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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from________ to__________
Commission File Number: 0-27066
PHARMACYCLICS, INC.
(Exact name of Registrant as specified in its charter)
------------------------------------------------------
Delaware 94-3148201
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
995 E. Arques Avenue, Sunnyvale, CA 94086-4521
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code:(408) 774-0330
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of April 24, 1998, there were 12,265,777 shares of the Registrant's Common
Stock outstanding, par value $0.0001 per share.
This quarterly report on Form 10-Q consists of 29 Pages of which this is page 1.
The Exhibit Index is located at page 27.
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PHARMACYCLICS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NUMBER
-----------
<S> <C>
Item 1. Financial Statements (unaudited)
Condensed Balance Sheet as of March 31, 1998 and June 30, 1997........3
Condensed Statement of Operations for the three and nine months
ended March 31, 1998 and 1997..........................................4
Condensed Statement of Cash Flows for the nine months ended March
31, 1998 and 1997......................................................5
Notes to Condensed Financial Statements................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Facts that May Affect Future
Operating Results......................................................9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................25
Item 2. Changes in Securities.................................................25
Item 3. Defaults Upon Senior Securities.......................................25
Item 4. Submission of Matters to a Vote of Security Holders...................25
Item 5. Other Information.....................................................25
Item 6. Exhibits and Reports on Form 8-K......................................25
SIGNATURES...........................................................................26
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
PHARMACYCLICS, INC.
(a development stage company)
CONDENSED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 24,023 $ 15,869
Short-term investments 30,636 14,958
Accounts receivable 592 --
Prepaid expenses and other current assets 217 216
--------- ---------
Total current assets 55,468 31,043
Long-term investments 17,818 6,103
Property and equipment, net 2,100 2,504
Other assets 53 57
--------- ---------
$ 75,439 $ 39,707
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,190 $ 1,323
Accrued liabilities 327 311
Current portion of capital lease obligations 297 768
--------- ---------
Total current liabilities 2,814 2,402
Capital lease obligations, less current portion 314 530
Deferred rent 49 79
--------- ---------
Total liabilities 3,177 3,011
--------- ---------
Stockholders' equity:
Preferred Stock -- --
Common Stock 1 1
Additional paid-in capital 116,404 74,911
Deficit accumulated during development stage (44,143) (38,216)
--------- ---------
Total stockholders' equity 72,262 36,696
--------- ---------
$ 75,439 $ 39,707
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
3
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PHARMACYCLICS, INC.
(a development stage company)
CONDENSED STATEMENT OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License and grant revenues $ -- $ -- $ 2,700 $ 25
Contract revenue 452 -- 666 --
-------- -------- -------- --------
Total revenues 452 -- 3,366 25
-------- -------- -------- --------
Operating expenses:
Research and development 3,573 2,405 9,655 7,342
General and administrative 476 454 1,376 1,451
-------- -------- -------- --------
Total operating expenses 4,049 2,859 11,031 8,793
-------- -------- -------- --------
Loss from operations (3,597) (2,859) (7,665) (8,768)
Interest income, net 768 365 1,738 799
-------- -------- -------- --------
Net loss $ (2,829) $ (2,494) $ (5,927) $ (7,969)
======== ======== ======== ========
Basic and diluted net loss per
share (Note 2) $ (0.25) $ (0.26) $ (0.56) $ (0.86)
======== ======== ======== ========
Shares used to compute basic and
diluted net loss per share 11,467 9,542 10,590 9,253
======== ======== ======== ========
</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)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,927) $ (7,969)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 619 631
Write-down of equipment 188 --
Changes in assets and liabilities:
Accounts receivable (592) --
Prepaid expenses and other assets 3 218
Accounts payable 867 280
Accrued liabilities 16 (30)
Deferred rent (30) (15)
-------- --------
Net cash used in operating activities (4,856) (6,885)
-------- --------
Cash flows from investing activities:
Purchases of equipment (403) (4)
Purchases of investments (42,404) (4,587)
Proceeds from sale of investments 15,011 --
-------- --------
Net cash used in investing activities (27,796) (4,591)
-------- --------
Cash flows from financing activities:
Payments under capital lease obligations (687) (707)
Proceeds from sale of stock, net of issuance costs 41,493 24,720
-------- --------
Net cash provided by financing activities 40,806 24,013
-------- --------
Net increase in cash and cash equivalents 8,154 12,537
Cash and cash equivalents at the beginning of the period 15,869 13,950
-------- --------
Cash and cash equivalents at the end of the period $ 24,023 $ 26,487
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 12 $ 182
Equipment acquired under capital lease obligations -- $ 319
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
5
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PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
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 for the year ended June 30, 1997 filed with the
Securities and Exchange Commission on September 30, 1997.
The results of operations for the nine months ended March 31, 1998 are not
necessarily indicative of the operating results that may be reported for the
fiscal year ending June 30, 1998 or for any other future period.
REVENUE RECOGNITION
License fees are recognized as revenue when earned, as evidenced by achievement
of the specified milestones and the absence of any ongoing performance
obligation. Contract and grant revenues are recognized as earned, primarily
based on costs incurred to total estimated costs at completion, pursuant to the
terms of each agreement. License, contract and grant revenues are generally not
subject to repayment. Any amounts received in advance of performance are
recorded as deferred revenue.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and include costs
associated with collaborative agreements.
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
classifies its cash equivalents and investments as "available for sale." For all
periods presented, the cost of investments approximates their fair market value.
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NOTE 2 - NET LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128, ("SFAS
128") "Earnings Per Share," effective December 31, 1997. SFAS 128 requires the
presentation of both basic and diluted earnings per share. Basic earnings per
share is computed using the weighted average number of shares outstanding during
the period. Diluted earnings per share is computed using the weighted average
number of common and potential common stock outstanding during the period.
Potential common stock has been excluded from the computation of diluted
earnings per share as they are antidilutive. In connection with the adoption of
SFAS 128, the Company has restated all previously reported per share amounts, as
appropriate.
NOTE 3 - EQUITY
In February 1998, the Company completed its secondary public offering of
2,012,500 shares of common stock at a price of $21.75 per share. The Company
received cash of approximately $40.8 million net of underwriting discounts,
commissions and offering expenses. 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. Resale of shares acquired in both placements were registered
through a registration statement on Form S-3 declared effective on April 22,
1997.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("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 disclosures prescribed by SFAS 130 are effective for fiscal
1999. The Company does not expect such adoption to have a material effect on its
financial statements.
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 new standards for the way companies report
information about operating segments in annual financial statements. The
disclosures prescribed by SFAS 131 are effective for fiscal 1999. The Company
does not expect such adoption to have a material effect on the notes to its
financial statements.
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NOTE 5 - COLLABORATION AGREEMENTS
Nycomed Collaboration. In October 1997, the Company entered into an agreement
with Nycomed Imaging A/S ("Nycomed"), which acquired exclusive sales and
marketing rights to LUTRIN(TM) Photosensitizer for cancer indications in all
markets of the world excluding the United States, Canada and Japan. LUTRIN is a
lutetium texaphrin ("Lu-Tex") molecule being developed as a photosensitizer for
use in photodynamic therapy of cancer. In exchange for these rights, Nycomed has
agreed to pay the Company up to approximately $14.0 million in license fees,
development costs (based upon an agreed budget), and milestone payments, related
to the initial cancer indications for LUTRIN to be developed by the Company and
Nycomed, in each case subject to attainment of certain development, clinical or
commercialization milestones. Approximately $14.0 million in additional
milestone payments and development costs (assuming similar costs and agreement
upon a similar budget) may be paid by Nycomed during the course of development
for subsequent cancer indications, if such indications are successfully
completed. Upon receipt of marketing approval, Nycomed will pay a royalty on
product sales. Pharmacyclics is required to supply bulk drug substance through
its manufacturing collaboration with Hoechst Celanese Corporation ("Celanese")
and Nycomed is required to produce finished product for use by it and the
Company.
Alcon Collaboration. In December 1997, the Company entered into an evaluation
and license agreement with Alcon Pharmaceuticals Ltd. ("Alcon") under which its
affiliate Alcon acquired worldwide marketing rights to Lu-Tex for ophthalmology
indications. Alcon is a wholly-owned subsidiary of Nestle S.A. Alcon will
conduct and bear all costs for worldwide development and regulatory submissions
for ophthalmology indications of Lu-Tex. The Company received an up-front
payment and will receive payments based on completion of milestones, as well as
royalties on product sales. Pharmacyclics is required to supply bulk drug
substance through its manufacturing collaboration with Celanese; Alcon will be
responsible for formulation and packaging.
GADOLITE(R) is registered U.S. trademark of the Company and LUTRIN(TM) and
ANTRIN(TM) are trademarks of the company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition to historical information, this report contains predictions,
estimates and other forward looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results could differ materially from
any future performance suggested in this report as a result of the factors,
including those set forth below under the caption "Factors That May Affect
Future Operating Results," and elsewhere in this report and in the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997.
RESULTS OF OPERATIONS
Revenues
Revenue was $452,000 and $3.4 million for the three and nine month periods ended
March 31, 1998, respectively, compared to $0 and $25,000 for the three and nine
months ended March 31, 1997.
In the second quarter of fiscal 1998, the Company entered into two corporate
collaboration agreements. Under the first agreement, Nycomed acquired exclusive
sales and marketing rights to LUTRIN for treatment of cancer indications in all
markets of the world excluding the United States, Canada and Japan. LUTRIN is a
Lu-Tex molecule being developed as a photosensitizer for use in photodynamic
therapy of cancer. In exchange for these rights, Nycomed has agreed to pay an
initial non-refundable license fee, milestone payments, contract research and
development costs and royalties on product sales. The second agreement is an
evaluation and license agreement with Alcon under which Alcon acquired worldwide
marketing rights to Lu-Tex for ophthalmology indications. Alcon will conduct and
bear all costs for worldwide development and regulatory submissions for
ophthalmology indications of Lu-Tex. The Company received an initial,
non-refundable, payment from Alcon and will receive payments based on completion
of milestones, as well as royalties on any future product sales.
Revenue in the third quarter of fiscal 1998 consisted of contract research and
development revenue from Nycomed and Alcon. Approximately $2.7 million of
license fee revenue in the nine months ended March 31, 1998 was related to
non-refundable license payments received from Nycomed and Alcon. In fiscal 1997,
$25,000 of license revenue was recognized from E-Z-EM, Ltd. upon execution of a
European sales and distribution agreement for GADOLITE(R) ORAL SUSPENSION
("GADOLITE") and a milestone payment received upon receipt of regulatory
approval for marketing of GADOLITE in the United Kingdom. The total revenue
recognized was net of royalty payments to The University of Texas ("UT") since
the products covered by the agreement with E-Z-M, Ltd. incorporate the
technology licensed by the Company from UT.
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Research and Development
Research and development expenses increased $1.2 million to $3.6 million in the
three months ended March 31, 1998 as compared to $2.4 million in the three
months ended March 31, 1997. This increase was primarily due to increased
clinical trial costs and higher drug manufacturing development costs. For the
nine months ended March 31, 1998, research and development expenses increased
$2.4 million to $9.7 million from $7.3 million in the nine months ended March
31, 1997. This increase was mainly attributable to increased clinical trial
costs, higher drug manufacturing development costs, higher personnel costs as
well as the cost associated with the write down of certain R & D equipment. The
Company expects research and development spending to increase over the next
several years as product development, clinical trials and core research efforts
continue to expand.
General and Administrative
General and administrative expenses increased to $476,000 in the three months
ended March 31, 1998, compared to $454,000 in the three months ended March 31,
1997. The increase was primarily related to increases in personnel and related
expenses. For the nine months ended March 31, 1998, general and administrative
expenses decreased to $1.4 million as compared to $1.5 million in the nine
months ended March 31, 1997. The decrease is attributable to approximately
$300,000 of financing costs incurred in the first quarter of fiscal 1997 related
to a planned public financing which was subsequently withdrawn due to market
conditions, partially offset by increases in personnel and related expenses.
Interest income, Net
Interest income, net increased to $768,000 and$1.7 million in the three and nine
months ended March 31, 1998, respectively, compared to $365,000 and $799,000 for
the three and nine months ended March 31, 1997, respectively. The increase in
both periods was primarily attributable to increased earnings from higher
investment balances resulting from the private equity placements during fiscal
1997 and the public equity offering completed in February 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of working capital have been private and public
equity financings and proceeds from collaborative research and development
agreements, as well as grant revenues, interest income and property and
equipment financings.
As of March 31, 1998, the Company had approximately $72.5 million in cash, cash
equivalents and investments. Net cash used in operating activities of $4.9
million during the nine months ended March 31, 1998 resulted primarily from the
net loss of $5.9 million and an increase in accounts receivable, partially
offset by non-cash depreciation expense, a write-down of equipment and an
increase in accounts payable. Net cash
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used in operating activities of $6.9 million during the nine months ended March
31, 1997 reflects the net loss of $8.0 million, partially offset by non-cash
depreciation expense, a decrease in prepaid expenses and an increase in accounts
payable.
Cash used in investing activities of $27.8 million and $4.6 million for the nine
months ended March 31, 1998 and 1997, respectively, consisted primarily of
purchases of investment securities, net of maturities. Net cash provided by
financing activities of $40.8 million and $24.0 for the nine months ended March
31, 1998 and 1997, respectively, consisted primarily of net proceeds from the
issuance of common stock.
In November 1996, the Company completed a private placement of 580,000 shares of
common stock at $14.00 per share for net proceeds of $8.1 million. In February
1997, the Company completed a private placement of 862,190 shares of Common
Stock at $19.05 per share for net proceeds of $16.4 million. In February 1998,
the Company sold 2,012,500 shares of its common stock at a price of $21.75 per
share which resulted in net proceeds to the Company of approximately $40.8
million.
The Company expects to incur ongoing expenditures that may not only fluctuate
from quarter to quarter, but are expected to increase as the levels of clinical
activities for the Company's products increases. 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 investments
will provide funding for the Company's operations through at least the calendar
year 2000. However, the Company's actual capital requirements will depend on
many factors, including the status of product development; the time and cost
involved in conducting clinical trials and 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'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
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Company to raise capital when needed could have a material adverse effect on the
Company's business, financial condition and results of operations.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
UNCERTAINTIES RELATED TO CLINICAL TRIALS AND PRODUCT DEVELOPMENT
All of the Company's product candidates are in development and have not
generated product sales revenue to date, and there can be no assurance that any
of the Company's products under development will be commercialized or will
generate product sales revenue in the future. To achieve profitable operations,
the Company, alone or with collaborative partners, must successfully research,
develop, obtain regulatory approval for, manufacture, introduce, market and
distribute its products under development. The time frame necessary to achieve
these goals for any individual product is long and uncertain. Most of the
Company's product candidates are generally in early stages of development and
will require significant additional research and development, preclinical and
clinical testing and regulatory approval prior to commercialization. A number of
factors will impact the timing and ability of the Company to successfully
complete clinical trials for its products under development.
Before obtaining regulatory clearance for the commercial sale of any of its
products under development, the Company must demonstrate through preclinical
studies and clinical trials that the potential product is safe and efficacious
for use in humans for each target indication. Pharmacyclics has conducted and
plans to continue extensive and costly clinical trials to assess the safety and
efficacy of its potential products. There can be no assurance that the Company
will be permitted to undertake or continue its intended clinical trials for any
of its potential products or, if permitted, that such products will be
demonstrated to be safe and efficacious.
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 and longevity of the target patient
population, proximity of patients to clinical sites and eligibility criteria for
the trials. There can be no assurance that the Company will obtain adequate
levels of patient enrollment in its clinical trials. Delays in planned patient
enrollment may result in increased costs, delays or termination of clinical
trials, which could have a material adverse affect on the Company. In addition,
the U.S. Food and Drug Administration ("FDA") may suspend clinical trials at any
time if, among other reasons, it concludes that patients participating in such
trials are being exposed to unacceptable health risks.
The Company also relies on third parties to assist the Company in conducting,
overseeing and monitoring its clinical trials. If such third parties fail to
perform under their agreements with the Company or fail to meet regulatory
standards in the performance of their obligations under such agreements, such
clinical trials may
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be delayed or halted. The Company's reliance on assistance from third parties
with respect to its clinical trials is likely to increase as the Company expands
the number and scope of its clinical trials.
Additionally, demands on the Company's clinical staff have been increasing and
are expected to continue to increase as a result of later-stage clinical trials
of its products in development and its monitoring of additional Phase I clinical
trials of Gd-Tex and LUTRIN for various indications which are being funded by
the National Cancer Institute ("NCI"). There can be no assurance that the
Company will be able to effectively oversee and monitor these multiple clinical
trials. The Company's inability to effectively manage multiple concurrent
clinical trials would result in increased costs or delays of the Company's
clinical trials. There can be no assurance that the Company will be able to
complete the necessary data and submit a new drug application ("NDA") as
scheduled even if clinical trials are completed or that such application will be
reviewed and cleared by the FDA in a timely manner, if at all.
Data obtained from preclinical studies and clinical trials of the products under
development by the Company are not necessarily indicative of results that will
be obtained from subsequent or more extensive preclinical studies and clinical
trials. Moreover, such data is susceptible to varying interpretations which
could delay, limit or prevent regulatory approval. In advanced clinical
development, numerous factors may be involved that may lead to different results
in larger, later-stage trials from those obtained in earlier-stage trials. A
number of companies in the pharmaceutical industry, including biotechnology
companies, have suffered significant setbacks in advanced clinical trials, even
after promising results in earlier trials. The failure to adequately demonstrate
the safety and efficacy of a product under development could delay or prevent
regulatory clearance of the potential product and would have a material adverse
effect on the Company. There can be no assurance that the Company's clinical
trials will demonstrate the sufficient levels of safety and efficacy necessary
to obtain the requisite regulatory approval or will result in marketable
products.
NO ASSURANCE OF MARKET ACCEPTANCE
There can be no assurance that, if approved for marketing, any of the Company's
products under development will achieve market acceptance. The degree of market
acceptance will depend upon a number of factors, including the receipt of
regulatory approvals, the establishment and demonstration in the medical
community of the clinical efficacy and safety of the Company's product
candidates and their potential advantages over existing therapeutic products,
diagnostic and/or imaging techniques, and pricing and reimbursement policies of
government and third-party payers. There can be no assurance that physicians,
patients, payers or the medical community in general will accept and utilize any
products that may be developed by the Company.
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HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred significant operating losses since its inception in
1991 and, as of March 31, 1998, had an accumulated deficit of approximately
$44.1 million. The Company expects to continue to incur significant operating
losses over the next several years as it continues to incur increasing costs of
research and development, in addition to costs related to clinical trials and
manufacturing activities. The Company's ability to achieve profitability is
dependent upon its ability, alone or with others, to successfully complete the
development of its proposed products, obtain the required regulatory clearances
and manufacture and market its proposed products. To date, the Company has not
generated revenue from the commercial sale of its products and does not expect
to receive any such revenue in the near future. All revenues to date have
resulted primarily from non-refundable license, contract research and
development and milestone payments and, to a lesser extent, funding from one
government research grant.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
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 United States and abroad.
Before receiving FDA clearance to market a product, the Company will have to
demonstrate that the product is safe and effective on the patient population
that will be treated. Clinical trials, manufacturing and marketing of products
are subject to the rigorous testing and approval process of the FDA and
equivalent foreign regulatory authorities. The Federal Food, Drug and Cosmetic
Act and other federal and state statutes and regulations govern and influence
the testing, manufacture, labeling, advertising, distribution and promotion of
drugs and medical devices. As a result, clinical trials and regulatory approval
can take a number of years to accomplish and require the expenditure of
substantial resources. Data obtained from clinical trials are susceptible to
varying interpretations which could delay, limit or prevent regulatory
clearances. In addition, delays or rejections may be encountered based upon
additional government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development,
clinical trials and FDA regulatory review. Similar delays also may be
encountered in foreign countries. 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. Marketing or promoting a
drug for an unapproved indication is subject to very strict controls under The
Food and Drug Administration Modernization Act of 1997 (the "1997 FDA Act").
Furthermore, clearance may entail ongoing requirements for postmarketing
studies. 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
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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.
Manufacturers of drugs also are required to comply with the applicable FDA good
manufacturing practice ("GMP") regulations, which include requirements relating
to quality control and quality assurance as well as the corresponding
maintenance of records and documentation. Manufacturing facilities are subject
to inspection by the FDA, including unannounced inspection, and must be licensed
before they can be used in commercial manufacturing of the Company's products.
There can be no assurance that the Company or its present or future suppliers
will be able to comply with the applicable GMP regulations and other FDA
regulatory requirements.
The Company may elect to seek approval of Gd-Tex and LUTRIN under the fast track
("Fast Track") provisions codified in the 1997 FDA Act. Significant uncertainty
exists as to the extent to which such changes will result in accelerated review
and approval. Further, the FDA has not made available comprehensive information
with respect to the 1997 FDA Act and retains considerable discretion to
determine eligibility for Fast Track review and approval. Accordingly, the FDA
could employ such discretion to deny eligibility of Gd-Tex or LUTRIN as a
candidate for Fast Track review or to require additional clinical trials or
other information before approving either product. A determination that Gd-Tex
or LUTRIN is not eligible for accelerated review or delays and additional
expenses associated with generating a response to any such request for
additional trials could have a material adverse effect on the Company.
In addition to the drug approval requirements applicable to the Company's LUTRIN
and ANTRIN Photosensitizer products for photodynamic therapy 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, and may result in
additional delays or difficulties in obtaining approval for the use of LUTRIN or
ANTRIN as photosensitizers. Manufacturers of such light delivery devices
currently are under no obligation to the Company to file or pursue such
applications and any delay or refusal on their part to do so could have a
material adverse affect on the Company.
The Company submitted an NDA for its GADOLITE product 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 also require resolution of current manufacturing
uncertainties relating to GADOLITE. These issues must be resolved before
GADOLITE can be successfully
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<PAGE> 16
manufactured and marketed. There can be no assurance that the FDA will decide
that the NDA satisfies the criteria for approval. In 1996, the Company received
approval from the Medicines Control Agency to market GADOLITE in the United
Kingdom. In April 1998, the Company received approval from the Health Protection
Branch of Health Canada to market Gadolite in Canada. The Company will not
market GADOLITE in Europe or Canada 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 United States, 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. See "-- Limited Manufacturing
Experience; Dependence Upon Contract Manufacturers."
UNCERTAINTIES REGARDING PATENTS AND PROPRIETARY RIGHTS
The Company believes its success depends upon, among other things, the Company's
ability to protect its proprietary position with respect to technology that the
Company believes is important to its business. The Company, therefore,
aggressively pursues, prosecutes, protects, and defends patent applications,
issued patents, trade secrets, and licensed patent and trade secret rights
covering certain aspects of the Company's technology.
The Company's patents, patent applications, and licensed patent rights variously
cover composition of matter and method of use claims relating to certain
compounds and their applications and therapeutic uses. As of March 31, 1998, the
Company owns or has licensed rights to 49 issued U.S. patents, 9 additional
allowed patent applications in the United States, and 21 other pending U.S.
patent applications. The issued U.S. patents expire between 2009 and 2014. The
Company is also the owner or licensee of 7 issued non-U.S. patents (i.e., 2
patents issued in Europe, 3 patents issued in Australia, 1 patent issued in
Norway, and 1 patent issued in New Zealand) and 72 pending non-U.S. patent
applications filed in Europe, Japan and certain other countries and under the
Patent Cooperation Treaty ("PCT") designating all PCT member countries. There
can be no assurance that the Company will have continued success in prosecuting
its patent applications or that patents will issue in respect of those patent
applications. Even if patents are issued and maintained, there can be no
assurance that the patents are or will be of adequate scope to benefit the
Company, or that any such patents would be upheld as valid and enforceable with
respect to third parties.
Because there are a number of third-party patents issued and third-party patent
applications filed relating to biometallic and expanded porphyrin chemistries,
the Company believes there is some 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 similar or even the same compositions,
methods, or designs of the Company or its products. It is pertinent, however,
that patents and patent applications owned or licensed by the Company cover
various aspects, ranging from base
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<PAGE> 17
compositions, to methods of manufacture, to processes for use and related
applications, of the biometallic and expanded porphyrin chemistries peculiar to
the Company's products. In any event, if any third-party patents include claims
that are alleged to be infringed and are upheld as valid and enforceable, the
Company could nonetheless 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 any 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 or other legal proceedings may be
necessary to defend against claims of infringement, to enforce patents of the
Company, or to protect trade secrets, and could result in substantial cost to,
and diversion of efforts by, the Company.
The Company is aware of several U.S. patents owned or licensed to Schering AG
("Schering") that relate to the use of agents that enhance magnetic resonance
imaging ("MRI") scans. The Company has obtained an opinion of special patent
counsel that the technologies employed by the Company for its imaging product
under development and MRI detectable compounds do not infringe the claims of
such patents; however, there can be no assurances that Schering would not allege
infringement of one or more of those patents. If infringement were alleged, a
legal determination of the infringement of any such patents by any Company
product having image-enhancing properties could have a material adverse affect
on the Company's business. Further, any allegation by Schering of infringement
of patent rights by the Company would likely 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 patent 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 of such patents. There can be no assurance that the
Company would be able to obtain a license from Schering, if required. Even if a
license could be obtained, there can be no assurance that the Company would
receive commercially reasonable terms.
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, and each of such persons has executed such type of agreement. 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 that these
agreements will not be breached, and, in some
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<PAGE> 18
instances, there may not be any appropriate remedy available to the Company for
breach of the agreements. Furthermore, no assurance can be given that
competitors will not independently develop substantially equivalent proprietary
information and techniques, reverse engineer such information and techniques, or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect the rights in unpatented proprietary
technology.
DEPENDENCE UPON THIRD PARTIES
The Company is dependent upon third parties for support in product development,
manufacturing, marketing and distribution. Pursuant to its collaboration with
Nycomed, the Company is dependent upon Nycomed for a portion of its LUTRIN
development costs in the form of milestone payments, and for the
commercialization, when and if LUTRIN is approved, of this product outside the
United States, Canada and Japan. In the field of macular degeneration, the
Company is dependent upon Alcon for preclinical and clinical studies, regulatory
filings and sales and marketing of Lu-Tex for ophthalmology indications
worldwide. The Company has entered into agreements with E-Z-EM, Ltd. and E-Z-EM,
Inc. (together "E-Z-EM") for sales, marketing and distribution of GADOLITE in
Europe and North America. These agreements may be terminated by E-Z-EM, Alcon or
Nycomed, respectively, at their election. There can be no assurance that any of
these parties will fulfill their obligations in a manner that maximizes revenues
for the Company. The failure by the Company to receive milestone payments or any
reduction or discontinuance of efforts by the Company's partners or the
termination of these alliances could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is also dependent upon the NCI for the sponsoring and funding of
certain of the clinical trials of the Company's Gd-Tex radiation sensitizer and
LUTRIN photosensitizer products in development. There can be no assurance that
the NCI will enlist support for all such trials or that it will continue its
funding. If such trials are not supported by the NCI, the Company may be
required to fund its own continuation of such trials or reduce the number of
indications for which it would pursue clinical trials.
There can be no assurance that the Company will be successful in entering into
additional strategic alliances for the development or commercialization of other
product candidates, nor that any such alliances, if entered into, will be on
terms favorable to the Company or that they will ultimately be successful.
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 Inc., Laserscope, Inc. and
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<PAGE> 19
Diomed, Inc.; LEDs from Quantum Devices, Inc.; and cylindrically diffusing light
fibers from Rare Earth Medical 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 supply sources which may require additional regulatory approvals and
could materially delay commercialization of the Company's LUTRIN and ANTRIN
products under development. There can be no assurance that the Company will be
able to establish or maintain relationships with other supply 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.
LIMITED MANUFACTURING EXPERIENCE; DEPENDENCE UPON CONTRACT MANUFACTURERS
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, LUTRIN and ANTRIN bulk drug
substances, which are the subject of a manufacturing and supply agreement with
Celanese Corporation, and GADOLITE, which has been the subject of a
manufacturing and supply agreement with Glaxo-Wellcome Co. ("Glaxo"), the
Company does not have access to the manufacturing capacity necessary to provide
clinical and commercial quantities of the Company's products. Any failure by
these third parties to supply the Company's or the NCI's requirements for
clinical trial materials would have a material adverse effect upon the
completion of such trials and could therefore have a material adverse effect on
the Company. The Company's agreement with Glaxo for manufacturing and supply of
GADOLITE may be terminated because of delay in FDA approval for GADOLITE. The
Company may be required to change manufacturing sources for GADOLITE. There can
be no assurance that the Company can renegotiate the manufacturing agreement
with Glaxo or negotiate a satisfactory manufacturing agreement with another
supplier, that Glaxo would successfully manufacture sufficient supplies of
GADOLITE, or that, if the Company switched suppliers, such a manufacturing
change would not delay the Company's approval and commercialization plans for
GADOLITE. 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, LUTRIN and ANTRIN. A failure to successfully complete any such agreement
could, 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
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 with
manufacturers
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<PAGE> 20
or that the Company will enter into supply agreements 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.
LACK OF MARKETING AND SALES EXPERIENCE
The Company currently does not have marketing, sales or distribution experience.
Therefore, to service markets in which it has retained sales and marketing
rights and in the event either of the above agreements is terminated, the
Company must develop a sales force with technical expertise. The Company does
not have any experience in developing, training or managing a sales force. The
Company will incur substantial additional expenses in developing, training and
managing such an organization. There can be no assurance that the Company will
be able to build such a sales force, that the cost of establishing such a sales
force will not exceed any product revenues, or that the Company's direct
marketing and sales efforts will be successful. In addition, the Company
competes with many other companies that currently have extensive and well-funded
marketing and sales operations. There can be no assurance that the Company's
marketing and sales efforts will compete successfully against such other
companies.
RAPID TECHNOLOGICAL CHANGE AND INTENSE 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. These entities represent significant
competition for the Company. Acquisitions of, or investments in, competing
pharmaceutical or biotechnology companies by large corporations could increase
such competitors' financial, marketing, manufacturing and other resources. The
Company is a relatively new enterprise and is engaged in the development of
novel therapeutic technologies. As a result its resources are limited and it may
experience technical challenges inherent in such novel technologies. There can
be no assurance that developments of others will not render the Company's
products under development 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 therapeutic, diagnostic and/or imaging 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 of a product for certain indications in the United States and
other countries. There can be no assurance that the Company's competitors will
not develop products that are safer, more
20
<PAGE> 21
effective or less costly than the products developed by the Company and,
therefore, present a serious competitive threat to the Company's product
offerings.
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, LUTRIN or ANTRIN and could render the Company's
technology noncompetitive or obsolete. Also, there can be no assurance that
physicians will use Gd-Tex as a radiation sensitizer or chemosensitizer in
cancer treatment, LUTRIN as a photosensitizer in cancer treatment or ANTRIN as a
photosensitizer in 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.
FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF 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's future
capital requirements will depend on many factors, including, among others,
continued scientific progress of its research and development programs, the
ability of the Company to establish additional collaborative arrangements,
changes in its existing collaborative relationships, progress with preclinical
studies and clinical trials, the time and costs involved in obtaining regulatory
clearance, the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and competing technological and market developments. The
Company believes that its cash, cash equivalents, and short-and long-term
investments will be adequate to fund the Company's operations through at least
the calendar year 2000. However, the Company's actual capital requirements will
depend on many factors, including the status of product development; the time
and cost involved in conducting clinical trials and 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 may seek to raise any necessary additional funds
through equity or debt financings, collaborative arrangements with corporate
partners or other sources which may be dilutive to existing stockholders. In
addition, in the event that additional funds are obtained
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through arrangements with collaborative partners or other partners, such
arrangements may require the Company to relinquish rights to certain of its
technologies, product candidates or products under development that the Company
would otherwise seek to develop or commercialize itself. 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 may be required to delay, reduce the scope of or
eliminate one or more of its research or development programs which would
materially and adversely affect the Company's business, financial condition and
results of operations.
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 obtain additional needed personnel or
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.
VOLATILITY OF STOCK PRICE
The market prices for securities of small capitalization 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 preclinical testing and
clinical trials, technological innovations or new therapeutic products,
governmental regulation, developments in patent or other proprietary rights,
litigation, public concern as to the safety of products developed by the Company
or others, comments by securities analysts and general market conditions may
have a significant effect on the market price of the Company's Common Stock. In
addition, the realization of any of the risks described in these "Factors That
May Affect Future Operating Results" could have a dramatic and material adverse
impact on the market price of the Company's Common Stock.
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 payers 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 United States, given
22
<PAGE> 23
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 payers are increasingly challenging the
prices charged for medical products and services. Also, the trend toward managed
health care in the United States 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 payers
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 $5.0 million annual aggregate limit in connection with 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 to 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.
HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS
In connection with its research and development activities and its manufacture
of materials and products under development, the Company is subject to federal,
state and local laws, rules, regulations and policies
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<PAGE> 24
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 the applicable
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 completely 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.
NO DIVIDENDS
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> 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other information.
Changes in Members of Board of Directors
In February 1998, Mr. Brian A. Markison was elected to the Company's
Board of Directors. Mr. Markison is currently Senior Vice President,
Neuroscience/Anti-Infective Sales for Bristol-Myers Squibb Company.
Mr. Markison was formerly Vice President, Marketing and Advanced
Medical Services for Bristol-Myers Squibb Oncology.
On May 4, 1998, Mr. Patrick Latterell, a member of the Company's
Board of Directors since 1991, resigned.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
10.38 Employment Agreement, dated December 18, 1997, by and
between the Company and Leiv Lea.
27 Financial Data Schedule
b. Reports on Form 8-K.
None
25
<PAGE> 26
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 13, 1998 By: /s/ Richard A. Miller, M.D.
------------------------------------------
Richard A. Miller, M.D.
President and Chief Executive Officer
Date: May 13, 1998 By: /s/ Leiv Lea
------------------------------------------
Leiv Lea
Vice President, Finance and Administration
26
<PAGE> 27
EXHIBIT INDEX
Exhibit
No.
10.38 Employment agreement, dated December 18, 1997, by and between the
Company and Leiv Lea.
27 Financial Data Schedule
27
<PAGE> 1
EXHIBIT 10.38
PHARMACYCLICS, INC.
995 East Arques Avenue
Sunnyvale, CA 94086-4593
December 18, 1997
Leiv Lea
31 Morse Lane
Woodside, California 94062
Dear Leiv;
On behalf of the Company's Board of Directors, I am pleased to make you
an offer to join the Company as its Vice President Finance & Administration. The
purpose of this letter is to set forth the terms of your proposed employment
with the Company, including your compensation level and benefit entitlements.
1. EMPLOYMENT AND DUTIES.
A. The Company will employ you as Vice President Finance &
Administration, commencing on December 17, 1997, and you will accordingly make
yourself available on a full-time bases to assume that position on or before
such date. In that position, you will report directly to the Vice President
Business Development & CFO.
B. You will perform the duties inherent in your position
in good faith and to the best of your ability and will render all services which
may be reasonably required of you in such position. There will be an Orientation
Period of six months. This period shall be utilized as an orientation and
training period, during which time the demonstrated abilities, potential and
general suitability will be observed and evaluated by the Vice President
Business Development & CFO. While you are employed with the company, you will
devote your full time and effort to the business and affairs of the Company.
Your principal place of operations will be at the Company's corporate offices,
which are presently located in Sunnyvale, California.
2. COMPENSATION.
A. Your initial base salary will be at the rate of
$150,000.00 per year. Your base salary will be subject to adjustment by the
Company's Board of Directors for each calendar year of service following the
1997 calendar year.
B. Your base salary will be paid at periodic intervals in
accordance with the Company's payroll practices for salaried employees.
<PAGE> 2
Page 2
C. The Company will deduct and withhold, from the base
salary and bonuses payable to you hereunder, any and all applicable Federal,
state and local income and employment withholding taxes and any other amounts
required to be deducted or withheld by the Company under applicable statute or
regulation.
3. EMPLOYEE STOCK OPTIONS. As soon as possible after you join the
Company as Vice President Finance & Administration , you will be granted a stock
option to purchase 50,000 shares of Pharmacyclics Common Stock at $24.25 per
share. The option will have an exercise price equal to 100% of the fair market
value of the Pharmacyclics Common Stock on the grant date and will have a
maximum term of 10 years, subject to earlier termination upon your cessation of
employment with the Company. The option will become exercisable as follows: the
option will become exercisable for 10,000 shares upon completion of one year of
service after your date of hire, the option will become exercisable for the
remaining 40,000 shares in a series of 48 equal successive monthly installments
upon completion of each month of service thereafter. All vesting under your
option will cease upon your termination of employment. The remaining terms and
conditions of your option will be in accordance with the standard provisions
utilized for stock option grants under the Company's 1995 Stock Option Plan.
4. EXPENSE REIMBURSEMENT. You will be entitled to reimbursement
from the Company for all customary, ordinary and necessary business expenses
incurred by you in the performance of your duties hereunder, provided you
furnish the Company with vouchers, receipts and other details of such expenses
within thirty (30) days after they are incurred.
5. FRINGE BENEFITS. You will be eligible to participate in any
group life insurance plan, group medical and/or dental insurance plan,
accidental death and dismemberment plan, short-term disability program and other
employee benefit plans, including the Section 401(k) plan and the Employee Stock
Purchase Plan, which are made available to executive officers of the Company and
for which you otherwise qualify.
<PAGE> 3
Page 3
6. VACATION. You will accrue paid vacation benefits in accordance
with the Company policy in effect for executive officers.
7. RESTRICTIVE COVENANTS. During the period of service as Vice
President Finance & Administration:
(i) you will devote your full working time and effort to
the performance of your duties as Vice President
Finance & Administration
(ii)except as approved by the President & CEO you will
not directly or indirectly, whether for your own
account or as an employee, consultant or advisor,
provide services to any business enterprise other than
the Company.
However, you will have the right to perform such
incidental services as are necessary in connection with (a) your private passive
investments, (b) your charitable or community activities, and (c) your
participation in trade or professional organizations, but only to the extent
such incidental services do not interfere with the performance of your services
as Vice President Finance & Administration.
8. PROPRIETARY INFORMATION. Upon the commencement of your
services as Vice President Finance & Administation, you will sign and deliver to
the Company the standard-form Proprietary Information and Inventions Agreement
required of all key employees of the Company.
9. TERMINATION OF EMPLOYMENT: SALARY CONTINUATION.
A. Your employment as Vice President Finance &
Administration pursuant to this agreement will be entirely at will.
B. The Company may terminate your employment under this
agreement at any time for any reason, with or without cause (as defined below),
by providing you with at least thirty (30) days prior written notice. However,
such notice requirement will not apply to the termination of your employment for
cause pursuant to subparagraph D below.
C. You may terminate your employment under this agreement
at any time for any reason upon thirty (30) days prior written notice to the
Company.
D. The Company may at any time, upon written notice,
terminate your employment hereunder for cause. Such termination will be
effective immediately upon such notice.
<PAGE> 4
Page 4
For purposes of this agreement, your employment with the Company
will be deemed to have been involuntarily terminated for cause if your services
are terminated by the Company for one or more of the following reasons:
(i) acts of fraud or embezzlement or other intentional
misconduct which adversely affects the Company's
business, or
(ii) failure to correct any material deficiency in the
performance of your services as Vice President Finance
& Administration within thirty (30) after written
notification of such deficiency from the Board, or
(iii) misappropriation or unauthorized disclosure or use
of the Company's proprietary information.
Please indicate your acceptance of the foregoing provisions of
this employment agreement by signing the enclosed copy of this agreement and
returning it to the Company.
Very truly yours,
PHARMACYCLICS, INC.
By _____________________________________________
Title: Vice President & Chief Financial Officer
ACCEPTED BY AND AGREED TO
Signature:________________________
Leiv Lea
Dated:_____________, 1997
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
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0
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