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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-27066
PHARMACYCLICS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 94-3148201
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
995 E. Arques Avenue, Sunnyvale, CA 94086-4521
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (408) 774-0330
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
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As of March 31, 1997, there were 10,054,386 shares of the Registrant's Common
Stock outstanding, par value $0.0001.
This quarterly report on Form 10-Q consists of 27 pages of which this is page 1.
The Exhibit Index is located at page 26.
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<TABLE>
<CAPTION>
PHARMACYCLICS, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NUMBER
- ------- --------------------- -----------
<S> <C> <C> <C>
Item 1. Financial Statements (unaudited)
Condensed Balance Sheet as of March 31, 1997 and
June 30, 1996..........................................................................3
Condensed Statement of Operations for the three and nine months ended
March 31, 1997 and 1996................................................................4
Condensed Statement of Cash Flows for the nine months ended
March 31,1997 and 1996.................................................................5
Notes to Condensed Financial Statements................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................24
Item 2. Changes in Securities..................................................................24
Item 3. Defaults Upon Senior Securities........................................................24
Item 4. Submission of Matters to a Vote of Security Holders....................................24
Item 5. Other Information......................................................................24
Item 6. Exhibits and Reports on Form 8-K.......................................................24
SIGNATURES..............................................................................................25
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHARMACYCLICS, INC.
(a development stage company)
Condensed Balance Sheet
(in thousands, unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
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<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,487 $ 13,950
Short-term investments 12,640 8,053
Prepaid expenses and other current assets 83 241
-------- --------
Total current assets 39,210 22,244
Property and equipment, net 2,357 2,622
Other assets 89 149
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$ 41,656 $ 25,015
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,033 $ 753
Accrued liabilities 270 300
Current portion of capital lease obligations 900 917
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Total current liabilities 2,203 1,970
Capital lease obligations, less current portion 570 941
Deferred rent 98 113
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Total liabilities 2,871 3,024
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Stockholders' equity
Common stock 1 1
Convertible preferred stock -- --
Additional paid-in capital 75,029 49,948
Deferred compensation related to stock options (318) --
Accumulated deficit (35,927) (27,958)
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Total stockholders' equity 38,785 21,991
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$ 41,656 $ 25,015
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
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PHARMACYCLICS, INC.
(a development stage company)
Condensed Statement of Operations
(in thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
License and grant revenues $ - $ - $ 25 $ 301
------------ ------------ ------------ ------------
Operating expenses:
Research and development 2,405 1,926 7,342 5,199
General and administrative 454 428 1,451 982
------------ ------------ ------------ ------------
Total operating expenses 2,859 2,354 8,793 6,181
------------ ------------ ------------ ------------
Loss from operations (2,859) (2,354) (8,768) (5,880)
Interest and other income/(expense), net 365 286 799 407
------------ ------------ ------------ ------------
Net loss $ (2,494) $ (2,068) $ (7,969) $ (5,473)
============ ============ ============ ============
Net loss per share $ (0.26) $ (0.24) $ (0.86) $ (0.72)
============ ============ ============ ============
Weighted average common and
common equivalent shares 9,542 8,471 9,253 7,578
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
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PHARMACYCLICS, INC.
(a development stage company)
Condensed Statement of Cash Flows
(in thousands, unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,969) $ (5,473)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 631 496
Changes in assets and liabilities:
Prepaid expenses and other assets 218 86
Accounts payable 280 (382)
Accrued liabilities (30) 58
Deferred rent (15) 34
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Net cash used in operating activities (6,885) (5,181)
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Cash flows from investing activities:
Purchases of property and equipment (4) (16)
Purchase of short-term investments (4,587) (9,012)
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Net cash used for investing activities (4,591) (9,028)
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Cash flows from financing activities:
Payments under capital lease obligations (707) (554)
Proceeds from notes payable - 1,000
Proceeds from sale of stock, net of issuance costs 24,720 28,591
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Net cash provided by financing activities 24,013 29,037
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Net increase in cash and cash equivalents 12,537 14,828
Cash and cash equivalents at the beginning of the period 13,950 376
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Cash and cash equivalents at the end of the period $ 26,487 $ 15,204
============= ===============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 182 $ 223
Equipment acquired under capital lease obligations $ 319 $ 123
Conversion of notes payable and accrued interest
into convertible preferred stock $ - $ 3,051
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
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PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Pharmacyclics, Inc.
(the Company or Pharmacyclics) have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not contain all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the accompanying unaudited condensed financial statements reflect
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the Company's interim financial
information. These financial statements and notes should be read in conjunction
with the audited financial statements of the Company included in the Company's
Annual Report on Form 10-K, as amended, for the year ended June 30, 1996 filed
with the Securities and Exchange Commission on April 15, 1997.
The results of operations for the nine months ended March 31, 1997 are not
necessarily indicative of the operating results that may be reported for the
fiscal year ending June 30, 1997 or for any other future period.
NOTE 2 - NET LOSS PER SHARE
Net loss per share for the three months and nine months ended March 31, 1997 and
1996 is computed using the weighted average number of shares of common stock
outstanding during the periods presented. In addition, the computation includes
the effect of the conversion of all shares of Series A, A1, B and C Convertible
Preferred Stock into 5,156,971 shares of common stock upon the completion of the
Company's initial public offering completed October 1995 using the if-converted
method. Common stock equivalent shares arising from stock options and warrants
are excluded from the computation because their effect is antidilutive, except
that common stock equivalent shares arising from stock options and warrants
(using the treasury stock method and the initial public offering price) issued
from July 1, 1994 through the effective date of the Company's initial public
offering on October 23, 1995 are included in the computation of net loss per
share as if they were outstanding for all periods prior to the initial public
offering.
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NOTE 3 - ISSUANCE OF PREFERRED STOCK AND INITIAL PUBLIC OFFERING
On July 31, 1995, notes payable aggregating $3,000,000 ($2,000,000 outstanding
at June 30, 1995 plus additional borrowings of $1,000,000 entered into during
July 1995) plus accrued interest thereon were converted into 353,483 shares of
Series C Convertible Preferred Stock. The Company also issued an additional
295,649 shares of Series C Convertible Preferred Stock on July 31, 1995,
resulting in net proceeds of $2,550,000.
The Company completed an initial public offering on October 23, 1995, issuing
2,150,000 shares of its common stock at $12.00 per share. Upon the closing of
the offering, all outstanding shares of Convertible Preferred Stock were
automatically converted into 5,156,971 shares of common stock. On November 6,
1995, the underwriters of the initial public offering exercised their
over-allotment option with respect to an additional 233,450 shares of common
stock. The Company received, net of underwriters' commissions and other offering
expenses, approximately $26 million in net proceeds from the initial public
offering.
NOTE 4 - PRIVATE PLACEMENTS
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 862,468 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 covering resales of the shares issued, on Form S-3 for
both private placements, which was declared effective on April 22, 1997.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains, in addition to historical information, the Company's
position regarding liquidity and capital resources, and 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 set forth under the heading "Risk
Factors" in this Form 10-Q.
RESULTS OF OPERATIONS
Revenues
To date, Pharmacyclics has received only limited revenues and no revenues from
product sales. For the quarter ended March 31, 1997, no revenue was recognized.
For the nine months ended March 31, 1997, $25,000 was recognized. This was the
result of milestone payments from E-Z-EM, Ltd. related to the signing of a
European sales and distribution agreement (expanding upon an August 1995
agreement granting E-Z-EM, Inc. rights in the United States) and marketing
approval in the United Kingdom. The total recognized is net of royalty payments
to The University of Texas (UT) required because the products covered by the
E-Z-EM Ltd. Agreement incorporate the technology licensed by the Company from
UT.
During the first nine months of fiscal year 1996, $301,000 of revenue was
recognized. This included $250,000 from E-Z-EM, Inc. 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 during the same period.
Research and Development
Research and development expenses increased to $2.4 million for the three months
ended March 31, 1997 compared to $1.9 million during the same period of the
prior fiscal year. Approximately half of the 26% increase is related to
supporting clinical trials for Gd-Tex. This includes the costs of clinical
product supplies, payments to clinical sites and internal support of the trials.
During the third quarter of fiscal year 1997, patient enrollment
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continued in the Gd-Tex Phase Ib/II trial. The remainder of the increase relates
to the purchase of supplies to start a Lu-Tex Phase II trial in May 1997.
During the nine months ended March 31,1997, research and development expenses
increased to $7.3 million compared to $5.2 million during the same period of the
prior fiscal year. In addition to the factors which contributed to the increase
in research and development expenses discussed above, the nine month period
included costs incurred as a result of signing a definitive agreement with
Hoechst Celanese (HCC), a manufacturer of chemicals and pharmaceutical
intermediates. HCC is providing the process optimization, scale up, and clinical
and commercial supply of Gd-Tex and Lu-Tex which resulted in additional costs
during the first nine months of fiscal year 1997.
General and Administrative
General and administrative expenses for the three months ended March 31, 1997
were $454,000 compared to $428,000 during the same period in the prior fiscal
year, an increase of 6%
For the nine months ended March 31, 1997, general and administrative expenses
totaled $1.4 million compared to $982,000 during the same period in the prior
fiscal year, an increase of 48%. General and administrative expenses during
fiscal year 1997 include approximately $300,000 of financing costs incurred
during the first quarter.
Interest and Other Income
Interest income, net of interest expense, totaled $365,000 for the three months
ended March 31, 1997 compared to $286,000 for the same period in the prior
fiscal year. For the three month period, interest income resulting from
investment of the recent private placement proceeds exceeded interest expense on
borrowings under the Company's lease lines.
During the nine month period ended March 31, 1997, interest income, net of
interest expense, totaled $799,000 compared to $407,000 during the prior period.
During the first four months of fiscal year 1996, interest expense under the
Company's lease lines offset interest income generated on the Company's cash,
cash equivalent and short-term investment balances. The proceeds for the initial
public offering (IPO) in October 1995
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provided balances which reversed this trend. Growth in interest income during
fiscal year 1997 is due to the sale of additional equity capital resulting in
larger investment balances.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through March 31, 1997
primarily through the private and public sale of equity securities, payments
under third party agreements, and proceeds from lease lines of credit.
In February 1997, the Company completed a private placement of 862,468 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. Both equity placements were
completed at the then current market price. The Company filed a registration
statement covering resales of the shares issued, on Form S-3 for both private
placements, which was declared effective on April 22, 1997.
As of March 31, 1997, the Company had approximately $39.1 million in cash, cash
equivalents and short-term investments. Net cash used in operating activities of
$6.9 million during the nine months ended March 31, 1997 resulted primarily from
the net loss incurred during that period, partially offset by increases in
accounts payable and depreciation expense.
The Company completed an IPO in October 1995 issuing 2,150,000 common shares at
$12.00. 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 common shares at the IPO price to cover
over-allotments. Proceeds received by the Company, net of underwriters'
commissions and expenses payable the Company, totaled approximately $26 million.
In July 1995, notes payable aggregating $3 million ($2 million outstanding at
June 30, 1995 plus additional borrowings of $1 million entered into during July,
1995) plus accrued interest thereon were converted into 353,483 shares of Series
C Convertible Preferred Stock. The
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Company also issued an additional 295,649 shares of Series C Convertible
Preferred Stock resulting in net proceeds to the Company of $2.6 million.
The Company expects to incur ongoing levels of expenditures which may not only
fluctuate from quarter to quarter but which are expected to increase as the
levels of clinical activity for the Company's products 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 years.
The Company currently anticipates, based upon the current status of its product
development and commercialization plans, that its cash, cash equivalents, and
short-term investments will provide funding for the Company's operations through
at least mid calendar 1999.
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RISK FACTORS
NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT AND EXTENSIVE GOVERNMENT
REGULATION
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 manufacturing and marketing of the Company's products and its research and
development activities are subject to extensive regulation for safety, efficacy
and quality by numerous government authorities in the U.S. and other countries.
Clinical trials, manufacturing and marketing of products are subject to the
rigorous testing and approval process of the FDA and equivalent foreign
regulatory authorities. As a result, clinical trials and regulatory approval can
take a number of years to accomplish and require the expenditure of substantial
resources. To date, the Company has only received regulatory approval for the
commercial sale of GADOLITE in the United Kingdom. There can be no assurance
that requisite FDA approvals or those of foreign regulatory authorities will be
obtained on a timely basis, if at all, or that any approvals granted will cover
the clinical indications for which the Company may seek approval. The
manufacture and marketing of drugs are subject to continuing FDA and foreign
regulatory review and later discovery of previously unknown problems with a
product, manufacturer or facility may result in restrictions, including
withdrawal of the product from the market. Failure to obtain or
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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.
UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS
Pharmacyclics has conducted and plans to continue to undertake extensive and
costly clinical testing to assess the safety and efficacy of its potential
products. The rate of completion of the Company's clinical trials is dependent
upon, among other factors, the rate of patient enrollment. Patient enrollment is
a function of many factors, including the nature of the Company's clinical trial
protocols, existence of competing protocols, size of the patient population,
proximity of patients to clinical sites and eligibility criteria for the study.
Delays in patient enrollment will result in increased costs and delays, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the FDA may suspend clinical
trials at any time if it concludes that the subjects or patients participating
in such trials are being exposed to unacceptable health risks. Success in
preclinical or early stage clinical trials does not assure success in later
stage clinical trials. Data obtained from preclinical and clinical activities
are susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. Further, there can be no assurance that clinical testing
will show any current or future product candidate to be safe and effective for
use in humans.
NO ASSURANCE OF PRODUCT APPROVAL
To date, the Company has approval to market only one of its products that being
in the United Kingdom. No other products have been approved for sale in the U.S.
or any other international markets. 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. In December 1996
the Company received an "approvable" letter from the FDA which
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letter included a series of issues which must first 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. Although the process for regulatory approval in
Western Europe is similar to that in the United States, there are numerous and
sometimes unique risks associated with the approval of an MAA. There can be no
assurance that such authorization will be granted in other member states under
the European Union's mutual recognition procedure.
Delay in obtaining or failure to obtain regulatory approvals would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the policies of the FDA and foreign
regulatory bodies may change, and additional regulations may be promulgated
which could prevent or delay regulatory approval of the Company's potential
products. Even if regulatory approval of a product is granted, such approval may
impose limitations on the indicated uses for which a product may be marketed.
Further, later discovery of previously unknown problems with a product may
result in restrictions on the product, including withdrawal of the product from
the market.
In addition to the drug approval requirements applicable to the Company's Lu-Tex
product for photosensitization of certain cancers and atherosclerosis, the
Company will also need to obtain the approval of the FDA and other foreign
regulatory authorities for the laser, light emitting diode ("LED") or associated
light delivery devices used in such treatments. Such device approval requires
additional regulatory submissions both by the Company and by the manufacturers
of such devices that must include clinical data obtained from the use of such
light delivery devices with Lu-Tex for photodynamic therapy, and may result in
additional delays or difficulties in obtaining approval for the use of Lu-Tex as
a photosensitizer. Such light delivery device manufacturers currently are under
no obligation to the Company to file or pursue such applications.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company is a development stage company and has incurred operating losses
since its inception in 1991 and, as of March 31, 1997, had an accumulated
deficit of approximately $35.9 million. The Company anticipates that such
operating losses will continue over the next several years, as it continues to
incur increasing costs of research and development, clinical and manufacturing
activities. To date, the Company has not
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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.
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 texaphyrins bulk drug substance, which are
the subject of a manufacturing and supply agreement with Hoechst Celanese Corp.
("HCC"), and GADOLITE, which is the subject of a manufacturing and supply
agreement with Glaxo Wellcome ("Glaxo"), the Company does not have access to the
manufacturing capacity necessary to provide clinical and commercial quantities
of the Company's products. Access to such manufacturing capacity is necessary
for the Company to conduct clinical trials, obtain regulatory approval and
commercialize its products. See "Risk Factors -- Reliance as Third Party
Relationships." The Company is engaged in preliminary discussions with a number
of manufacturers of parenteral products regarding process development and
validation, filling, labeling and packaging of the finished dosage form of
Gd-Tex and Lu-Tex. A failure to successfully complete such agreement would, if
the Company could not locate alternate manufacturing capabilities, have a
material adverse impact on the Company's business, financial condition and
results of operations. Prior to any regulatory approval of the Company's other
products under development, the Company intends to negotiate supply agreements
with manufacturers who will have the ability to manufacture, fill, label and
package such materials prior to commercial introduction of such products. There
are, however, a limited number of contract manufacturers that operate under
current federal and state Good Manufacturing Practices ("GMP") regulations and
are capable of manufacturing the Company's products. Accordingly, there can be
no assurance that the Company will be able to enter into supply agreements on
commercially acceptable terms or with manufacturers who will be able to deliver
supplies in appropriate quantity and quality to develop and commercialize its
products. Any interruption of supply of its products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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The Company also has entered into a sales and distribution agreement with
E-Z-EM, Inc. ("E-Z-EM"), a leading distributor worldwide of oral contrast
agents, for North American and European sales, marketing and distribution of
GADOLITE. The Company plans to enter into similar agreements to market GADOLITE
in Asia. To date, however, no such arrangement has been established, and there
can be no assurance that any such agreement will be entered into. To the extent
that the Company determines not to, or is unable to, enter into marketing
agreements or to arrange for third party distribution of its other products or
to the extent that the agreement with E-Z-EM is terminated without a replacement
agreement, significant additional resources will be required to develop a sales
force. There can be no assurance that the Company will be able to establish such
a sales force or enter into such marketing or distribution agreements. In
addition, the Company currently has no arrangement for the sale and distribution
of any of its other products under development.
The Company has no expertise in the development of light sources and associated
light delivery devices required for the Company's Lu-Tex photosensitizer
program. Successful development, manufacturing, approval and distribution of the
Company's photosensitization products will require third party arrangements for
the required light sources, associated light delivery devices and other
equipment. The Company currently obtains lasers from Coherent, Inc. ("Coherent")
and Laserscope, and LEDs from Quantum Devices, Inc. ("Quantum") on a purchase
order basis, and such entities are under no obligation to continue to deliver
light devices on an ongoing basis. Failure to maintain such relationships may
require the Company to develop additional sources which may require additional
regulatory approvals and could delay commercialization of the Company's Lu-Tex
products under development. There can be no assurance that the Company will be
able to establish or maintain relationships with other sources on a commercially
reasonable basis, if at all, or that such devices will receive regulatory
approval for use in photodynamic therapy.
RELIANCE ON THIRD PARTY RELATIONSHIPS
The Company has no manufacturing facilities for commercial production of its
products under development, nor does the Company have experience in sales,
marketing or distribution. The Company's strategy for commercialization of some
of its products requires entering into various arrangements with corporate and
other collaborators to conduct clinical trials and to manufacture, distribute
and market its products. To the extent the Company relies on such third party
manufacturing sources it is dependent upon their
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successfully implementing approvable manufacturing processes. Any failure to
implement such manufacturing processes will have a material adverse impact on
the Company. There can be no assurance that such parties will perform their
obligations as expected or that the Company's reliance on others for the
clinical development, manufacturing, distribution and marketing of its products
will not result in unforeseen problems. The Company does not have the ability to
conduct these development activities in house. If one or more of these
relationships were terminated or the organizations did not perform up to
expectations, the clinical development of the Company's product candidates would
likely be delayed and could be substantially impaired depending on the
availability and quality of substitute development capabilities.
RAPID TECHNOLOGICAL CHANGE AND SUBSTANTIAL COMPETITION
The pharmaceutical industry is subject to rapid and substantial technological
change. Technological competition in the industry from pharmaceutical and
biotechnology companies, universities, governmental entities and others
diversifying into the field is intense and is expected to increase. Many of
these entities have significantly greater research and development capabilities
than the Company, as well as substantially more marketing, manufacturing,
financial and managerial resources, and represent significant competition for
the Company. Acquisitions of, or investments in, competing pharmaceutical
companies by large collaborating partners could increase such competitors'
financial, marketing, manufacturing and other resources. There can be no
assurance that developments by others will not render the Company's products or
technologies noncompetitive or obsolete, or that the Company will be able to
keep pace with technological developments or other market factors. Competitors
have developed or are in the process of developing technologies that are, or in
the future may be, the basis for competitive products. Some of these products
may have an entirely different approach or means of accomplishing similar
diagnostic, imaging and/or therapeutic effects than products being developed by
the Company. The Company is aware that one of its competitors in the market for
photodynamic therapy drugs has received marketing approval for certain
indications in the U.S., and other countries for Photofrin(R). There can be no
assurance that the Company's competitors will not develop products that are
safer, more effective and less costly than the products developed by the Company
and, therefore, present a serious competitive threat to the Company's product
offerings.
17
<PAGE> 18
Further, the medical indications for which the Company is developing its
therapeutic products also can be treated, in the case of cancer, by surgery,
radiation and chemotherapy, and in the case of atherosclerosis, by surgery
(e.g., bypass), angioplasty, atherectomy, the use of stents and drug therapy.
These treatments are widely accepted in the medical community and have a long
history of use. In addition, technological advances with other therapies for
cancer and atherosclerosis could make such other therapies more efficacious or
cost-effective than Lu-Tex and could render the Company's technology
noncompetitive or obsolete. Also, there can be no assurance that physicians will
use either Gd-Tex as a radiation sensitizer or chemosensitizer in the case of
cancer or Lu-Tex as a photosensitizer in the case of cancer or atherosclerosis
to replace or supplement established treatments for such diseases or that the
therapeutic products the Company is developing will become competitive with
current or future treatments. Further, some companies developing photodynamic
therapy products are developing specialized light delivery devices for such
products, which when integrated with their product offering may afford them a
competitive advantage relative to the Company's strategy of sourcing such
devices from third parties.
The markets for MRI contrast agents are highly competitive. Other oral MRI
contrast agents have been or are about to receive FDA approval. Although the
Company believes 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 contrast agents.
REQUIREMENTS FOR ADDITIONAL FINANCING AND ACCESS TO CAPITAL MARKETS The Company
has expended and will continue to expend substantial funds to complete the
research, development and clinical testing of its products. The Company will
require additional funds for these purposes, to establish additional clinical
and commercial-scale manufacturing arrangements and to provide for the marketing
and distribution of its products. The Company believes that its cash, cash
equivalents and short-term investments, amounts available under a capital lease
agreement and the proceeds from recent private placements will be adequate to
satisfy its capital needs through mid-calendar 1999. However, the actual amount
of the Company's capital requirements will depend on many factors, including the
status of the development of products, the time and costs involved in conducting
clinical trials, obtaining regulatory approvals, and filing, prosecuting
18
<PAGE> 19
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.
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 42 issued patents, 6 allowed, and 27 pending patent
applications. Outside the U.S., the Company is the owner or exclusive licensee
of five counterpart patents, and 57 pending counterpart patent applications.
There can be no assurance that the Company's patent applications will result in
additional patents being issued or that issued patents will afford protection
against competitors with similar technology, nor can there be any assurance that
any patents issued to the Company will not be infringed by or designed around by
others. Even issued patents may later be modified or revoked by the U.S. Patent
and Trademark Office in proceedings instituted by third parties or otherwise
found to be invalid or unenforceable. Moreover, the Company believes that
obtaining foreign patents may be more difficult than obtaining domestic patents
because of differences in patent
19
<PAGE> 20
laws, and believes the protection provided by foreign patents, if obtained, may
be weaker than that provided by domestic patents.
Although the Company has conducted searches for patents issued to other
companies, research or academic institutions or others, no assurance can be
given that such patents do not exist, have not been filed or could not be filed
or issued which contain claims relating to the Company's technology, products or
processes. Because of the number of patents issued and patent applications filed
relating to biometallic and expanded porphyrin chemistries, Pharmacyclics
believes there is a significant risk that current and potential competitors and
other third parties have filed or in the future will file applications for, or
have received or in the future will receive, patents and will obtain additional
proprietary rights relating to materials or processes used or proposed to 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 a number of U.S. patents that relate to MRI contrast
agents including several that are owned by or licensed to Schering AG. Schering
AG has sent communications to the Company suggesting that GADOLITE may infringe
certain of such Schering AG patents. The Company has obtained advice of special
patent counsel that the technologies employed by the Company for its imaging
products under development do not infringe the claims of such Schering AG
patents. A determination of the infringement of any such patents could have a
material adverse effect on the Company's business. There can be no assurance
that Schering AG will not seek to assert such patent rights against the Company,
which would result in significant legal costs and require substantial management
resources. The Company is aware that Schering AG has asserted such rights
against at least one other company in the contrast agent imaging market and that
a number of companies have entered into licensing arrangements with Schering AG
with respect to one or more such patents. There can be no assurance that the
Company would be able to obtain a license from Schering AG, if required, on
commercially reasonable terms, if at all.
20
<PAGE> 21
The Company also relies on trade secrets and proprietary know-how that it seeks
to protect, in part, by confidentiality agreements with its employees,
consultants, suppliers and licensees. No assurance can be given that others will
not independently develop substantially equivalent proprietary information and
techniques, that others will not otherwise gain access to the Company's
proprietary technology, or disclose such technology, or that the Company can
meaningfully protect its rights in such unpatented proprietary technology.
UNCERTAINTIES REGARDING THIRD PARTY REIMBURSEMENT AND HEALTH CARE 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 health maintenance
organizations ("HMOs"). Third party payors are increasingly challenging the
prices charged for medical products and services. Also, the trend toward managed
health care in the U.S. and the concurrent growth of organizations such as HMOs,
which could control or significantly influence the purchase of health care
services and products, as well as legislative proposals to reform health care or
reduce government insurance programs, may all result in lower prices for the
Company's products. The cost containment measures that health care payors and
providers are instituting and the effect of any health care reform could
materially adversely affect the Company's ability to operate profitably.
21
<PAGE> 22
PRODUCT LIABILITY EXPOSURE
The testing, manufacturing, marketing and sale of the products under development
by the Company entail an inherent risk that product liability claims will be
asserted against the Company. Although the Company is insured against such risks
up to a $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 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.
ENVIRONMENTAL REGULATION
In connection with its research and development activities and its manufacturing
materials and products, the Company is subject to federal, state and local laws,
rules, regulations and policies governing the use, generation, manufacture,
storage, air emission, effluent discharge, handling and disposal of certain
materials, biological specimens and wastes. Although the Company believes that
it has complied with these laws, regulations and policies in all material
respects and has not been required to take any significant action to correct any
material noncompliance, there can be no assurance that the Company will not be
required to incur significant costs to comply with environmental and health and
safety regulations in the future. The Company's research and development
involves the controlled use of hazardous materials, including but not limited to
certain hazardous chemicals and radioactive materials. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result and any such liability could exceed the resources of the
Company.
22
<PAGE> 23
CONTROL BY EXISTING STOCKHOLDERS
As of March 31, 1997 the Company's officers, directors and principal
stockholders, and certain of their affiliates beneficially owned approximately
50% of the Company's outstanding Common Stock. Such concentration of ownership
may have the effect of delaying or preventing a change in control of the
Company. Additionally, these stockholders will have significant influence over
major corporate transactions as well as the election of directors of the Company
and control over board decisions.
VOLATILITY OF STOCK PRICE; NO DIVIDENDS
The market prices for securities of pharmaceutical and biotechnology companies
(including the Company) have historically been highly volatile, and the market
has from time to time experienced significant price and volume fluctuations that
are unrelated to the operating performance of particular companies. Future
announcements concerning the Company, its competitors or other pharmaceutical
and biotechnology companies including the results of testing and clinical
trials, technological innovations or new therapeutic products, governmental
regulation, developments in patent or other proprietary rights, litigation or
public concern as to the safety of products developed by the Company or others
and general market conditions may have a significant effect on the market price
of the Common Stock. The Company has not paid any cash dividends on its Common
Stock and does not anticipate paying any dividends in the foreseeable future.
SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 1997, 10,054,386 shares of the Company's common stock were
outstanding. Virtually all of these outstanding shares are currently available
for resale without restriction. In addition, as of March 31, 1997, there were
outstanding options to purchase a total of approximately 1,120,518 shares of the
Company's common stock under the stock option plans of the Company. Sale of
substantial amounts of such shares in the public market or the prospect of such
sales could adversely affect the market price of the Company's common stock.
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 also is subject to provisions of the Delaware General
Corporation Law which may make certain business combinations more difficult.
23
<PAGE> 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. None
Item 2. Changes in Securities.
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 862,468 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 covering resales
of the shares issued, on Form S-3 for both private placements, which was
declared effective on April 22, 1997.
Item 3. Defaults Upon Senior Securities. None
Item 4. Submission of Matters to Vote of Security holders. None
Item 5. Other information. None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Exhibit 11.1 - "Computation of Net Loss Per Share" is attached
hereto.
Exhibit 27 - Financial Data Schedule.
b. Reports on Form 8-K. None
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACYCLICS, INC.
(Registrant)
Date: May 1, 1997 By: /s/ Dr. Richard A. Miller
-------------------------------------------
Dr. Richard A. Miller
President and Chief Executive Officer
Date: May 1, 1997 By: /s/ Cheryl B. Jaszewski
-------------------------------------------
Cheryl B. Jaszewski
Vice President, Finance and Administration
25
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit
No.
---
<S> <C>
11.1 Computation of Net Loss Per Share
27.1 Financial Data Schedule
</TABLE>
26
<PAGE> 1
EXHIBIT 11.1
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
COMPUTATION OF NET LOSS PER SHARE
(in thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
March 31, March 31,
--------------------------------- --------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 9,542 8,471 9,253 5,298
Convertible preferred stock (1) - - - 2,149
Common stock equivalent arising from
options and warrants issued subsequent to
June 30, 1994 through October 23, 1995 (2) - - - 131
------------- -------------- ------------- -------------
Weighted average common and
common equivalent shares 9,542 8,471 9,253 7,578
============= ============== ============= =============
Net Loss $ (2,494) $ (2,068) $ (7,969) $ (5,473)
Net loss per share $ (0.26) $ (0.24) $ (0.86) $ (0.72)
============= ============== ============= =============
</TABLE>
(1) Shares of convertible preferred stock issued from July 1, 1994
through the effective date of the Company's initial public offering
on October 23, 1995 have been included in the calculation of net loss
per share using the if-converted method.
(2) Stock options and warrants granted from July 1, 1994 through the
effective date of the Company's initial public offering on October
23, 1995 have been included in the computation of net loss per share
using the treasury stock method and the initial public offering
price.
27
<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
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 26,487
<SECURITIES> 12,640
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39,210
<PP&E> 4,585
<DEPRECIATION> (2,227)
<TOTAL-ASSETS> 41,656
<CURRENT-LIABILITIES> 2,203
<BONDS> 570
0
0
<COMMON> 1
<OTHER-SE> 38,785
<TOTAL-LIABILITY-AND-EQUITY> 41,656
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,859
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 365
<INCOME-PRETAX> (2,859)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,494)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> 0
</TABLE>
