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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 December 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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 December 31, 1998, there were 12,385,836 shares of the Registrant's Common
Stock outstanding, par value $0.0001 per share.
This quarterly report on Form 10-Q consists of 24 pages of which this is page 1.
The Exhibit Index is located at page 22.
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PHARMACYCLICS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NUMBER
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Condensed Balance Sheet as of December 31, 1998 and June 30, 1998..... 3
Condensed Statement of Operations for the three and six months
ended December 31, 1998 and 1997................................... 4
Condensed Statement of Cash Flows for the six months
ended December 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 Factors that May Affect Future
Operating Results ................................................. 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................... 21
Item 2. Changes in Securities ................................................ 21
Item 3. Defaults Upon Senior Securities ...................................... 21
Item 4. Submission of Matters to a Vote of Security Holders .................. 21
Item 5. Other Information .................................................... 21
Item 6. Exhibits and Reports on Form 8-K ..................................... 22
SIGNATURES ............................................................................ 23
</TABLE>
PHARMACYCLICS(R), the "pentadentate" logo [LOGO], GADOLITE(R), XCYTRIN(TM),
ANTRIN(TM), LUTRIN(TM), and OPTRIN(TM) are trademarks of Pharmacyclics, Inc.
Other trademarks, trade names or service marks used herein are the property of
their respective owners.
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACYCLICS, INC.
(a development stage company)
CONDENSED BALANCE SHEET
(unaudited; in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,984 $ 13,456
Short-term investments 39,674 23,189
Accounts receivable 360 166
Prepaid expenses and other current assets 629 166
--------- ---------
Total current assets 50,647 36,977
Long-term investments 11,992 33,736
Property and equipment, net 2,501 2,253
Other assets 53 53
--------- ---------
$ 65,193 $ 73,019
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,466 $ 3,377
Accrued liabilities 544 432
Current portion of capital lease obligations 225 255
--------- ---------
Total current liabilities 4,235 4,064
Capital lease obligations 163 275
Deferred rent 18 39
--------- ---------
Total liabilities 4,416 4,378
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 1 1
Additional paid-in capital 116,901 116,531
Other 76 --
Deficit accumulated during development stage (56,201) (47,891)
--------- ---------
Total stockholders' equity 60,777 68,641
--------- ---------
$ 65,193 $ 73,019
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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PHARMACYCLICS, INC.
(a development stage company)
CONDENSED STATEMENT OF OPERATIONS
(unaudited; in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License and grant revenues $ -- $ 2,700 $ -- $ 2,700
Contract revenue 219 214 454 214
-------- -------- -------- --------
Total revenues 219 2,914 454 2,914
-------- -------- -------- --------
Operating expenses:
Research and development 4,730 3,317 9,337 6,082
General and administrative 689 512 1,248 900
-------- -------- -------- --------
Total operating expenses 5,419 3,829 10,585 6,982
-------- -------- -------- --------
Loss from operations (5,200) (915) (10,131) (4,068)
Interest income, net 865 472 1,821 970
-------- -------- -------- --------
Net loss $ (4,335) $ (443) $ (8,310) $ (3,098)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.35) $ (0.04) $ (0.67) $ (0.31)
======== ======== ======== ========
Shares used to compute basic and diluted
net loss per share 12,373 10,187 12,354 10,152
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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PHARMACYCLICS, INC.
(a development stage company)
CONDENSED STATEMENT OF CASH FLOWS
(unaudited; in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
---------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,310) $ (3,098)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 424 442
Write-down of equipment -- 188
Changes in assets and liabilities:
Accounts receivable (194) (214)
Prepaid expenses and other assets (463) 12
Accounts payable 89 147
Accrued liabilities 112 99
Deferred rent (21) (20)
-------- --------
Net cash used in operating activities (8,363) (2,444)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (672) (245)
Purchases of investments (10,768) (11,652)
Proceeds from sale of investments 16,103 3,596
-------- --------
Net cash provided by (used in) investing activities 4,663 (8,301)
-------- --------
Cash flows from financing activities:
Payments under capital lease obligations (142) (574)
Proceeds from sale of stock 370 244
-------- --------
Net cash provided by (used in) financing activities 228 (330)
-------- --------
Net decrease in cash and cash equivalents (3,472) (11,075)
Cash and cash equivalents at the beginning of the period 13,456 15,869
-------- --------
Cash and cash equivalents at the end of the period $ 9,984 $ 4,794
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 20 $ 50
</TABLE>
The accompanying notes are an integral part of these financial statements.
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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, 1998 filed with the
Securities and Exchange Commission on September 25, 1998.
The results of operations for the six-months ended December 31, 1998 are not
necessarily indicative of the operating results that may be reported for the
fiscal year ending June 30, 1999 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. Research and development costs consist
of direct and indirect internal costs related to specific projects as well as
fees paid to other entities which conduct certain research activities on behalf
of the Company.
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.
NOTE 2 - BASIC AND DILUTED NET LOSS PER SHARE
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common and potential common shares
outstanding during the period. Potential common shares consist of stock options
and warrants (using the treasury stock method) and have been excluded from the
computation of dilutive earnings per share because their effect is
anti-dilutive.
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PHARMACYCLICS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - EQUITY
In February 1998, the Company sold 2,012,500 shares of its Common Stock in a
public offering, at a price of $21.75 per share, which resulted in net proceeds
to the Company of approximately $40,800,000. 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 $16,300,000. 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 $8,100,000. The Company filed and had declared effective on April
22, 1997, a registration statement on Form S-3 covering the resales of the
securities purchased in both private placements.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
Effective July 1998, Pharmacyclics adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income." SFAS 130
establishes standards for reporting comprehensive income (loss) and its
components in a year end financial statement that is displayed with the same
prominence as other financial statements. Similar information should be provided
in the notes to interim financial statements. Comprehensive income (loss) as
defined includes all changes in equity (net assets) during a period from
nonowner sources. Examples of items to be included in comprehensive income
(loss), which are currently excluded from the results of operations, include
foreign currency translation adjustments and unrealized gain/loss on
available-for-sale securities.
The Company's total comprehensive losses were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- ------------------------
1998 1997 1998 1997
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss $ (4,335) $ (443) $ (8,310) $ (3,098)
Net unrealized gains (losses) on
available-for-sale securities (234) --- 76 ---
----------- ----------- ---------- ----------
Comprehensive net loss $ (4,569) $ (443) $ (8,234) $ (3,098)
=========== =========== ========== ==========
</TABLE>
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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 discussed in "Factors That May Affect Future Operating Results,"
elsewhere in this report and in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1998.
OVERVIEW
Pharmacyclics is a pharmaceutical company developing energy-potentiating drugs
to improve radiation therapy and chemotherapy of cancer, and to enable or
improve the photodynamic therapy of certain cancers, atherosclerotic
cardiovascular disease, and retinal diseases. The Company is currently in
multicenter Phase III clinical trials with XCYTRIN(TM) (a gadolinium texaphyrin
molecule also known as "Gd-Tex") as a radiation sensitizer to improve the
efficacy of radiation therapy of brain metastases resulting from a variety of
cancers, including those of the lung and breast. The Company is conducting
a Phase I clinical trial for ANTRIN(TM) photosensitizer to evaluate
its safety and efficacy for photoangioplasty treatment of patients with
atherosclerotic peripheral arterial disease. LUTRIN(TM) photosensitizer is in
multicenter Phase II clinical trials to evaluate its safety and efficacy for use
in the treatment of recurrent breast cancers to the chest wall, which are
accessible to illumination by externally-applied light. The National Cancer
Institute ("NCI") intends to conduct several Phase I clinical trials of XCYTRIN
and several Phase I clinical trials of LUTRIN, each for a variety of additional
cancer indications. In addition, the Company has conducted preclinical studies
with OPTRIN(TM) photosensitizer for use in certain ophthalmic diseases, such as
age-related macular degeneration ("ARMD"). In October 1997, the Company entered
into a collaborative agreement with Nycomed Imaging A/S ("Nycomed") to sell and
market LUTRIN for cancer therapy outside the United States, Canada and Japan. In
December 1997, the Company entered into an evaluation and license agreement with
Alcon Pharmaceuticals, Ltd. ("Alcon") under which Alcon obtained the right to
conduct worldwide development, marketing and sales of OPTRIN photosensitizer for
ophthalmology indications. Alcon is conducting Phase I studies in patients with
ARMD.
To date, the Company has devoted substantially all of its resources to research
and development. No revenues have been derived from product sales, and the
Company does not expect to receive product revenues for at least the next
several years. The Company has incurred significant operating losses since its
inception in 1991 and, as of December 31, 1998, had an accumulated deficit of
approximately $56.2 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 expects that losses
will fluctuate from quarter to quarter and that such fluctuations may be
substantial. The Company's ability to achieve profitability is dependent upon
its ability, alone or with others, to successfully complete the development of
its products under development, and obtain required regulatory clearances and
successfully manufacture and market these products.
RESULTS OF OPERATIONS
Revenues
Revenues were $219,000 for the three-month period ended December 31, 1998,
compared to $2,914,000 for the three-months ended December 31, 1997. Revenue in
fiscal 1999 consisted of contract revenue associated with one of the Company's
corporate collaboration agreements. Revenue in fiscal 1998 consisted of
$2,700,000 of license fees related to non-refundable license payments received
from the Company's two corporate collaboration agreements and $214,000 of
contract research and development revenue. Revenues for the six-month period
ended December 31, 1998 were $454,000 compared to $2,914,000 in the comparable
fiscal 1998 period.
8
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Research and Development
Research and development expenses for the three-months ended December 31, 1998,
were $4,730,000 compared to $3,317,000 for the three-months ended December 31,
1997, which represents a 42.6% increase. For the six-months ended December 31,
1998 and 1997, research and development expenses were $9,337,000 and $6,082,000,
respectively, or an increase of 53.5%. The increases in research and development
expenses in both periods were mainly attributable to increased clinical trial
costs, greater drug purchases and greater personnel costs. The Company expects
research and development spending to increase further over the next several
years as product development, clinical trials and core research efforts continue
to expand.
General and Administrative
General and administrative expenses for the three-months ended December 31,
1998, were $689,000 compared to $512,000 for the three-months ended December 31,
1997, which represents a 34.6% increase. For the six-months ended December 31,
1998 and 1997, general and administrative expenses were $1,248,000 and $900,000,
respectively, or an increase of 38.7%. The increase in both periods was
primarily related to increases in personnel and related expenses.
Interest Income, Net
Interest income, net was $865,000 and $472,000 for the three-months ended
December 31, 1998 and 1997, respectively, representing an increase of 83.3%. For
the six-months ended December 31, 1998 and 1997, interest income, net was
$1,821,000 and $970,000, respectively, or an increase of 87.7%. The increases
were primarily attributable to increased earnings from higher investment
balances resulting from a 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 and contract revenues and interest income.
As of December 31, 1998, the Company had approximately $61,650,000 in cash, cash
equivalents and investments. Net cash used in operating activities of $8,363,000
during the six-months ended December 31, 1998 resulted primarily from the net
loss for the period. Net cash used in operating activities of $2,444,000 during
the six-months ended December 31, 1997 resulted primarily from the net loss for
the period and a decrease in accounts payable, partially offset by noncash
charges for depreciation expense and a write-down of equipment.
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Cash provided by investing activities of $4,663,000 for the six-months ended
December 31, 1998, consisted primarily of proceeds from the sale of investments,
net of purchases. Cash used in investing activities of $8,301,000 for the
six-months ended December 31, 1997, consisted primarily of purchases of
investments, net of proceeds from the sale of investments. Net cash provided by
financing activities of $228,000 for the six months ended December 31, 1998
consisted of proceeds from the sale of stock, offset by payments under capital
lease obligations. Net cash used in financing activities of $330,000 for the six
months ended December 31, 1997, consisted of payments under capital lease
obligations, partially offset by proceeds from the sale of stock.
Based on the current status of its product development and commercialization
plans, the Company believes its cash, cash equivalents and short and long-term
investments will be adequate to satisfy its capital needs 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 Company to
raise capital when needed could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Factors That May
Affect Future Operating Results."
IMPACT OF YEAR 2000
The Company believes that with upgrades to its existing software and conversions
to new software, all of which are readily available in the market, the Year 2000
issue will not pose significant operational problems for its internal computer
systems. All required modifications and conversions of computer systems that are
critical to the Company's business operations are expected to be completed no
later than June 30, 1999 which is prior to the estimated occurrence of any Year
2000 issues. The Company has initiated formal communications with its
significant suppliers and service providers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. There is no guarantee that the systems of
other companies on which the Company's systems rely will be timely converted and
will not have an adverse impact on the Company's systems. The Company estimates
that the cost of required upgrades and conversions will not have a significant
impact on its results of operations.
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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 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 XCYTRIN and LUTRIN for various indications which are being funded by
the 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.
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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.
HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred significant operating losses since its inception in
April 1991 and, as of December 31, 1998, had an accumulated deficit of
approximately $56.2 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 increasing
costs related to later stage 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,
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including withdrawal of the product from the market. Failure to obtain or
maintain requisite governmental approvals, failure to obtain approvals of the
clinically intended uses or the identification of adverse side effects of the
Company's products under development could delay or preclude the Company from
further developing a particular product or from marketing its products, or could
limit the commercial use of its products, any of which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Manufacturers of drugs also are required to comply with the applicable FDA good
manufacturing practices ("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 XCYTRIN 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 XCYTRIN 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 XCYTRIN 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, ANTRIN and OPTRIN photosensitizer products for photodynamic therapy of
certain cancers, atherosclerosis and ARMD, the Company or its collaborators will
also need to obtain the approval of the FDA and other foreign regulatory
authorities for the laser, light emitting diodes ("LEDs") or associated light
delivery devices used in such treatments. Such device approval requires
additional regulatory submissions both by the Company or its collaborators and
by the manufacturers of such devices, which 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, ANTRIN or OPTRIN 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(R) oral suspension 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. 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. GADOLITE will not be marketed in Europe or Canada until
product manufacturing and product stability issues are resolved. 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 a marketing authorization in Europe. 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.
13
<PAGE> 14
UNCERTAINTIES REGARDING PATENTS AND PROPRIETARY RIGHTS
The Company believes its success depends upon, among other things, the Company's
ability to protect its intellectual property position. The Company, therefore,
aggressively pursues, prosecutes, protects and defends its patent applications,
issued patents, trade secrets, and licensed patent and trade secret rights
covering, e.g., compositions of matter, methods of use and synthetic methodology
relating to its products under development. The Company owns or has licensed
various rights to patents and pending applications in the U.S., Europe, Japan
and elsewhere throughout the world. The issued U.S. patents expire between 2006
and 2016. 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 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 opinions of special patent
counsel that the technologies employed by the Company for its imaging product
under development and its therapeutic agent that is detectable by MRI 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 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. These agreements provide that all confidential information developed by
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. The agreements also provide that
all inventions conceived by an employee (or consultant or advisor to the extent
appropriate for the services provided) during the course of the relationship
shall be the exclusive property of the Company, other than inventions unrelated
to the Company and
14
<PAGE> 15
developed entirely with the individual's own time and resources. There can be no
assurance that these agreements will not be breached, and, in some 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 OPTRIN for ophthalmology indications
worldwide. The Company has entered into agreements with E-Z-EM, Inc. and E-Z-EM,
Ltd. (together "E-Z-EM") for sales, marketing and distribution of GADOLITE in
Europe and North America. The respective agreements may be terminated by E-Z-EM,
Alcon or Nycomed, 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 XCYTRIN 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 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.
15
<PAGE> 16
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. XCYTRIN, LUTRIN, ANTRIN and OPTRIN bulk drug
substances are the subject of a manufacturing and supply agreement with
Celanese, Ltd. ("Celanese"), an affiliate of Hoechst Celanese Corporation
("HCC"). The Company does not have its own manufacturing facilities. Supply
agreements are being negotiated with additional manufacturers who have the
ability to manufacture, fill, label and package such additional necessary
materials prior to commercial introduction of its products. There can be no
assurance that the Company will be able to enter into additional supply
agreements on commercially acceptable terms or with manufacturers who will be
able to deliver supplies in appropriate quantity and quality to meet commercial
demand or that third party manufacturers will perform their contractual
obligations. 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.
In September 1996, the Company entered into an agreement with HCC, a
manufacturer of chemicals and pharmaceutical intermediates, for the process
optimization, scale-up and supply of the Company's texaphyrin-based products. In
October 1997, HCC assigned its rights and obligations under that agreement to
Celanese in connection with HCC's corporate restructuring. The agreement
presently grants Celanese exclusive worldwide manufacturing rights and requires
Celanese to supply all of Pharmacyclics' requirements of XCYTRIN and lutetium
texaphyrin drug substance for late-stage clinical and commercial use. During the
fourth quarter of fiscal 1998, the Company received indications from Celanese
that, due to a change in its business focus, Celanese wishes to reduce the scope
of its obligations under the agreement. The Company and Celanese then initiated
discussions aimed at possible modifications to the Agreement to allow the
Company to purchase commercial material from additional sources while relieving
Celanese of certain obligations under the agreement. The Company believes it is
in its best interest to have multiple sources of drug substance and has
commenced efforts to identify multiple additional sources of bulk drug
substance. Such efforts are likely to consume time and expense and there can be
no assurance that the Company will be successful in obtaining additional
supplies of drug substance. Until such situation is resolved, the Company will
be subject to uncertainties regarding the willingness or ability of Celanese or
such additional suppliers to deliver bulk-drug substance for these products on a
timely or commercially attractive basis. The Company is engaged in discussions
with a number of manufacturers of parenteral products regarding process
development and validation, filling, labeling and packaging of the finished
dosage form of LUTRIN, ANTRIN and OPTRIN. 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 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.
16
<PAGE> 17
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 any 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 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, in the case of atherosclerosis, by surgery (e.g., bypass),
angioplasty, atherectomy, the use of stents and drug therapy and in the case of
ARMD by laser photocoagulation. 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, atherosclerosis and ARMD could make
such other therapies more efficacious or cost-effective than XCYTRIN, LUTRIN,
ANTRIN or OPTRIN and could render the Company's technology noncompetitive or
obsolete. Also, there can be no assurance that physicians will use XCYTRIN as a
radiation sensitizer or chemosensitizer in cancer treatment, LUTRIN as a
photosensitizer in cancer treatment, ANTRIN as a photosensitizer in
photoangioplasty of atherosclerosis or OPTRIN as a photosensitizer in ARMD 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.
17
<PAGE> 18
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 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.
IMPACT OF YEAR 2000
The Company believes that with upgrades to its existing software and conversions
to new software, all of which are readily available in the market, the Year 2000
issue will not pose significant operational problems for its internal computer
systems. All required modifications and conversions of computer systems that are
critical to the Company's business operations are expected to be completed no
later than June 30, 1999 which is prior to the estimated occurrence of any Year
2000 issues. The Company has initiated formal communications with its
significant suppliers and service providers to determine the extent to which the
Company's interface systems are vulnerable to those third parties' failure to
remediate their own Year 2000 issues. There is no guarantee that the systems of
other companies on which the Company's systems rely will be timely converted and
will not have an adverse impact on the Company's systems. The Company estimates
that the cost of required upgrades and conversions will not have a significant
impact on its results of operations.
18
<PAGE> 19
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 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 $10,000,000 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.
19
<PAGE> 20
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 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.
20
<PAGE> 21
PARTII. 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
On December 11, 1998, at the Company's 1998 Annual Meeting of Stockholders, the
following matters were submitted and voted on by stockholders and were adopted:
A. The election of Joseph S. Lacob, Brian A. Markison, Richard A.
Miller, Joseph C. Scodari and Craig C. Taylor by the
stockholders to serve on the Board of Directors.
The results of the vote are as follows:
<TABLE>
<CAPTION>
Total Vote for Total Vote Withheld
Each Director from Each Director
------------- -------------------
<S> <C> <C>
Joseph S. Lacob 10,609,612 57,450
Brian A. Markison 10,609,612 57,450
Richard A. Miller, M.D. 10,609,612 57,450
Joseph C. Scodari 10,609,612 57,450
Craig C. Taylor 10,609,612 57,450
</TABLE>
B. The amendment of the Company's 1995 Stock Option Plan in order
to increase the total number of shares of common stock
authorized for issuance over the term of the Plan by an
additional 400,000 shares.
The results of the vote are as follows:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
7,800,473 2,853,125 13,474
</TABLE>
C. The ratification of the appointment of PricewaterhouseCoopers
LLP as the Company's independent accountants for the fiscal year
ending June 30, 1999.
The results of the vote are as follows:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
10,615,477 43,065 8,520
</TABLE>
Item 5. Other Information
None
21
<PAGE> 22
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K
Pharmacyclics filed a report on Form 8-K on December 23, 1998,
relating to an amendment of its Rights Agreement, dated April
19, 1997, between the Company and BankBoston, N.A., the Rights
Agent, to delete "continuing director" provisions throughout the
Rights Agreement.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, (the "Exchange Act") the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PHARMACYCLICS, INC.
(Registrant)
Dated: February 11, 1999 By: /s/ RICHARD A. MILLER, M.D.
---------------------------------------
Richard A. Miller, M.D.
President and Chief Executive Officer
Dated: February 11, 1999 By: /s/ LEIV LEA
---------------------------------------
Leiv Lea
Vice President, Finance and
Administration and CFO
23
<PAGE> 24
Exhibit Index
<TABLE>
<CAPTION>
Exhibits
Number Description
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEET AND UNAUDITED CONDENSED STATEMENT OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,984
<SECURITIES> 39,674
<RECEIVABLES> 360
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 50,647
<PP&E> 6,104
<DEPRECIATION> (3,603)
<TOTAL-ASSETS> 65,193
<CURRENT-LIABILITIES> 4,235
<BONDS> 163
0
0
<COMMON> 1
<OTHER-SE> 60,776
<TOTAL-LIABILITY-AND-EQUITY> 65,193
<SALES> 0
<TOTAL-REVENUES> 454
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,585
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
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