be available for future issuance under the 1995 Plan.
Under the 1995 Plan, employees (including officers), non-employee members
of the Board of Directors (other than those serving as members of the
Compensation Committee) and independent consultants may, at the discretion of
the plan administrator, be granted options to purchase shares of common stock at
an exercise price not less than 85% of the fair market value of such shares on
the grant date. Non-employee members of the Board of Directors will also be
eligible for automatic option grants under the Company's 1995 Non-Employee
Directors Stock Option Plan. Generally, shares subject to options under the 1995
Plan vest over a five-year period and are exercisable for a period of ten years.
The exercise price for options granted under the 1995 Plan may be paid in
cash or in outstanding shares of common stock. Options may also be exercised on
a cashless basis through the same-day sale of the purchased shares. The
Compensation Committee may permit the optionee to pay the exercise price through
a promissory note payable in installments over a period of years. The amount
financed may include any federal or state income and employment taxes incurred
by reason of the option exercise. The Compensation Committee has the authority
to effect, from time to time, the cancellation of outstanding options under the
1995 Plan,
42
<PAGE> 44
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
including options incorporated from the 1992 Plan, in exchange for the grant of
new options for the same or different number of option shares with an exercise
price per share based upon the fair market value of the common stock on the new
grant date.
In the event the Company is acquired by merger, consolidation or asset
sale, the shares of common stock subject to each option outstanding at that time
under the 1995 Plan will immediately vest in full, except to the extent the
Company's repurchase rights with respect to those shares are to be assigned to
the acquiring entity, and options will accelerate to the extent not assumed by
the acquiring entity. Any assumed options will accelerate and assigned
repurchase rights will terminate upon the optionee's involuntary termination
within 18 months following the acquisition. The Compensation Committee also has
discretion to provide for the acceleration of one or more outstanding options
under the 1995 Plan (including options incorporated from the 1992 Plan) and the
vesting of shares subject to outstanding options upon the occurrence of certain
hostile tender offers. Such accelerated vesting may be conditioned upon the
subsequent termination of the affected optionee's service.
The 1995 Plan also authorizes stock appreciation rights, which provide the
holders with the election to surrender their outstanding options for an
appreciation distribution from the Company equal to the excess of (i) the fair
market value of the vested shares of common stock subject to the surrendered
option over (ii) the aggregate exercise price payable for such shares. Such
appreciation distribution may be made in cash or in shares of common stock. To
date no such rights have been issued.
The Board may amend or modify the 1995 Plan at any time. The 1995 Plan will
terminate on August 1, 2005, unless terminated earlier by the Board.
1995 Non-Employee Directors Stock Option Plan. The Company's 1995
Non-Employee Directors Stock Option Plan (the "Directors Plan") was adopted by
the Board of Directors on August 2, 1995. Automatic option grants are made at
periodic intervals to eligible non-employee Board members under the Directors
Plan. The Directors Plan became effective as of the effective date of the
Company's initial public offering. A total of 166,667 shares of common stock
have been reserved for issuance under the Directors Plan.
Each individual serving as a non-employee Board member on the effective
date of the Company's initial public offering was automatically granted a
non-statutory option to purchase 5,000 shares of common stock, vesting in equal
monthly installments for one year after the grant date. Each individual first
elected or appointed as a non-employee Board member after the effective date of
the Company's initial public offering will automatically be granted, on the date
of such election or appointment, a non-statutory option to purchase 10,000
shares of common stock vesting over five years. In addition, on the date of each
Annual Stockholders Meeting, beginning with the 1996 Annual Meeting, each
individual who is to continue to serve as a non-employee Board member after that
Annual Meeting and has been a member of the Board for at least six months will
automatically be granted a non-statutory option to purchase 5,000 shares of
common stock, vesting in equal monthly installments for one year after the grant
date. There will be no limit on the number of such annual 5,000-share option
grants any one non-employee Board member may receive over his or her period of
continued Board service. The exercise price per share of each automatic option
grant will be equal to the fair market value of the common stock on the
automatic grant date. Each automatic option will be immediately exercisable;
however, any shares purchased upon exercise of the option will be subject to
repurchase should the optionee's service as a non-employee Board member cease
prior to vesting in the shares. Each 10,000-share grant will vest in five equal
and successive annual installments over the optionee's period of Board service.
Each 5,000-share grant will vest in twelve equal and successive monthly
installments over the optionee's period of Board service.
In the event of the optionee's death or permanent disability or in the
event the Company is acquired by a merger or asset sale and in the event of
certain hostile tender offers, each outstanding option will become
43
<PAGE> 45
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
exercisable for fully vested shares. Upon the acquisition of 50% or more of the
Company's outstanding voting stock pursuant to a hostile tender offer, each
automatic option grant outstanding for at least six months may be surrendered
automatically or be canceled in exchange for a cash distribution to the director
based upon the tender offer price. The Directors Plan will terminate on August
1, 2005.
The following table summarizes activity under the Company's stock option
plans (in thousands, except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE
FOR GRANT OUTSTANDING PRICE
--------- ----------- --------
<S> <C> <C> <C>
Balance at June 30, 1994................................ 361 315 $ 1.37
Options exercised....................................... -- (39) $ 0.24
Options granted......................................... (193) 193 $ 3.75
Options canceled........................................ 38 (38) $ 1.49
---- -----
Balance at June 30, 1995................................ 206 431 $ 2.50
Options authorized...................................... 485 --
Options exercised....................................... -- (92) $ 3.09
Options granted......................................... (492) 492 $10.03
Options canceled........................................ 11 (11) $ 6.11
---- -----
Balance at June 30, 1996................................ 210 820 $ 9.20
Options authorized...................................... 842 --
Options exercised....................................... -- (96) $ 2.74
Options granted......................................... (569) 569 $16.69
Options canceled........................................ 31 (31) $12.21
---- -----
Balance at June 30, 1997................................ 514 1,262 $11.58
==== =====
</TABLE>
A summary of outstanding and exercisable stock options as of June 30, 1997
is as follows (in thousands, expect per share and contractual life amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ------------------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.08 - $ 5.25 250,131 6.98 $ 3.21 179,915 $ 3.00
$ 7.50 - $12.00 345,337 8.11 $ 8.04 118,869 $ 8.55
$13.25 - $17.50 355,807 9.35 $15.29 47,054 $14.92
$17.75 - $20.25 311,031 9.01 $17.98 43,676 $17.79
--------- -------
1,262,306 8.46 $11.58 389,514 $ 7.79
========= =======
</TABLE>
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Purchase Plan"), was adopted by the Board of Directors on August 2, 1995.
A total of 50,000 shares of common stock are reserved for issuance under the
Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423
of the Internal Revenue Code, provides for 24-month offering periods with
purchases occurring at six month intervals. The initial offering period
commenced on October 23, 1995. The Purchase Plan is administered by the
Compensation Committee of the Board. Employees are eligible to participate in
the initial
44
<PAGE> 46
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
offering period if they are employed by the Company for at least 20 hours per
week and five months per calendar year. For subsequent offering periods,
employees will become eligible to participate if they are employed by the
Company for at least 20 hours per week and five months per calendar year and
have completed 90 days of service with the Company or any affiliate. The
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 10% of an employee's cash compensation.
The price of stock purchased under the Purchase Plan will generally be 85% of
the lower of the fair market value of the common stock at the beginning of the
24-month offering period or on the applicable semi-annual purchase date.
Employees may end their participation in the offering at any time during the
offering period, and participation ends automatically following termination of
employment with the Company. Each outstanding purchase right will be exercised
immediately prior to a merger or consolidation. The Board may amend or terminate
the Purchase Plan immediately after the close of any offering period. However,
the Board may not materially increase the number of shares of common stock
available for issuance or materially modify the eligibility requirements for
participation or the benefits available to participants without stockholder
approval. The Purchase Plan will terminate in October 2005.
Pro forma disclosure
The weighted average estimated grant date fair value, as defined by SFAS
123, for options granted under the Company's stock option plans during fiscal
1997 and 1996 was $9.22 and $7.00 per share, respectively. The weighted average
estimated grant date fair value for purchase awards under the Company's Purchase
Plan during fiscal 1997 and 1996 was $5.51 and $10.18, respectively. The
estimated grant date fair value disclosed by the Company is calculated using the
Black-Scholes model. The Black-Scholes model was developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option and
purchase awards. This model also requires highly subjective assumptions,
including future stock price volatility and expected time until exercise, which
greatly affect the calculated grant date fair value.
The following assumptions are included in the estimated grant date fair
value calculations for the Company's stock option and purchase awards:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1997 1996
------ ------
<S> <C> <C>
Stock option plans:
Expected dividend yield............................ 0% 0%
Expected stock price volatility.................... 49% 51%
Risk free interest rate............................ 6.52% 5.89%
Expected life (years).............................. 5.95 6.22
Stock purchase plan:
Expected dividend yield............................ 0% 0%
Expected stock price volatility.................... 48% 50%
Risk free interest rate............................ 5.30% 5.42%
Expected life (years).............................. .25 .65
</TABLE>
45
<PAGE> 47
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pro forma net loss and net loss per share
Had the Company recorded compensation based on the estimated grant date
fair value, as defined by SFAS 123, for awards granted under its stock option
plans and stock purchase plan, the Company's net loss and net loss per share
would have been increased to the pro forma amounts below (in thousands, expect
per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
Net loss as reported............................. $10,258 $ 8,235
Pro forma net loss............................... 11,314 8,612
Net loss per share as reported................... $ 1.11 $ 1.05
Pro forma net loss per share..................... 1.22 1.10
</TABLE>
The pro forma effect on the net loss and net loss per share for 1997 and
1996 is not representative of the pro forma effect in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to fiscal year 1996.
Shareholder rights plan
In April 1997, the Board of Directors approved a shareholder rights plan
under which stockholders of record on May 1, 1997 received a right to purchase
(a "Right") one one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $.001 per share (the "Series A Preferred Stock"), at
an exercise price of $125 per one one-hundredth of a share, subject to
adjustment. The Rights will separate from the common stock and Rights
certificates will be issued and will become exercisable upon the earlier of (i)
10 business days following a public announcement that a person or group of
affiliated or associated persons has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the Company's outstanding common stock or
(ii) 10 business days or such later date as may be determined by a majority of
the Board of Directors following the commencement of, or announcement of an
intention to make, a tender offer or exchange offer the consummation of which
would result in the beneficial ownership by a person or group of 15% or more of
the outstanding common stock of the Company. The Rights expire at the close of
business on April 30, 2007. The Company has designated 120,000 shares of its
Preferred Stock as Series A Junior Participating Preferred Stock in connection
with this plan.
NOTE 5 -- INCOME TAXES:
Deferred tax assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 13,296 $ 9,193
Tax credit carryforwards....................... 1,540 1,300
Capitalized start-up costs..................... 920 927
Other.......................................... 250 240
-------- --------
Gross deferred tax assets...................... 16,006 11,660
Less valuation allowance....................... (16,006) (11,660)
-------- --------
Net deferred tax assets........................ $ -- $ --
======== ========
</TABLE>
46
<PAGE> 48
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A full valuation allowance has been established for the Company's deferred
tax assets since realization of such assets through the generation of future
taxable income is uncertain.
The provision for income taxes differs from the amount determined by
applying the US statutory income tax rate to loss before income taxes as
summarized below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Tax benefit at statutory rate............. $ 3,590 $ 2,882 $ 3,563
Net operating loss carryforward for which
no benefit was available................ (3,590) (2,882) (3,563)
------ ------ ------
$ -- $ -- $ --
====== ====== ======
</TABLE>
At June 30, 1997, the Company had net operating loss carryforwards of
approximately $33.0 million for federal and state income tax reporting purposes
and tax credit carryforwards of approximately $1.5 million for federal reporting
purposes. These amounts expire at various times through 2012.
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses and tax credit carryovers that can be carried forward may be
impaired or limited in certain circumstances. These circumstances include, but
are not limited to, a cumulative stock ownership change of greater than 50%, as
defined, over a three year period. Such an ownership change occurred as a result
of the Company's initial public offering. As a result, utilization of
approximately $17.0 million of the Company's federal and state net operating
loss and tax credit carryforwards will be subject to an annual limitation of
approximately $4.0 million.
NOTE 6 -- COMMITMENTS:
The Company leases its facilities under a non-cancelable operating lease
which expires in 2001. The Company also leases certain assets under long-term
lease agreements that are classified as capital leases. The total amount of
assets acquired under capital lease arrangements which is included in property
and equipment (Note 2), is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
Equipment........................................ $ 2,542 $ 2,154
Furniture and fixtures........................... 278 278
Leasehold improvements........................... 1,050 1,050
------- -------
3,870 3,482
Less accumulated depreciation and amortization... (2,060) (1,381)
------- -------
$ 1,810 $ 2,101
======= =======
</TABLE>
The capital lease agreements require the Company, among other things, to
pay insurance and maintenance costs.
47
<PAGE> 49
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments at June 30, 1997 under all non-cancelable
operating and capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JUNE 30, LEASES LEASES
------------------------------------------------- ------- ---------
<S> <C> <C>
1998............................................. $ 840 $ 407
1999............................................. 285 392
2000............................................. 229 371
Thereafter....................................... 26 572
------ ------
1,380 $ 1,742
======
Less amount representing interest................ (82)
------
1,298
Less current portion............................. (768)
------
Long-term portion of capital lease obligations... $ 530
======
</TABLE>
Rent expense for the years ended June 30, 1997, 1996 and 1995 was $371,000,
$366,000 and $366,000, respectively, and $1,446,000 for the period from
inception through June 30, 1997. The terms of the facility lease provide for
rental payments on a graduated scale. The Company recognizes rent expense on a
straight-line basis over the lease period and has accrued for rent expense
incurred but not paid at June 30, 1997.
The Company has a manufacturing and supply agreement with a third party
under which clinical and commercial quantities of a product will be manufactured
for the Company for a period of five years. Certain minimum quantities of
manufactured product will be required to be purchased by the Company from this
party. Upon FDA approval and commercialization of the product, minimum
quantities approximate $2,900,000 over the contractual period. In addition, the
Company will be obligated to make certain payments to this party for validation,
quality assurance and technical services associated with product manufacturing.
NOTE 7 -- LICENSE AND MARKETING AGREEMENTS:
The Company has entered into two exclusive patent license agreements with
UT which permit the Company to exclusively manufacture, use and sell products
covered by patents that result from certain research conducted by UT. Each
agreement requires the Company to pay royalties to the University. Royalties
totaling $275,000 were paid under the agreements through June 30, 1997 in
connection with the E-Z-EM, Inc. agreement described below. In connection with
the UT License Agreement, the Company has entered into a license agreement with
Dr. Stuart W. Young, a co-inventor of GADOLITE, pursuant to which the Company
has been granted an exclusive royalty-bearing license to manufacture, use and
sell certain products that fall within the scope of the UT agreements.
In August 1995, the Company entered into an agreement with E-Z-EM, a
leading manufacturer and worldwide distributor of oral contrast agents and other
products for use in gastrointestinal radiology, for the exclusive marketing and
sale of the Company's GADOLITE product in the US In fiscal 1997, the Company
entered into a similar agreement with E-Z-EM, Ltd., an affiliate of E-Z-EM, Inc.
The Company and E-Z-EM will share equally in profits from the sale of GADOLITE,
and the Company may also receive premium payments if certain sales levels are
achieved. During the years ended June 30, 1997 and 1996, the Company recorded
revenue of $25,000 and $250,000 (net of royalties paid to UT) upon signing these
agreements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
48
<PAGE> 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 (with respect to Directors) is
hereby incorporated by reference from the information under the caption
"Election of Directors" contained in the Company's definitive proxy statement,
to be filed with the Securities and Exchange Commission no later than 120 days
from the end of the Company's last fiscal year in connection with the
solicitation of proxies for its Annual Meetings of Stockholders to be held on
December 17, 1997 (the "Proxy Statement"). The required information concerning
MANAGEMENT -- Directors and Executive Officers is contained in Item 1, Part 1 of
this Form 10-K under the caption "Directors and Executive Officers" on pages 25
and 26.
The information required by Section 16(a) is hereby incorporated by
reference from the information under the caption "Compliance with Section 16(a)
of the Securities Exchange Act of 1934" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference from
the information under the caption "Election of Directors, Summary of Cash and
Certain Other Compensation, Stock Options, Exercises and Holdings" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by reference from
the information under the caption "Stock Ownership of Management and Certain
Beneficial Owners" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated by reference from
the information under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement.
49
<PAGE> 51
PART IV
ITEM 14. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE, EXHIBITS AND
REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
See Index to Financial Statements under Item 8.
(a) 2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not applicable or are not
required or the information required to be set forth therein is
included in the consolidated financial statement or notes thereto.
(b) REPORTS ON FORM 8-K
Not Applicable
(c) Exhibits
The following documents are referenced or included in this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company...............
3.2 Amended and Restated Bylaws of the Company (Incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on
Form S-1, Commission File No. 33-96048)............................
3.3 Certificate of Designation of Series A Junior Participating
Preferred Stock of the Company.....................................
4.1 Amended and Restated Investors' Rights Agreement between the
Company and the investors specified therein dated July 31, 1995
(Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Commission File No.
33-96048)..........................................................
4.2 Specimen Certificate of the Company's Common Stock (Incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-1, Commission File No. 33-96048)............................
10.1 Form of Indemnification Agreement between the Company and its
directors and executive officers (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048)......................................
10.2 Series C Stock Purchase Agreement dated as of June 13, 1994 between
the Company and the investors specified therein (Incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement
on Form S-1, Commission File No. 33-96048).........................
10.3 Investment Agreement dated as of July 31, 1995 between the Company
and the investors specified therein (Incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048)......................................
10.4 Form of Series C Preferred Stock Purchase Warrant dated as of July
31, 1995 issued by the Company to the investors listed on Schedule
A thereto (Incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1, Commission File No.
33-96048)..........................................................
</TABLE>
50
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------
<S> <C> <C>
10.5 Master Lease and Warrant Agreements entered into between the
Company and Comdisco, Inc. dated as of July 22, 1992, July 30,
1992, March 31, 1993, June 24, 1993 and October 3, 1994,
respectively (Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1, Commission File No.
33-96048)..........................................................
10.6* Patent License Agreement entered into between the Company and The
University of Texas, Austin dated entered into on or about July 1,
1991 (Incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1, Commission File No.
33-96048)..........................................................
10.7* Patent License Agreement entered into between the Company and The
University of Texas, Dallas dated as of July 1, 1992, as amended by
the Patent License Agreement dated May 27, 1993 (Incorporated by
reference to Exhibit 10.9 to the Company's Registration Statement
on Form S-1, Commission File No. 33-96048).........................
10.8* Patent License Agreement entered into between the Company and
Stuart W. Young dated as of October 15, 1992 (Incorporated by
reference to Exhibit 10.10 to the Company's Registration Statement
on Form S-1, Commission File No. 33-96048).........................
10.9 Lease Agreement entered into between the Company and New England
Mutual Life Insurance Company dated as of June 17, 1993, as amended
on July 22, 1993, and as further amended on March 1, 1994
(Incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1, Commission File No.
33-96048)..........................................................
10.10 Supply Agreement entered into between the Company and Glaxo
Wellcome Co. (f/k/a Burroughs Wellcome Co.) dated as of March 1,
1995 (Incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1, Commission File No.
33-96048)..........................................................
10.11* License Agreement entered into between the Company and Cook,
Incorporated dated as of April 4, 1995 (Incorporated by reference
to Exhibit 10.13 to the Company's Registration Statement on Form
S-1, Commission File No. 33-96048).................................
10.12* License and Supply Agreement entered into between the Company and
E-Z-EM, Inc. dated as of August 7, 1995 (Incorporated by reference
to Exhibit 10.14 to the Company's Registration Statement on Form
S-1, Commission File No. 33-96048).................................
10.13 The Company's 1995 Stock Option Plan (Incorporated by reference to
Exhibit 99.1 to the Company's Registration Statement on Form S-8,
Commission File No. 333-21551).....................................
10.14 The Company's 1995 Non-Employee Directors' Stock Option Plan
(Incorporated by reference to Exhibit 99.7 to the Company's
Registration Statement on Form S-8, Commission File No.
33-98514)..........................................................
10.15 The Company's Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 99.11 to the Company's Registration Statement
on Form S-8, Commission File No. 33-98514).........................
10.16 Employment Agreement entered into between the Company and Richard
A. Miller, M.D. dated as of June 10, 1992 (Incorporated by
reference to Exhibit 10.19 to the Company's Registration Statement
on Form S-1, Commission File No. 33-96048).........................
</TABLE>
51
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------
<S> <C> <C>
10.17 Employment Agreement entered into between the Company and Marc L.
Steuer dated as of October 31, 1994 (Incorporated by reference to
Exhibit 10.20 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048)......................................
10.18 Employment Agreement entered into between the Company and William
C. Dow, Ph.D. dated as of May 20, 1992, as amended by a letter
agreement dated July 8, 1992 (Incorporated by reference to Exhibit
10.21 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048)......................................
10.19 Employment Agreement entered into between the Company and Stuart W.
Young, M.D. dated as of April 19, 1993 (Incorporated by reference
to Exhibit 10.22 to the Company's Registration Statement on Form
S-1, Commission File No. 33-96048).................................
10.20 Promissory Notes issued by the Company to Stuart W. Young, M.D.
dated as of September 1994 and April 1995, in the amounts of
$65,000 and $30,000, respectively (Incorporated by reference to
Exhibit 10.24 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048)......................................
10.21* Master Process Development and Supply Agreement dated September 6,
1996 entered into between the Company and Hoechst Celanese
Corporation (Incorporated by reference to exhibit of the same
number to the Annual Report on Form 10-K for the fiscal year ended
June 30, 1996).....................................................
10.22 Form of Notice of Grant of Stock Option generally to be used under
the 1995 Stock Option Plan (Incorporated by reference to Exhibit
99.2 to the Company's Registration Statement on Form S-8,
Commission File No. 33-98514)......................................
10.23 Form of Stock Option Agreement (Incorporated by reference to
Exhibit 99.3 to the Company's Registration Statement on Form S-8,
Commission File No. 33-98514)......................................
10.24 Form of Addendum to Stock Option Agreement (Limited Stock
Appreciate Right) (Incorporated by reference to Exhibit 99.4 to the
Company's Registration Statement on Form S-8, Commission File No.
33-98514)..........................................................
10.25 Form of Addendum to Stock Option Agreement (Special Tax Election)
(Incorporated by reference to Exhibit 99.5 to the Company's
Registration Statement on Form S-8, Commission File No.
33-98514)..........................................................
10.26 Form of Addendum to Stock Option Agreement (Involuntary Termination
following Change in Control) (Incorporated by reference to Exhibit
99.6 to the Company's Registration Statement on Form S-8,
Commission File No. 33-98514)......................................
10.27 Form of Notice of Grant of Automatic Stock Option (Initial Grant)
(Incorporated by reference to Exhibit 99.8 to the Company's
Registration Statement on Form S-8, Commission File No.
33-98514)..........................................................
10.28 Form of Notice of Grant of Automatic Stock Option (Annual Grant)
(Incorporated by reference to Exhibit 99.9 to the Company's
Registration Statement on Form S-8, Commission File No.
33-98514)..........................................................
10.29 Form of Non-Employee Director Stock Option Agreement (Incorporated
by reference to Exhibit 99.10 to the Company's Registration
Statement on Form S-8, Commission File No. 33-98514)...............
</TABLE>
52
<PAGE> 54
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------
<S> <C> <C>
10.30 Form of Employee Stock Purchase Plan Enrollment/Change Form
(Incorporated by reference to Exhibit 99.12 to the Company's
Registration Statement on Form S-8, Commission File No.
33-98514)..........................................................
10.31 Form of Stock Purchase Agreement (Incorporated by reference to
Exhibit 99.13 to the Company's Registration Statement on Form S-8,
Commission File No. 33-98514)......................................
10.32 Form of Special Officer Participation Form (Incorporated by
reference to Exhibit 99.14 to the Company's Registration Statement
on Form S-8, Commission File No. 33-98514).........................
10.33 Common Stock Purchase Agreement dated November 11, 1996, by and
among the Company and the persons listed on Schedule 1 thereto
(Incorporated by Referenced to Exhibit 10.1 to the Company's
Registration Statement on Form S-1, Commission File No.
333-22747).........................................................
10.34 Common Stock Purchase Agreement dated February 21, 1997, by and
among the Company and the persons listed on Schedule 1 thereto
(Incorporated by Referenced to Exhibit 10.1 to the Company's
Registration Statement on Form S-1, Commission File No.
333-22747).........................................................
11.1 Computation of Net Loss and Pro Forma Net Loss per Share...........
23.1 Consent of Price Waterhouse LLP, Independent Accountants...........
24.1 Power of Attorney (see page 54)....................................
27 Financial Data Schedule............................................
</TABLE>
- ---------------
* Confidential treatment has been granted as to certain portions of this
agreement.
53
<PAGE> 55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: September 23, 1997
PHARMACYCLICS, INC.
By: /s/ RICHARD A. MILLER
------------------------------------
Richard A. Miller, M.D.
President and Chief Executive
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints jointly and severally, Richard A. Miller and Marc
L. Steuer, or either of them as his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Report on Form
10-K, and to file the same, with all 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 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 any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -------------------
<C> <S> <C>
/s/ RICHARD A. MILLER President and Chief September 23, 1997
- --------------------------------------------- Executive Officer and
Richard A. Miller, M.D. Director (Principal
Executive Officer)
/s/ MARC L. STEUER Vice President, Business September 23, 1997
- --------------------------------------------- Development and Chief
Marc L. Steuer Financial Officer (Principal
Financial Officer)
/s/ CHERYL B. JASZEWSKI Vice President, Finance and September 23, 1997
- --------------------------------------------- Administration (Principal
Cheryl B. Jaszewski Accounting Officer)
/s/ THOMAS D. KILEY Director September 23, 1997
- ---------------------------------------------
Thomas D. Kiley
/s/ JOSEPH S. LACOB Director September 23, 1997
- ---------------------------------------------
Joseph S. Lacob
Director September , 1997
- ---------------------------------------------
Patrick F. Latterell
/s/ JOSEPH C. SCODARI Director September 23, 1997
- ---------------------------------------------
Joseph C. Scodari
/s/ CRAIG C. TAYLOR Director September 23, 1997
- ---------------------------------------------
Craig C. Taylor
</TABLE>
54
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company...............
3.2 Amended and Restated Bylaws of the Company (Incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on
Form S-1, Commission File No. 33-96048)............................
3.3 Certificate of Designation of Series A Junior Participating
Preferred Stock of the Company.....................................
4.1 Amended and Restated Investors' Rights Agreement between the
Company and the investors specified therein dated July 31, 1995
(Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Commission File No.
33-96048)..........................................................
4.2 Specimen Certificate of the Company's Common Stock (Incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-1, Commission File No. 33-96048)............................
10.1 Form of Indemnification Agreement between the Company and its
directors and executive officers (Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048)......................................
10.2 Series C Stock Purchase Agreement dated as of June 13, 1994 between
the Company and the investors specified therein (Incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement
on Form S-1, Commission File No. 33-96048).........................
10.3 Investment Agreement dated as of July 31, 1995 between the Company
and the investors specified therein (Incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048)......................................
10.4 Form of Series C Preferred Stock Purchase Warrant dated as of July
31, 1995 issued by the Company to the investors listed on Schedule
A thereto (Incorporated by reference to Exhibit 10.6 to the
Company's Registration Statement on Form S-1, Commission File No.
33-96048)..........................................................
10.5 Master Lease and Warrant Agreements entered into between the
Company and Comdisco, Inc. dated as of July 22, 1992, July 30,
1992, March 31, 1993, June 24, 1993 and October 3, 1994,
respectively (Incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1, Commission File No.
33-96048)..........................................................
10.6* Patent License Agreement entered into between the Company and The
University of Texas, Austin dated entered into on or about July 1,
1991 (Incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-1, Commission File No.
33-96048)..........................................................
10.7* Patent License Agreement entered into between the Company and The
University of Texas, Dallas dated as of July 1, 1992, as amended by
the Patent License Agreement dated May 27, 1993 (Incorporated by
reference to Exhibit 10.9 to the Company's Registration Statement
on Form S-1, Commission File No. 33-96048).........................
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------
<S> <C> <C>
10.8* Patent License Agreement entered into between the Company and
Stuart W. Young dated as of October 15, 1992 (Incorporated by
reference to Exhibit 10.10 to the Company's Registration Statement
on Form S-1, Commission File No. 33-96048).........................
10.9 Lease Agreement entered into between the Company and New England
Mutual Life Insurance Company dated as of June 17, 1993, as amended
on July 22, 1993, and as further amended on March 1, 1994
(Incorporated by reference to Exhibit 10.11 to the Company's
Registration Statement on Form S-1, Commission File No.
33-96048)..........................................................
10.10 Supply Agreement entered into between the Company and Glaxo
Wellcome Co. (f/k/a Burroughs Wellcome Co.) dated as of March 1,
1995 (Incorporated by reference to Exhibit 10.14 to the Company's
Registration Statement on Form S-1, Commission File No.
33-96048)..........................................................
10.11* License Agreement entered into between the Company and Cook,
Incorporated dated as of April 4, 1995 (Incorporated by reference
to Exhibit 10.13 to the Company's Registration Statement on Form
S-1, Commission File No. 33-96048).................................
10.12* License and Supply Agreement entered into between the Company and
E-Z-EM, Inc. dated as of August 7, 1995 (Incorporated by reference
to Exhibit 10.14 to the Company's Registration Statement on Form
S-1, Commission File No. 33-96048).................................
10.13 The Company's 1995 Stock Option Plan (Incorporated by reference to
Exhibit 99.1 to the Company's Registration Statement on Form S-8,
Commission File No. 333-21551).....................................
10.14 The Company's 1995 Non-Employee Directors' Stock Option Plan
(Incorporated by reference to Exhibit 99.7 to the Company's
Registration Statement on Form S-8, Commission File No.
33-98514)..........................................................
10.15 The Company's Employee Stock Purchase Plan (Incorporated by
reference to Exhibit 99.11 to the Company's Registration Statement
on Form S-8, Commission File No. 33-98514).........................
10.16 Employment Agreement entered into between the Company and Richard
A. Miller, M.D. dated as of June 10, 1992 (Incorporated by
reference to Exhibit 10.19 to the Company's Registration Statement
on Form S-1, Commission File No. 33-96048).........................
10.17 Employment Agreement entered into between the Company and Marc L.
Steuer dated as of October 31, 1994 (Incorporated by reference to
Exhibit 10.20 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048)......................................
10.18 Employment Agreement entered into between the Company and William
C. Dow, Ph.D. dated as of May 20, 1992, as amended by a letter
agreement dated July 8, 1992 (Incorporated by reference to Exhibit
10.21 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048)......................................
10.19 Employment Agreement entered into between the Company and Stuart W.
Young, M.D. dated as of April 19, 1993 (Incorporated by reference
to Exhibit 10.22 to the Company's Registration Statement on Form
S-1, Commission File No. 33-96048).................................
</TABLE>
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------
<S> <C> <C>
10.20 Promissory Notes issued by the Company to Stuart W. Young, M.D.
dated as of September 1994 and April 1995, in the amounts of
$65,000 and $30,000, respectively (Incorporated by reference to
Exhibit 10.24 to the Company's Registration Statement on Form S-1,
Commission File No. 33-96048)......................................
10.21* Master Process Development and Supply Agreement dated September 6,
1996 entered into between the Company and Hoechst Celanese
Corporation (Incorporated by reference to exhibit of the same
number to the Annual Report on Form 10-K for the fiscal year ended
June 30, 1996).....................................................
10.22 Form of Notice of Grant of Stock Option generally to be used under
the 1995 Stock Option Plan (Incorporated by reference to Exhibit
99.2 to the Company's Registration Statement on Form S-8,
Commission File No. 33-98514)......................................
10.23 Form of Stock Option Agreement (Incorporated by reference to
Exhibit 99.3 to the Company's Registration Statement on Form S-8,
Commission File No. 33-98514)......................................
10.24 Form of Addendum to Stock Option Agreement (Limited Stock
Appreciate Right) (Incorporated by reference to Exhibit 99.4 to the
Company's Registration Statement on Form S-8, Commission File No.
33-98514)..........................................................
10.25 Form of Addendum to Stock Option Agreement (Special Tax Election)
(Incorporated by reference to Exhibit 99.5 to the Company's
Registration Statement on Form S-8, Commission File No.
33-98514)..........................................................
10.26 Form of Addendum to Stock Option Agreement (Involuntary Termination
following Change in Control) (Incorporated by reference to Exhibit
99.6 to the Company's Registration Statement on Form S-8,
Commission File No. 33-98514)......................................
10.27 Form of Notice of Grant of Automatic Stock Option (Initial Grant)
(Incorporated by reference to Exhibit 99.8 to the Company's
Registration Statement on Form S-8, Commission File No.
33-98514)..........................................................
10.28 Form of Notice of Grant of Automatic Stock Option (Annual Grant)
(Incorporated by reference to Exhibit 99.9 to the Company's
Registration Statement on Form S-8, Commission File No.
33-98514)..........................................................
10.29 Form of Non-Employee Director Stock Option Agreement (Incorporated
by reference to Exhibit 99.10 to the Company's Registration
Statement on Form S-8, Commission File No. 33-98514)...............
10.30 Form of Employee Stock Purchase Plan Enrollment/Change Form
(Incorporated by reference to Exhibit 99.12 to the Company's
Registration Statement on Form S-8, Commission File No.
33-98514)..........................................................
10.31 Form of Stock Purchase Agreement (Incorporated by reference to
Exhibit 99.13 to the Company's Registration Statement on Form S-8,
Commission File No. 33-98514)......................................
10.32 Form of Special Officer Participation Form (Incorporated by
reference to Exhibit 99.14 to the Company's Registration Statement
on Form S-8, Commission File No. 33-98514).........................
10.33 Common Stock Purchase Agreement dated November 11, 1996, by and
among the Company and the persons listed on Schedule 1 thereto
(Incorporated by Referenced to Exhibit 10.1 to the Company's
Registration Statement on Form S-1, Commission File No.
333-22747).........................................................
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------------------------------------------------------------
<S> <C> <C>
10.34 Common Stock Purchase Agreement dated February 21, 1997, by and
among the Company and the persons listed on Schedule 1 thereto
(Incorporated by Referenced to Exhibit 10.1 to the Company's
Registration Statement on Form S-1, Commission File No.
333-22747).........................................................
11.1 Computation of Net Loss and Pro Forma Net Loss per Share...........
23.1 Consent of Price Waterhouse LLP, Independent Accountants...........
24.1 Power of Attorney (see page 54)....................................
27 Financial Data Schedule............................................
</TABLE>
- ---------------
* Confidential treatment has been granted as to certain portions of this
agreement.
<PAGE> 1
EXHIBIT 3.1
PAGE 1
State of Delaware
Office of the Secretary of State
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED
CERTIFICATE OF "PHARMACYCLICS, INC.", FILED IN THIS OFFICE ON THE THIRTY-FIRST
DAY OF JANUARY, A.D. 1997, AT 10 O'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL]
/s/ EDWARD J. FREEL
-----------------------------------
Edward J. Freel, Secretary of State
2260594 8100 AUTHENTICATION: 8312990
971033689 DATE: 02/03/97
<PAGE> 2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF PHARMACYCLICS, INC.
A DELAWARE CORPORATION
Pharmacyclics, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"General Corporation Law")
DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is Pharmacyclics, Inc. and that the
Corporation was originally incorporated on April 19, 1991, pursuant to the
General Corporation Law.
SECOND: The Amended and Restated Certificate of Incorporation has been
duly adopted in accordance with the provisions of Sections 242 and 245 of the
General Corporation Law by the directors and stockholders of the Corporation:
"RESOLVED, that the Restated Certificate of Incorporation of
the Corporation (the "Certificate") shall be amended and restated in
its entirety as follows:
ARTICLE I
The name of this corporation is Pharmacyclics, Inc.
ARTICLE II
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
<PAGE> 3
ARTICLE IV
(A) Classes of Stock. This Corporation is authorized to issue two
classes of stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares which the Corporation is authorized to issue
is Twenty-Five Million (25,000,000) shares. Twenty-Four Million (24,000,000)
shares shall be Common Stock, par value $0.0001 per share and One Million
(1,000,000) shares shall be Preferred Stock, par value $0.0001 per share.
(B) Rights, Preferences and Restrictions of Preferred Stock. The
Preferred Stock authorized by this Amended and Restated Certificate of
Incorporation may be issued from time to time in series. The Board of Directors
is hereby authorized to fix or alter the rights, preferences, privileges and
restrictions granted to or imposed upon any series of Preferred Stock, and the
number of shares constituting any such series and the designation thereof, or of
any of them. Subject to compliance with applicable protective voting rights that
have been or may be granted to the Preferred Stock or series thereof in
Certificates of Determination or the corporation's Certificate of Incorporation,
as amended and restated from time to time, and requirements and restrictions of
applicable law ("Protective Provisions"), the rights, privileges, preferences
and restrictions of any such additional series may be subordinated to, pari
passu with (including, without limitation, inclusion in provisions with respect
to liquidation and acquisition preferences, redemption and/or approval of
matters by vote or written consent), or senior to any of those of any present or
future class or series of Preferred or Common Stock. Subject to compliance with
applicable Protective Provisions, the Board of Directors is also authorized to
increase or decrease the number of shares of any series, prior or subsequent to
the issue of that series, but not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status that they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
(C) Common Stock.
1. Dividend Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of the Common Stock shall be entitled to receive, when and as
declared by the Board of Directors, out of any assets of the Corporation legally
available therefor, such dividends as may be declared from time to time by the
Board of Directors.
2. Liquidation Rights. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to liquidation,
the assets of the Corporation, upon the liquidation, dissolution or winding up
of the Corporation, shall be distributed to the holders of the Common Stock.
3. Redemption. The Common Stock is not redeemable.
2.
<PAGE> 4
4. Voting Rights. The holder of each share of Common Stock shall have
the right to one vote, and shall be entitled to notice of any stockholders'
meeting in accordance with the Bylaws of the Corporation, and shall be entitled
to vote upon such matters and in such manner as may be provided by law.
ARTICLE V
Except as otherwise provided in this Amended and Restated Certificate
of Incorporation, in furtherance and not in limitation of the powers conferred
by statute, the Board of Directors is expressly authorized to make, repeal,
alter, amend and rescind any or all of the Bylaws of the Corporation.
ARTICLE VI
The number of directors of the Corporation shall be fixed from time to
time by a bylaw or amendment thereof duly adopted by the Board of Directors or
by the stockholders.
ARTICLE VII
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE VIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE IX
In the event the Corporation is subject to Section 2115 of the
California Corporations Code, Section A of this Article shall apply. Otherwise,
Section B of this Article shall apply.
A. California. The liability of each and every director of this
Corporation for monetary damages shall be eliminated to the fullest extent
permissible under California law. If California law is hereafter amended to
authorize, with the approval of a Corporation's stockholders, further reductions
in the liability of the Corporation's directors for breach of
3.
<PAGE> 5
fiduciary duty, then a director of the Corporation shall not be liable for any
such breach to the fullest extent permitted by California law, as so amended.
B. Delaware. To the fullest extent permitted by the General Corporation
Law of Delaware, as the same may be amended from time to time, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director. If
the General Corporation Law of Delaware is hereafter amended to authorize, with
the approval of a Corporation's stockholders, further reductions in the
liability of the Corporation's directors for breach of fiduciary duty, then a
director of the Corporation shall not be liable for any such breach to the
fullest extent permitted by the General Corporation Law of Delaware, as so
amended.
C. Consistency. In the event of any inconsistency between Sections A
and B of this Article, the controlling Section, as to any particular issue with
regard to any particular matter, shall be the one which provides to the director
in question the greatest protection from liability.
D. Effect of Repeal or Modification. Any repeal or modification of the
foregoing provisions of this Article IX shall not adversely affect any right or
protection of a director of the Corporation with respect to any acts or
omissions of such director occurring prior to such repeal or modification.
ARTICLE X
In the event the Corporation is subject to Section 2115 of the
California Corporations Code, Section A of this Article shall apply. Otherwise,
Section B of this Article shall apply.
A. California. To the fullest extent permitted by California law, the
Corporation is authorized to provide indemnification of (and advancement of
expenses to) agents (as defined in Section 317 of the California Corporations
Code) through bylaw provision, agreements with agents, vote of stockholders or
disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 317 of the California Corporations
Code, subject only to applicable limits set forth in Section 204 of the
California Corporations Code, with respect to actions for breach of duty to the
Corporation and its stockholders.
B. Delaware. To the fullest extent permitted by applicable law, the
Corporation is also authorized to provide indemnification of (and advancement of
expenses to) such agents (and any other persons to which Delaware law permits
the Corporation to provide indemnification) though bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested
directors or otherwise, in excess of the indemnification and advancement
otherwise permitted by Section 145 of the Delaware General Corporation Law,
4.
<PAGE> 6
subject only to limits created by applicable Delaware law (statutory or
non-statutory), with respect to actions for breach of duty to the Corporation,
its stockholders, and others.
C. Consistency. In the event of any inconsistency between Sections A
and B of this Article, the controlling Section, as to any particular issue with
regard to any particular matter, shall be the one which authorizes for the
benefit of the agent or other person in question the provision of the fullest,
most prompt, most certain or otherwise most favorable indemnification and/or
advancement.
D. Effect of Repeal or Modification. Any repeal or modification of any
of the foregoing provisions of this Article X shall not adversely affect any
right or protection of a director, officer, agent or other person existing at
the time of, or increase the liability of any director of the Corporation with
respect to any acts or omissions of such director, officer or agent occurring
prior to such repeal or modification.
ARTICLE XI
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation."
IN WITNESS WHEREOF, the Amended and Restated Certificate of
Incorporation has been signed by the President and the Secretary of the
Corporation this 29th day of January, 1997.
PHARMACYCLICS, INC.
By: /s/ RICHARD A. MILLER
-------------------------------------
Richard A. Miller
President and Chief Executive Officer
ATTEST:
/s/ J. STEPHAN DOLEZALEK
- -----------------------------
J. Stephan Dolezalek
Secretary
5.
<PAGE> 1
EXHIBIT 3.3
PAGE 1
State of Delaware
Office of the Secretary of State
-------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
DESIGNATION OF "PHARMACYCLICS, INC.", FILED IN THIS OFFICE ON THE TWENTY-EIGHTH
DAY OF APRIL, A.D. 1997, AT 4 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW
CASTLE COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL]
/s/ EDWARD J. FREEL
-----------------------------------
Edward J. Freel, Secretary of State
2260594 8100 AUTHENTICATION: 8446608
971137541 DATE: 05/01/97
<PAGE> 2
CERTIFICATE OF DESIGNATION
of
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
of
PHARMACYCLICS, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
----------------------------------
Pharmacyclics, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Corporation"), hereby certifies that the following resolution was adopted by
the Board of Directors of the Corporation as required by Section 151 of the
General Corporation Law at a meeting duly called and held on April 9, 1997:
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of the Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Certificate
of Incorporation, the Board of Directors hereby creates a series of Preferred
Stock, par value $.0001 per share (the "Preferred Stock"), of the Corporation
and hereby states the designation and number of shares, and fixes the relative
rights, preferences, and limitations thereof as follows:
Series A Junior Participating Preferred Stock:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be One Hundred Twenty Thousand (120,000). Such number of shares may
be increased or decreased by resolution of the Board of Directors; provided,
that no decrease shall reduce the number of shares of Series A Preferred Stock
to a number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation which are convertible into Series A Preferred Stock.
1
<PAGE> 3
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and
superior to the Series A Preferred Stock with respect to dividends, the
holders of shares of Series A Preferred Stock, in preference to the
holders of the Common Stock, par value $.0001 per share (the "Common
Stock"), of the Corporation, and of any other junior stock, shall be
entitled to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, quarterly dividends
payable in cash on the first day of March, June, September and December
in each year (each such date being referred to herein as a "Quarterly
Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share
of Series A Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to, subject to the provision for adjustment
hereinafter set forth, 100 times the aggregate per share amount of all
cash dividends, and 100 times the aggregate per share amount (payable
in kind) of all non-cash dividends or other distributions, other than a
dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise),
declared on the Common Stock since the immediately preceding Quarterly
Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a
share of Series A Preferred Stock. In the event the Corporation shall
at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event
under clause (b) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such
event and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or distribution
on the Series A Preferred Stock as provided in paragraph (A) of this
Section immediately after it declares a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock).
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such shares,
unless the date of issue of such shares is prior to the record date for
the first Quarterly Dividend Payment Date, in which case dividends on
such shares shall begin to accrue from the date of issue of such
shares, or unless the date of issue is a Quarterly Dividend Payment
Date or is a date after the record date for the determination of
holders of shares of Series A Preferred Stock entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which
2
<PAGE> 4
events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not
bear interest. Dividends paid on the shares of Series A Preferred Stock
in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The
Board of Directors may fix a record date for the determination of
holders of shares of Series A Preferred Stock entitled to receive
payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the
payment thereof.
Section 3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the holder
thereof to 100 votes on all matters submitted to a vote of the
stockholders of the Corporation. In the event the Corporation shall at
any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the number of votes per share to which
holders of shares of Series A Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a
fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(B) Except as otherwise provided herein, in any other
Certificate of Designation creating a series of Preferred Stock or any
similar stock, or by law, the holders of shares of Series A Preferred
Stock and the holders of shares of Common Stock and any other capital
stock of the Corporation having general voting rights shall vote
together as one class on all matters submitted to a vote of
stockholders of the Corporation.
(C) Except as set forth herein, or as otherwise provided by
law, holders of Series A Preferred Stock shall have no special voting
rights and their consent shall not be required (except to the extent
they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
3
<PAGE> 5
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in
Section 2 are in arrears, thereafter and until all accrued and unpaid
dividends and distributions, whether or not declared, on shares of
Series A Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding
up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except
dividends paid ratably on the Series A Preferred Stock and all
such parity stock on which dividends are payable or in arrears
in proportion to the total amounts to which the holders of all
such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to
the Series A Preferred Stock, provided that the Corporation
may at any time redeem, purchase or otherwise acquire shares
of any such junior stock in exchange for shares of any stock
of the Corporation ranking junior (either as to dividends or
upon dissolution, liquidation or winding up) to the Series A
Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any
shares of stock ranking on a parity with the Series A
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board
of Directors) to all holders of such shares upon such terms as
the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and
preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any
shares of stock of the Corporation unless the Corporation could, under
paragraph (A) of this Section 4, purchase or otherwise acquire such
shares at such time and in such manner.
4
<PAGE> 6
Section 5. Reacquired Shares. Any shares of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of a new series
of Preferred Stock subject to the conditions and restrictions on issuance set
forth herein, in the Certificate of Incorporation, or in any other Certificate
of Designation creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $125 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares of Series A
Preferred Stock shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth, equal to 100
times the aggregate amount to be distributed per share to holders of shares of
Common Stock, or (2) to the holders of shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares of Common
Stock, or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the aggregate amount to which
holders of shares of Series A Preferred Stock were entitled immediately prior to
such event under the proviso in clause (1) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction the numerator of which is the
number of shares of Common Stock outstanding immediately after such event and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the Corporation
shall enter into any consolidation, merger, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case each share
of Series A Preferred Stock shall at the same time be similarly exchanged or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount set forth
5
<PAGE> 7
in the preceding sentence with respect to the exchange or change of shares of
Series A Preferred Stock shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
Section 8. No Redemption. The shares of Series A Preferred
Stock shall not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank, with
respect to the payment of dividends and the distribution of assets, junior to
all series of any other class of the Corporation's Preferred Stock.
Section 10. Amendment. The Certificate of Incorporation of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least a majority of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
IN WITNESS WHEREOF, this Certificate of Designation is
executed on behalf of the Corporation by its President and Chief Executive
Officer and its Vice President, Finance and Administration and attested to by
its Secretary this 25th day of April, 1997.
/s/ RICHARD A. MILLER, M.D.
-------------------------------------------
Name: Richard A. Miller, M.D.
Title:President and Chief Executive Officer
/s/ CHERYL B. JASZEWSKI
-------------------------------------------
Name: Cheryl B. Jaszewski
Title:Vice President, Finance and
Administration
Attest:
/s/ J. STEPHAN DOLEZALEK
------------------------------
J. Stephan Dolezalek
Secretary
6
<PAGE> 1
EXHIBIT 11.1
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Weighted average common shares outstanding.......... 9,264 6,106 870
Convertible preferred stock......................... -- 1,611 5,157
Common stock equivalents arising from options and
warrants issued subsequent to June 30, 1994
through October 23, 1995.......................... -- 98 326
------- ------ -------
Weighted average common and common equivalent
shares............................................ 9,264 7,815 6,353
======= ====== =======
Net loss............................................ $(10,258) $(8,232) $(10,479)
======= ====== =======
Net loss per share.................................. $ (1.11) $ (1.05) (1.65)
======= ====== =======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-95514 and 333-21551) of Pharmacyclics, Inc. of
our report dated August 22, 1997 appearing on page 33 of this Annual Report on
Form 10-K for the year ended June 30, 1997.
PRICE WATERHOUSE LLP
San Jose, California
September 23, 1997
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> MAR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 15,869
<SECURITIES> 14,958
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 31,043
<PP&E> 4,934
<DEPRECIATION> (2,430)
<TOTAL-ASSETS> 39,707
<CURRENT-LIABILITIES> 2,402
<BONDS> 530
0
0
<COMMON> 0
<OTHER-SE> 36,695
<TOTAL-LIABILITY-AND-EQUITY> 39,707
<SALES> 0
<TOTAL-REVENUES> 25
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,537
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 419
<INCOME-PRETAX> (10,258)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,258)
<EPS-PRIMARY> (1.11)
<EPS-DILUTED> 0
</TABLE>
