<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1999
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
------------------------
PHARMACYCLICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3148201
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
995 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086-4521
(408) 774-0330
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RICHARD A. MILLER, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PHARMACYCLICS, INC.
995 EAST ARQUES AVENUE
SUNNYVALE, CALIFORNIA 94086-4521
(408) 774-0330
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
COPY TO:
<TABLE>
<S> <C>
J. STEPHAN DOLEZALEK, ESQ. DAVID J. SEGRE, ESQ.
JONATHAN P. SHANBERGE, ESQ. AMY E. REES, ESQ.
KRISTINE H. LEE, ESQ. JAMIE W. STEWART, ESQ.
BROBECK, PHLEGER & HARRISON LLP WILSON, SONSINI GOODRICH & ROSATI
TWO EMBARCADERO PLACE PROFESSIONAL CORPORATION
2200 GENG ROAD 650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94303 PALO ALTO, CALIFORNIA 94304
(650) 424-0160 (650) 424-0160 (650) 493-9300
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the
following box and list the Securities Act of 1933, as amended, registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, as amended, check the following box and list
the Securities Act of 1933, as amended, registration statement number of the
earlier effective registration statement for the same offering. [ ]
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value per
share........................... 2,012,500(1) $25.0625 $50,438,282 $14,022
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</TABLE>
(1) Includes an over-allotment option of 262,500 shares, which the underwriters
have the option to purchase to cover over-allotments, if any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued , 1999
1,750,000 Shares
LOGO
COMMON STOCK
------------------------
PHARMACYCLICS, INC. IS OFFERING 1,750,000 SHARES OF ITS COMMON STOCK.
------------------------
OUR COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL
"PCYC." ON AUGUST 10, 1999, THE LAST REPORTED SALE PRICE OF OUR COMMON STOCK ON
THE NASDAQ NATIONAL MARKET WAS $25 1/8 PER SHARE.
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS PHARMACYCLICS
----------------- ----------------------- -----------------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total................................... $ $ $
</TABLE>
Neither the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
We have granted the underwriters the right to purchase up to an additional
262,500 shares of common stock to cover any over-allotments. Morgan Stanley &
Co. Incorporated expects to deliver the shares to purchasers on ,
1999.
------------------------
MORGAN STANLEY DEAN WITTER
HAMBRECHT & QUIST
PACIFIC GROWTH EQUITIES, INC.
, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Cautionary Note on Forward-Looking Statements............... 5
Risk Factors................................................ 6
Use of Proceeds............................................. 14
Price Range of Common Stock................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Dilution.................................................... 16
Selected Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Business.................................................... 22
Management.................................................. 39
Principal Stockholders...................................... 41
Underwriting................................................ 43
Legal Matters............................................... 44
Experts..................................................... 44
Where You Can Find More Information......................... 44
Index to Financial Statements............................... F-1
</TABLE>
------------------------
You may rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. This prospectus is not an offer to sell nor is it seeking an
offer to buy these securities in any jurisdiction where the offer or sale is not
permitted. The information contained in this prospectus is correct only as of
the date of this prospectus, regardless of the time of the delivery of this
prospectus or any sale of these securities.
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors" and our financial statements and
the notes thereto before making an investment decision. Except as otherwise
noted, all information in this prospectus assumes no exercise of the
underwriters' over-allotment option. See "Underwriting."
PHARMACYCLICS
INTRODUCTION
We are a pharmaceutical company developing products to improve upon current
therapeutic approaches to cancer, atherosclerosis and retinal disease. We
develop patented small molecules called texaphyrins which, when injected,
accumulate in cancerous tumors, in the diseased portions of major blood vessels
and in small blood vessel growths in the retina. When these molecules are
exposed to certain energy sources, such as X-ray, light or chemical, they are
activated and can destroy diseased tissue with minimal damage to healthy cells.
Our versatile texaphyrin-based technology platform can be designed for
activation by different types of energy and used to treat a variety of diseases.
OUR LEAD PRODUCTS
- XCYTRIN(TM) is a molecule that enhances the effects of radiation and
chemotherapy for the treatment of cancer. XCYTRIN selectively accumulates
in tumors and, when activated by radiation or chemotherapy, increases the
destructive effect of these therapies on tumor cells, but not on healthy
cells. XCYTRIN demonstrated improved tumor response and patient survival
rates in a Phase I/II trial and is currently in an international Phase
III clinical trial for the treatment of patients with tumors that have
spread to the brain. Under an agreement with the National Cancer
Institute, XCYTRIN is also being tested in a variety of other cancer
types.
- LUTRIN(R) is a molecule that, when activated by light energy of specific
wavelengths, can be used to treat certain types of cancers. When injected
into the body, LUTRIN selectively accumulates in tumors and, when exposed
to the appropriate light energy, destroys tumor cells. LUTRIN also
readily clears from the bloodstream, reducing the toxic effects it might
have on healthy tissues. We have completed a Phase II clinical trial
using LUTRIN to treat breast cancer that has recurred after initial
treatment with other drugs and radiation therapy.
- ANTRIN(R) is a molecule that accumulates selectively in and reduces
vascular plaque when activated by light energy. Traditionally, this
plaque is treated with mechanical devices that physically reduce the
plaque or maintain the blood vessel opening. ANTRIN reduces or eliminates
vascular plaque using a non-mechanical technique we call
photoangioplasty. In photoangioplasty, ANTRIN is injected into the
bloodstream and the vessels are then exposed to light using an optical
fiber inserted into the vessel via a catheter. ANTRIN acts to reduce
plaque, opening blocked vessels for blood flow. Photoangioplasty with
ANTRIN does not appear to result in the complications often associated
with mechanical procedures and can be used to treat longer segments of
the diseased vessels. We have completed a Phase I clinical trial using
ANTRIN in patients with blocked arteries in the legs.
- OPTRIN(TM) is a molecule that selectively eliminates abnormal small blood
vessels in the retina when activated by light of specific wavelengths. If
left untreated, this condition, known as age-related macular
degeneration, can lead to blindness. OPTRIN is currently in a Phase I/II
clinical trial being conducted by our corporate partner Alcon.
We have retained worldwide product marketing rights for XCYTRIN and ANTRIN
and U.S., Canadian and Japanese marketing rights for LUTRIN. We have established
and will continue to establish relationships with third parties to expand our
research and development activities and to provide manufacturing capacity and
sales and marketing capabilities.
3
<PAGE> 5
THE OFFERING
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<S> <C>
Common stock offered...................... 1,750,000 shares
Common stock to be outstanding after the
offering................................ 14,178,871 shares
Over-allotment option..................... 262,500 shares
Use of proceeds........................... For research and development activities, including
clinical trials, process development and manufacturing
support; potentially for investments in complementary
businesses, products or technologies; and for general
corporate purposes and working capital.
Nasdaq National Market symbol............. PCYC
</TABLE>
The number of shares of our common stock outstanding as listed above does
not take into account, as of June 30, 1999, a total of 1,981,701 shares of
common stock, consisting of the following: (i) 1,966,995 shares of common stock
issuable upon exercise of options outstanding at a weighted average exercise
price of $17.38 per share and (ii) 14,706 shares of common stock issuable upon
exercise of warrants outstanding at a weighted average exercise price of $4.88
per share.
SUMMARY FINANCIAL DATA
The following is a summary of financial data included elsewhere in the
prospectus. You should read the following data with the more detailed
information contained in "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------------
1995 1996 1997 1998 1999
-------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
License, grant and contract revenues... $ 79 $ 301 $ 25 $ 3,531 $ 2,041
Loss from operations................... (10,247) (8,855) (11,512) (12,429) (22,610)
Net loss............................... (10,479) (8,235) (10,258) (9,675) (19,246)
Basic and diluted net loss per
share(1)............................ (12.04) (1.35) (1.11) (0.87) (1.55)
Shares used to compute basic and
diluted net loss per share(1)....... 870 6,106 9,264 11,061 12,378
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------------------
ACTUAL AS ADJUSTED(2)
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(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments.................... $ 51,472 $ 92,563
Total assets.............................................. 55,557 96,648
Capital lease obligations................................. 275 275
Total stockholders' equity................................ 49,957 91,048
</TABLE>
- ---------------
(1) See Note 1 of "Notes to Financial Statements" for a description of the
computation of basic and diluted net loss per share.
(2) As adjusted to reflect receipt of the estimated net proceeds from the sale
of 1,750,000 shares of common stock at an assumed public offering price of
$25 1/8 per share. See "Use of Proceeds" and "Capitalization."
------------------------
We were incorporated in Delaware in 1991. Our principal offices are located
at 995 East Arques Avenue, Sunnyvale, California 94086-4521, and our telephone
number is (408) 774-0330.
PHARMACYCLICS(R), our pentadentate logo, ANTRIN(R), LUTRIN(R), OPTRIN(TM)
and XCYTRIN(TM) are trademarks of Pharmacyclics, Inc. CITRA VU(TM) is the
trademark of E-Z-EM, Inc. for the oral contrast agent it has licensed from
Pharmacyclics, Inc. Other trademarks used herein are the property of their
respective owners.
4
<PAGE> 6
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary,"
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere in this
prospectus include forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements include, but are not limited to,
statements concerning our plans to:
- continue development of our current products under development;
- conduct clinical trials with respect to our products under development;
- utilize our capital resources and the net proceeds from this offering and
the time periods related thereto;
- seek regulatory approvals;
- engage third-party manufacturers to supply our clinical trials and
commercial requirements;
- establish a marketing and distribution capability; and
- evaluate additional products under development for subsequent clinical
and commercial development.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes," "estimates" and similar
expressions. These statements are based on our current beliefs, expectations and
assumptions and are subject to a number of risks and uncertainties. Actual
results and events may vary significantly from those discussed in the
forward-looking statements. A description of certain risks that could cause our
results to vary appears under the caption "Risk Factors" and elsewhere in this
prospectus. These forward-looking statements are made as of the date of this
prospectus, and we assume no obligation to update them or to explain the reasons
why actual results may differ. In light of these assumptions, risks and
uncertainties, the forward-looking events discussed in this prospectus might not
occur.
5
<PAGE> 7
RISK FACTORS
An investment in our shares is extremely risky. You should carefully
consider the following risks, in addition to the other information presented in
this prospectus, in evaluating us and our business. Any of the following risks,
as well as other risks not mentioned here, could seriously harm our business and
prospects and cause the price of our common stock to decline, which in turn
could cause you to lose all or part of your investment.
RISKS RELATED TO PHARMACYCLICS
ALL OF OUR PRODUCT CANDIDATES ARE IN DEVELOPMENT, AND WE CANNOT BE CERTAIN THAT
ANY OF OUR PRODUCTS UNDER DEVELOPMENT WILL BE COMMERCIALIZED
To be profitable, we must successfully research, develop, obtain regulatory
approval for, manufacture, introduce, market and distribute our products under
development. The time frame necessary to achieve these goals for any individual
product is long and uncertain. Before we can sell any of our products under
development, we must demonstrate through preclinical (animal) studies and
clinical (human) trials that each product is safe and effective for human use
for each targeted disease. We have conducted and plan to continue extensive and
costly clinical trials to assess the safety and effectiveness of our potential
products. We cannot be certain that we will be permitted to begin or continue
our planned clinical trials for our potential products, or if permitted, that
our potential products will prove to be safe and to produce their intended
effects.
The completion rate of our clinical trials depends upon, among other
factors, the rate of patient enrollment. We may fail to obtain adequate levels
of patient enrollment in our clinical trials. Delays in planned patient
enrollment may result in increased costs, delays or termination of clinical
trials, which could have a material adverse effect on us.
Additionally, demands on our clinical staff have been increasing and we
expect they will continue to increase as a result of later-stage clinical trials
of our products in development and our monitoring of additional clinical trials.
We may fail to effectively oversee and monitor these many simultaneous clinical
trials, which would result in increased costs or delays of our clinical trials.
Even if these clinical trials are completed, we may fail to complete and submit
a new drug application as scheduled. Even if we are able to submit a new drug
application as scheduled, the Food and Drug Administration may not clear our
application in a timely manner or may deny the application entirely.
Data already obtained from preclinical studies and clinical trials of our
products under development do not necessarily predict the results that will be
obtained from later preclinical studies and clinical trials. Moreover, data such
as ours is susceptible to varying interpretations which could delay, limit or
prevent regulatory approval. A number of companies in the pharmaceutical
industry, including biotechnology companies like us, have suffered significant
setbacks in advanced clinical trials, even after promising results in earlier
trials. The failure to adequately demonstrate the safety and effectiveness of a
product under development could delay or prevent regulatory clearance of the
potential product and would materially harm our business. Our clinical trials
may not demonstrate the sufficient levels of safety and efficacy necessary to
obtain the requisite regulatory approval or may not result in marketable
products.
WE HAVE A HISTORY OF OPERATING LOSSES AND WE EXPECT TO CONTINUE TO HAVE LOSSES
IN THE FUTURE
We have incurred significant operating losses since our inception in 1991
and, as of June 30, 1999, had an accumulated deficit of approximately $67.1
million. We expect to continue to incur significant operating losses over the
next several years as we continue to incur increasing costs for research and
development, clinical trials and manufacturing. Our ability to achieve
profitability depends upon our ability, alone or with others, to successfully
complete the development of our proposed products, obtain the required
regulatory clearances and manufacture and market our proposed products. To date,
we have not generated revenue from the commercial sale of our products and do
not expect to receive any such revenue in the near future. All revenues
6
<PAGE> 8
to date are primarily from license and milestone payments and, to a lesser
extent, funding from one government research grant.
FAILURE TO OBTAIN PRODUCT APPROVALS OR COMPLY WITH ONGOING GOVERNMENTAL
REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS
The manufacture and marketing of our products and our 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, we will have to demonstrate
that the product is safe and effective on the patient population and for the
diseases 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, state and foreign 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. We compared the results of our Phase Ib/II clinical trial
of XCYTRIN to historical data using a 528-patient database containing
information on clinical features and outcomes in comparable patients receiving
treatment with identical doses of radiation alone. Historical analyses have many
limitations and, while supportive, are not considered proof that XCYTRIN
improved the outcome of patients enrolled in the study.
In addition, we may encounter delays or rejections 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. We may encounter similar delays in foreign countries.
We may be unable to obtain requisite approvals from the FDA and foreign
regulatory authorities, and even if obtained, such approvals may not be on a
timely basis, or they may not cover the clinical uses that we specify.
Marketing or promoting a drug for an unapproved use is subject to very
strict controls. Furthermore, clearance may entail ongoing requirements for
post-marketing studies. The manufacture and marketing of drugs are subject to
continuing FDA and foreign regulatory review and later discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions, including withdrawal of the product from the market. Any of the
following events, if they were to occur, could delay or preclude us from further
developing, marketing or realizing full commercial use of our products, which in
turn would have a material adverse effect on our business, financial condition
and results of operations:
- failure to obtain or maintain requisite governmental approvals;
- failure to obtain approvals of clinically intended uses of our products
under development; or
- identification of serious and unanticipated adverse side effects in our
products under development.
Manufacturers of drugs also must comply with the applicable FDA good
manufacturing practice regulations, which include quality control and quality
assurance requirements as well as the corresponding maintenance of records and
documentation. Manufacturing facilities are subject to ongoing periodic
inspection by the FDA and corresponding state agencies, including unannounced
inspections, and must be licensed before they can be used in commercial
manufacturing of our products. We or our present or future suppliers may be
unable to comply with the applicable good manufacturing practice regulations and
other FDA regulatory requirements. We have not been subject to a GMP inspection
by the FDA or any state agency.
We may be subject to delays in commercializing our products for
photodynamic therapies due to delays in approvals of the third-party light
sources required for these products. E-Z-EM will not be able to market our CITRA
VU product until we satisfactorily address FDA issues, which may involve
performing an additional pivotal clinical trial.
7
<PAGE> 9
ACCEPTANCE OF OUR PRODUCTS IN THE MARKETPLACE IS UNCERTAIN, AND FAILURE TO
ACHIEVE MARKET ACCEPTANCE WILL HARM OUR BUSINESS
Even if approved for marketing, our products may not achieve market
acceptance. The degree of market acceptance will depend upon a number of
factors, including:
- the receipt of regulatory approvals for the uses that we are studying;
- the establishment and demonstration in the medical community of the
safety and clinical efficacy of our products and their potential
advantages over existing therapeutic products and diagnostic and/or
imaging techniques; and
- pricing and reimbursement policies of government and third-party payors
such as insurance companies, health maintenance organizations and other
plan administrators.
Physicians, patients, payors or the medical community in general may be
unwilling to accept, utilize or recommend any of our products.
WE MAY FAIL TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS OR
SECURE RIGHTS TO THIRD-PARTY PATENTS
A number of third-party patent applications have been published, and some
have issued, relating to biometallic and expanded porphyrin chemistries. It is
likely that competitors and other third parties have and will continue to file
applications for and receive patents relating to similar or even the same
compositions, methods or designs as those of our products. If any third-party
patent claims are asserted against the company's products and are upheld as
valid and infringed, we could be prevented from practicing the subject matter
claimed in such patents, require license(s) or have to redesign our products or
processes to avoid infringement. Such licenses may not be available or, if
available, may not be on terms acceptable to us. Alternatively, we may be
unsuccessful in any attempt to redesign our products or processes to avoid
infringement. Litigation or other legal proceedings may be necessary to defend
against claims of infringement, to enforce our patents, or to protect our trade
secrets, and could result in substantial cost to the company, and diversion of
our efforts.
We are aware of several U.S. patents owned or licensed to Schering AG that
relate to pharmaceutical formulations and methods for enhancing magnetic
resonance imaging. We have obtained the opinion of special patent counsel that
the technologies we employ for our imaging product under development and
magnetic resonance imaging detectable compounds do not infringe the claims of
such patents. Nevertheless, Schering AG may still choose to assert one or more
of those patents. If any of our products were legally determined to be
infringing a valid and enforceable claim of any such patents, our business could
be materially adversely affected. Further, any allegation by Schering AG that we
infringed their patents would likely result in significant legal costs and
require the diversion of substantial management resources. Schering AG sent
communications to us suggesting that our oral magnetic resonance imaging
contrast agent, CITRA VU, may infringe certain of their patents. We are aware
that Schering AG 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 AG with respect to one or more of such
patents. We cannot be certain that we would be successful in defending a lawsuit
or able to obtain a license on commercially reasonable terms from Schering AG,
if required.
We also rely upon trade secrets, technical know-how and continuing
technological innovation to develop and maintain our competitive position. We
require our employees, consultants, advisors and collaborators to execute
appropriate confidentiality and assignment-of-inventions agreements with us.
These agreements typically provide that all materials and confidential
information developed or made known to the individual during the course of the
individual's relationship with us is to be kept confidential and not disclosed
to third parties except in specific circumstances, and that all inventions
arising out of the relationship with Pharmacyclics shall be our exclusive
property. These agreements may be breached, and in some instances, we may not
have an appropriate remedy available for breach of the agreements. Furthermore,
our competitors may independently develop substantially equivalent proprietary
information and techniques, reverse engineer
8
<PAGE> 10
our information and techniques, or otherwise gain access to our proprietary
technology. We may be unable to meaningfully protect our rights in unpatented
proprietary technology.
WE RELY HEAVILY ON THIRD PARTIES
We currently depend heavily and will depend heavily in the future on third
parties for support in product development, manufacturing, marketing and
distribution. We have a collaboration agreement with Nycomed. We rely on Nycomed
for a portion of our 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 retinal
degeneration, we depend on Alcon for preclinical and clinical studies,
regulatory filings and sales and marketing of OPTRIN for ophthalmology uses
worldwide. We have entered into agreements with E-Z-EM, Ltd. and E-Z-EM, Inc.
(together "E-Z-EM") for sales, marketing and distribution of CITRA VU in Europe
and North America. E-Z-EM, Alcon or Nycomed may terminate their agreements with
us at their election. We cannot be certain that any of these parties will
fulfill their obligations in a manner that maximizes our revenues. Our failure
to receive milestone payments or any reduction or discontinuance of efforts by
our partners or the termination of these alliances could have a material adverse
effect on our business, financial condition and results of operations.
We also depend upon the National Cancer Institute for the sponsoring and
funding of certain of the clinical trials of our XCYTRIN radiation sensitizer
and LUTRIN photosensitizer products in development. We cannot be certain that
the National Cancer Institute will enlist support for all such trials or that it
will continue our funding. If the National Cancer Institute did not support such
trials, we may have to fund the continuation of such trials ourselves or reduce
the number of disease types in our clinical trials.
We may be unsuccessful in entering into additional strategic alliances for
the development or commercialization of other product candidates. Even if we did
enter into any such alliances, they may not be on terms favorable to us or they
may ultimately be unsuccessful. See "Business -- Research, Clinical Development
and Marketing Collaborations."
We have no expertise in the development of light sources and associated
light delivery devices required for our photoangioplasty and photodynamic
therapy products under development. Successful development, manufacturing,
approval and distribution of our photosensitization products will require third
party participation for the required light sources, associated light delivery
devices and other equipment. We currently obtain lasers from Diomed, Inc., light
emitting diodes from Quantum Devices, Inc. and cylindrically diffusing light
fibers from CardioFocus 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 us to develop additional supply
sources which may require additional clinical trials and regulatory approvals
and could materially delay commercialization of our LUTRIN and ANTRIN products
under development. We may be unable to establish or maintain relationships with
other supply sources on a commercially reasonable basis, if at all, or
alternatively, the enabling devices may not receive regulatory approval for use
in photoangioplasty or photodynamic therapy. See "Business -- Research, Clinical
Development and Marketing Collaborations" and "-- Manufacturing and Suppliers."
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND THUS RELY HEAVILY UPON CONTRACT
MANUFACTURERS
We must manufacture our products in commercial quantities, either directly
or through third parties, in compliance with regulatory requirements and at an
acceptable cost. We do not own manufacturing facilities necessary to provide
clinical and commercial quantities of our products.
In September 1996, we entered into an agreement with Hoechst Celanese
Corporation, a manufacturer of chemicals and pharmaceutical components, to
optimize and scale up a manufacturing process for and supply of our
texaphyrin-based products. In October 1997, Hoechst Celanese assigned the
agreement to Celanese, Ltd., in connection with Hoechst Celanese's corporate
restructuring. This agreement presently grants Celanese exclusive worldwide
manufacturing rights and requires Celanese to supply all of our texaphyrin drug
substance for late-stage clinical and commercial use. As a result of the change
in its business focus, Celanese has requested that we pursue alternative supply
sources. We are presently negotiating the definitive terms and
9
<PAGE> 11
conditions of an agreement pursuant to which Celanese will transfer the
manufacturing process it developed with us to other manufacturers. We have
entered into agreements with three new manufacturers to evaluate their ability
to supply us with the components of the texaphyrin products. None of these
manufacturers has delivered commercial quantities of the components or drug
substance to us yet, and we cannot be certain that they will be able to deliver
commercial quantities of the components or drug substance on a timely basis.
Because each of these manufacturers will supply a component of the bulk drug
substance, if any of these manufacturers fails to perform its obligations in a
timely fashion, our business could be materially harmed. Due to the addition of
alternative manufacturers, we must demonstrate to the FDA the substantial
chemical equivalence of the materials produced by these manufacturers to the
materials used in our clinical trials to date. Failure to demonstrate chemical
equivalence of the material produced by these manufacturers could involve
performing additional clinical trials and could have a material adverse effect
on our business, financial condition and results of operations. In addition, we
are in the process of negotiating commercial-scale supply agreements with the
same group of manufacturers, but we cannot be certain that we will be able to
successfully negotiate these agreements at all or on commercially acceptable
terms. Until the transfer from Celanese to the alternative manufacturers is
completed, we will face uncertainties regarding the willingness or ability of
Celanese or any additional suppliers to deliver bulk drug substance for our
products on a timely and commercially attractive basis. Any interruption of
supply could have a material adverse effect on our ability to manufacture and
commercialize our products.
Any failure by these third parties to supply our requirements or the
National Cancer Institute's requirements for clinical trial materials would
jeopardize the completion of such trials and could therefore have a material
adverse effect on us. We are engaged in preliminary discussions with a number of
manufacturers regarding process development and validation, filling, labeling
and packaging of the finished dosage form of XCYTRIN, LUTRIN and ANTRIN. A
failure to successfully complete any such agreement could, if we could not
locate alternate manufacturing capabilities, have a material adverse effect on
our business, financial condition and results of operations.
E-Z-EM has assumed manufacturing responsibility for CITRA VU through its
affiliate, Therapex. Because of the change in our manufacturing source for CITRA
VU, we must obtain approval of the new source and must demonstrate the
substantial equivalence of the new source to the sources that we used in our
previous clinical trials, which could involve performing additional clinical
trials. Failure to demonstrate equivalence of these sources could have a
material adverse effect on our business, financial condition and results of
operations.
Prior to regulatory approval of our products under development, we intend
to negotiate supply agreements with manufacturers who will have the ability to
manufacture, fill, label and package such materials prior to commercial
introduction of these products. However, only a limited number of contract
manufacturers that operate under current federal and state good manufacturing
practice regulations and are capable of manufacturing our products exist.
Accordingly, we cannot be certain that we will be able to enter into supply
agreements on commercially acceptable terms with manufacturers or that we will
enter into supply agreements with manufacturers who will be able to deliver
supplies in appropriate quantity and quality to develop and commercialize our
products. Any interruption of supply of our products could have a material
adverse effect on our business, financial condition and results of operations.
WE LACK MARKETING AND SALES EXPERIENCE
We currently do not have marketing, sales or distribution experience.
Therefore, to service markets in which we have retained sales and marketing
rights and in the event that any of our agreements with Alcon, Nycomed, or
E-Z-EM is terminated, we must develop a sales force with technical expertise. We
have no experience in developing, training or managing a sales force. We will
incur substantial additional expenses in developing, training and managing such
an organization. We may be unable to build such a sales force, the cost of
establishing such a sales force may exceed any product revenues, or our direct
marketing and sales efforts may be unsuccessful. In addition, we compete with
many other companies that currently have extensive and well-funded marketing and
sales operations. Our marketing and sales efforts may be unable to compete
successfully against such other companies.
10
<PAGE> 12
OUR CAPITAL REQUIREMENTS ARE UNCERTAIN AND WE MAY HAVE DIFFICULTY RAISING NEEDED
CAPITAL IN THE FUTURE
We have expended and will continue to expend substantial funds to complete
the research, development and clinical testing of our products. We 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 our products. Additional funds may not be available on
acceptable terms, if at all. If adequate funds are unavailable from operations
or additional sources of financing, we may have to delay, reduce the scope of or
eliminate one or more of our research or development programs which would
materially and adversely affect our business, financial condition and
operations.
We believe that the net proceeds of this offering, together with our cash,
cash equivalents and investments, will be adequate to satisfy our capital needs
through at least calendar year 2001. However, our actual capital requirements
will depend on many factors, including:
- continued progress of our research and development programs;
- our ability to establish additional collaborative arrangements;
- changes in our 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.
- our ability to market and distribute our products and establish new
collaborative and licensing arrangements.
We 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 sources, such arrangements may require us to relinquish rights to some
of our technologies, product candidates or products under development that we
would otherwise seek to develop or commercialize ourselves.
RISKS RELATED TO OUR INDUSTRY
WE FACE RAPID TECHNOLOGICAL CHANGE AND INTENSE COMPETITION
The pharmaceutical industry is subject to rapid and substantial
technological change. Developments by others may render our products under
development or technologies noncompetitive or obsolete, or we may be unable to
keep pace with technological developments or other market factors. 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 we do, as well as
substantially more marketing, manufacturing, financial and managerial resources.
These entities represent significant competition for us. Acquisitions of, or
investments in, competing pharmaceutical or biotechnology companies by large
corporations could increase such competitors' financial, marketing,
manufacturing and other resources.
We are a relatively new enterprise and are engaged in the development of
novel therapeutic technologies. As a result, our resources are limited and we
may experience technical challenges inherent in such novel technologies.
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 imaging effects than our products. We are
aware that one of our competitors in the market for photodynamic therapy drugs
has received marketing approval of
11
<PAGE> 13
a product for certain uses in the United States and other countries. Our
competitors may develop products that are safer, more effective or less costly
than our products and, therefore, present a serious competitive threat to our
product offerings.
The widespread acceptance of therapies that are alternatives to ours may
limit market acceptance of our products even if commercialized. The diseases for
which we are developing our therapeutic products can also be treated, in the
case of cancer, by surgery, radiation and chemotherapy, and in the case of
atherosclerosis, by surgery, angioplasty, drug therapy and the use of devices to
maintain and open blood vessels. These treatments are widely accepted in the
medical community and have a long history of use. The established use of these
competitive products may limit the potential for our products to receive
widespread acceptance if commercialized.
WE ARE SUBJECT TO UNCERTAINTIES REGARDING HEALTH CARE REIMBURSEMENT AND REFORM
The continuing efforts of government and insurance companies, health
maintenance organizations and other payors of healthcare costs to contain or
reduce costs of health care may affect our future revenues and profitability,
and the future revenues and profitability of our potential customers, suppliers
and collaborative partners and the availability of capital. 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, the U.S. Congress and state legislatures will likely
continue to focus on health care reform, the cost of prescription
pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we
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 our business, financial condition and results of operations.
Our ability to commercialize our products successfully will depend in part
on the extent to which appropriate reimbursement levels for the cost of our
products and related treatment are obtained by governmental authorities, private
health insurers and other organizations, such as HMOs. Third-party payors are
increasingly challenging the prices charged for medical products and services.
Also, the trend toward managed health care in the 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 or rejection of our
products. The cost containment measures that health care payors and providers
are instituting and the effect of any health care reform could materially
adversely affect our ability to operate profitably.
OUR BUSINESS EXPOSES US TO PRODUCT LIABILITY CLAIMS
The testing, manufacture, marketing and sale of our products involve an
inherent risk that product liability claims will be asserted against us.
Although we are insured against such risks up to a $10,000,000 annual aggregate
limit in connection with clinical trials and commercial sales of our products,
our present product liability insurance may be inadequate. A successful product
liability claim in excess of our insurance coverage could have a material
adverse effect on our business, financial condition and results of operations.
Any successful product liability claim may prevent us from obtaining adequate
product liability insurance in the future on commercially desirable or
reasonable terms. In addition, product liability coverage may cease 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 our pharmaceutical products. A product liability claim or
recall would have a material adverse effect on our reputation, business,
financial condition and results of operations.
OUR BUSINESS INVOLVES ENVIRONMENTAL RISKS
In connection with our research and development activities and our
manufacture of materials and products, we are 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 we believe that we
have complied with the applicable laws,
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<PAGE> 14
regulations and policies in all material respects and have not been required to
correct any material noncompliance, we may be required to incur significant
costs to comply with environmental and health and safety regulations in the
future. Our research and development involves the controlled use of hazardous
materials, including but not limited to certain hazardous chemicals and
radioactive materials. Although we believe that our safety procedures for
handling and disposing of such materials comply with the standards prescribed by
state and federal regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of such an
occurrence, we could be held liable for any damages that result and any such
liability could exceed our resources.
YEAR 2000 ISSUES COULD DISRUPT OUR BUSINESS OPERATIONS
We have assessed our exposure to Year 2000-related problems, focusing on
four potential areas of exposure: internal information systems, scientific
equipment, facility support systems and the readiness of significant third
parties with whom we have material business relationships. We have substantially
completed the implementation of all necessary upgrades and believe that the Year
2000 issue will not pose significant operational problems for our internal
computer systems. After an inventory of our major pieces of scientific equipment
and of our major facility support systems such as communications, security and
building maintenance systems, we believe them to be Year 2000-compliant. We have
contacted our significant suppliers and service providers to determine the
extent to which our systems which interact with systems of third parties would
be vulnerable if those third parties failed to address their own Year 2000
issues. We cannot be certain that the systems of other companies on which our
systems rely will be timely converted and any failure by these companies to do
so may have an adverse impact on our systems. We estimate that the cost of the
required upgrades and conversions will not have a significant impact on our
results of operations.
RISKS RELATED TO THIS OFFERING
THE PRICE OF OUR COMMON STOCK MAY BE VOLATILE
The market prices for securities of small capitalization biotechnology
companies, including ours, have historically been highly volatile. The market
has from time to time experienced significant price and volume fluctuations
unrelated to the operating performance of particular companies. The market price
of our common stock may fluctuate significantly due to a variety of factors,
including:
- the results of preclinical testing and clinical trials by us or our
competitors;
- 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 us or others;
- comments by securities analysts; and
- general market conditions in our industry.
In addition, if any of the risks described in these "Risk Factors" actually
occurred, it could have a dramatic and material adverse impact on the market
price of our common stock.
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<PAGE> 15
USE OF PROCEEDS
The net proceeds to us from the offering will be approximately $41.1
million at an assumed public offering price of $25 1/8 per share and after
deducting the underwriting discounts and estimated offering expenses ($47.3
million if the underwriters exercise their over-allotment option in full). We
expect to use the net proceeds from this offering for research and development
activities, including clinical trials, process development and manufacturing
support and for general corporate purposes, including working capital. We may
use a portion of the proceeds to acquire or invest in complementary businesses,
products or technologies, although we are not currently in negotiations
concerning any such acquisitions or investments. Based upon the current status
of our product development and commercialization plans, we believe that the net
proceeds of this offering, together with our cash, cash equivalents and
investments, will be adequate to satisfy our capital needs through at least the
calendar year 2001. Pending such uses, we intend to invest the net proceeds of
this offering in interest bearing, investment grade securities. See Risk Factors
"-- We have a history of operating losses and we may continue to have losses in
the future" and "-- We may have difficulty raising needed capital in the future
which could significantly harm our business."
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<PAGE> 16
PRICE RANGE OF COMMON STOCK
Our common stock began trading publicly on the Nasdaq National Market on
October 24, 1995 and is traded under the symbol "PCYC." Prior to that date,
there was no public market for our common stock. The following table sets forth
for the periods indicated the high and low sales prices of the common stock.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1998
First Quarter............................................ $27.00 $ 14.38
Second Quarter........................................... 28.00 21.00
Third Quarter............................................ 29.62 20.75
Fourth Quarter........................................... 34.88 22.00
FISCAL YEAR ENDED JUNE 30, 1999
First Quarter............................................ $24.00 $ 12.75
Second Quarter........................................... 26.00 10.63
Third Quarter............................................ 27.25 14.38
Fourth Quarter........................................... 29.00 13.38
FISCAL YEAR ENDING JUNE 30, 2000
First Quarter (through August 10, 1999).................. $30.13 23.88
</TABLE>
As of July 30, 1999, there were 111 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently anticipate that we will retain all future earnings for use in our
business and do not anticipate paying any cash dividends in the foreseeable
future.
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<PAGE> 17
CAPITALIZATION
The following table sets forth our actual capitalization and, as adjusted,
as of June 30, 1999, to give effect to the sale of the 1,750,000 shares of
common stock offered by this prospectus at an assumed public offering price of
$25 1/8 per share and the application of the estimated net proceeds from this
offering. The information below should be read in conjunction with our financial
statements and notes to those statements, and other financial information
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations................................... $ 275 $ 275
-------- --------
Stockholders' equity:
Preferred stock, $0.0001 par value; 1,000,000 shares
authorized; none issued and outstanding, actual or as
adjusted............................................... -- --
Common stock, $0.0001 par value; 24,000,000 shares
authorized; 12,428,871 shares issued and outstanding
actual; 14,178,871 shares issued and outstanding as
adjusted(1)............................................ 1 1
Additional paid-in capital................................ 117,178 158,269
Accumulated other comprehensive income.................... (85) (85)
Deficit accumulated during development stage.............. (67,137) (67,137)
-------- --------
Total stockholders' equity........................ 49,957 91,048
-------- --------
Total capitalization............................ $ 50,232 $ 91,323
======== ========
</TABLE>
- ---------------
(1) Excludes, as of June 30, 1999, an aggregate of 1,981,701 shares of common
stock consisting of:
- 1,966,995 shares of common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $17.38 per share;
- 14,706 shares of common stock issuable upon exercise of warrants
outstanding at a weighted average exercise price of $4.88 per share.
DILUTION
Our net tangible book value at June 30, 1999 was approximately $50.0
million, or $4.02 per share. Net tangible book value per share is determined by
dividing our tangible net worth (total tangible assets less total liabilities)
by the number of shares of common stock outstanding. After giving effect to our
sale of the 1,750,000 shares of common stock offered by this prospectus at an
assumed public offering price of $25 1/8 per share and after deducting
underwriting discounts and estimated offering expenses, our net tangible book
value at June 30, 1999 would have been approximately $91.0 million, or $6.42 per
share. This represents an immediate increase in net tangible book value of $2.40
per share to existing stockholders and an immediate dilution in net tangible
book value of $18.71 per share to new investors purchasing shares at the assumed
public offering price. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $ 25.13
Net tangible book value per share before the offering..... $ 4.02
Increase per share attributable to existing investors..... 2.40
--------
Net tangible book value per share after the offering...... 6.42
--------
Dilution per share to new investors......................... $ 18.71
========
</TABLE>
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<PAGE> 18
SELECTED FINANCIAL DATA
The historical statement of operations data below for the years ended June
30, 1997, 1998 and 1999 and the balance sheet data as of June 30, 1998 and 1999
are derived from audited financial statements, which are included elsewhere in
this prospectus. The statement of operations data for the years ended June 30,
1995 and 1996 and the balance sheet data at June 30, 1995, 1996 and 1997 are
derived from audited financial statements not included in this prospectus. You
should read this data in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial statements
and the notes to these statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
YEAR ENDED JUNE 30, (APRIL 1991)
------------------------------------------------------- THROUGH
1995 1996 1997 1998 1999 JUNE 30, 1999
-------- ------- -------- -------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License and grant revenues....... $ 79 $ 301 $ 25 $ 2,700 $ 750 $ 6,855
Contract revenue................. -- -- -- 831 1,291 2,122
-------- ------- -------- -------- -------- --------
Total revenues............... 79 301 25 3,531 2,041 8,977
-------- ------- -------- -------- -------- --------
Operating expenses:
Research and development......... 9,330 7,641 9,632 13,973 21,889 73,022
General and administrative....... 996 1,515 1,905 1,987 2,762 10,824
-------- ------- -------- -------- -------- --------
Total operating expenses..... 10,326 9,156 11,537 15,960 24,651 83,846
-------- ------- -------- -------- -------- --------
Loss from operations............... (10,247) (8,855) (11,512) (12,429) (22,610) (74,869)
Interest income.................... 187 940 1,480 2,826 3,398 9,165
Interest expense................... (419) (320) (226) (72) (34) (1,332)
-------- ------- -------- -------- -------- --------
Loss before income taxes........... (10,479) (8,235) (10,258) (9,675) (19,246) (67,036)
Provision for income taxes......... -- -- -- -- -- (101)
-------- ------- -------- -------- -------- --------
Net loss........................... $(10,479) $(8,235) $(10,258) $ (9,675) $(19,246) $(67,137)
======== ======= ======== ======== ======== ========
Basic and diluted net loss per
share(1)......................... $ (12.04) $ (1.35) $ (1.11) $ (0.87) $ (1.55)
======== ======= ======== ======== ========
Shares used to compute basic and
diluted net loss per share(1).... 870 6,106 9,264 11,061 12,378
======== ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------
1995 1996 1997 1998 1999
-------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments........... $ 376 $22,003 $ 30,827 $ 36,645 $ 46,405
Long-term investments.............. -- -- 6,103 33,736 5,067
Total assets....................... 3,539 25,015 39,707 73,019 55,557
Capital lease obligations.......... 2,178 1,858 1,298 530 275
Deficit accumulated during
development stage................ (19,723) (27,958) (38,216) (47,891) (67,137)
Total stockholders' equity
(deficit)........................ (1,652) 21,991 36,696 68,641 49,957
</TABLE>
- ---------------
(1) See Note 1 to the financial statements for a description of the computation
of basic and diluted net loss per share.
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<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with "Selected Financial
Data" and our financial statements and the related notes to the financial
statements included elsewhere in this prospectus. Our fiscal year ends on June
30.
OVERVIEW
Pharmacyclics is a pharmaceutical company focused on the development of
products that improve existing therapeutic approaches to cancer, atherosclerosis
and retinal disease. We are currently in a multicenter international Phase III
clinical trial of XCYTRIN to improve the efficacy of radiation therapy of tumors
that have spread to the brain resulting from a variety of cancers, including
those of the lung and breast. We have completed a Phase II clinical trial for
LUTRIN as a photosensitizer to evaluate its safety, tolerability and efficacy
for use in the photodynamic therapy of recurrent breast cancers to the chest
wall. Through our Cooperative Research and Development Agreement, the National
Cancer Institute intends to conduct several Phase I clinical trials of XCYTRIN
and LUTRIN, each for a variety of additional cancer indications. We have also
completed a Phase I clinical trial for ANTRIN to evaluate its safety and
efficacy for photoangioplasty treatment of patients with peripheral arterial
disease involving the blood vessels of the lower extremities. In addition, Alcon
is conducting a Phase I/II clinical trial of OPTRIN for the photodynamic therapy
of patients with a degenerative disease of the retina caused by growths of small
blood vessels in the retina known as age-related macular degeneration. Alcon is
conducting this trial under a 1997 evaluation and license agreement that gave
Alcon the right to conduct worldwide development, marketing and sales of OPTRIN
for ophthalmology indications. Also in 1997, we entered into a collaborative
agreement with Nycomed to sell and market LUTRIN for cancer therapy outside the
United States, Canada and Japan.
To date, we have devoted substantially all of our resources to research and
development. We have not derived any commercial revenues from product sales, and
we do not expect to receive product revenues for at least the next several
years. We have incurred significant operating losses since our inception in 1991
and, as of June 30, 1999, had an accumulated deficit of approximately $67.1
million. We expect to continue to incur significant operating losses over the
next several years as we continue to incur increasing research and development
costs, in addition to costs related to clinical trials and manufacturing
activities. We expect that losses will fluctuate from quarter to quarter and
that such fluctuations may be substantial. Our achieving profitability depends
upon our ability, alone or with others, to successfully complete the development
of our products under development, and obtain required regulatory clearances and
successfully manufacture and market our products. See "Risk Factors -- All of
our product candidates are in development and we cannot be certain that any of
our products under development will be commercialized," "-- Acceptance of our
products in the marketplace is uncertain and failure to achieve market
acceptance will harm our business," "-- We have a history of operating losses
and we expect to continue to have losses in the future" "-- Failure to obtain
product approvals or comply with ongoing governmental regulations could
adversely affect our business" and "-- Our capital requirements are uncertain
and we may have difficulty raising needed capital in the future."
RESULTS OF OPERATIONS
Comparison of Years Ended June 30, 1999, 1998 and 1997
Revenues. Our revenues for the years ended June 30, 1999, 1998 and 1997
were $2,041,000, $3,531,000 and $25,000, respectively. Revenues for the year
ended June 30, 1999 resulted primarily from a milestone payment from Alcon and
contract revenue from Nycomed and Alcon. Revenues in fiscal 1998 consisted
primarily of $2,700,000 in license revenue and $831,000 in contract revenue
associated with the Nycomed and Alcon agreements. The $25,000 of revenue in
fiscal 1997 was the result of milestone payments from E-Z-EM related to the
signing of a European sales and distribution agreement and receipt of marketing
approval in the United Kingdom for CITRA VU.
Research and Development Expenses. Research and development expenses were
$21,889,000 for the year ended June 30, 1999, compared to $13,973,000 for the
year ended June 30, 1998 and $9,632,000 for the
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<PAGE> 20
year ended June 30, 1997. The $7,916,000, or 57% increase from 1998 to 1999 was
due primarily to increased clinical trial costs, greater drug purchases for use
in clinical trials and greater personnel costs. Research and development
expenses incurred in connection with research and development contracts were
$3,150,000 for the year ended June 30, 1999. We expect research and development
expenses to increase in fiscal 2000 as we continue development of our products.
The $4,341,000, or 45% increase in research and development spending in
1998 from 1997 was due primarily to supporting clinical trials for XCYTRIN,
LUTRIN and ANTRIN. Such costs included clinical product supplies, clinical site
costs and personnel. Research and development expenses incurred in connection
with research and development contracts were $2,200,000 for the year ended June
30, 1998.
General and Administrative Expenses. General and administrative expenses
for the years ended June 30, 1999, 1998 and 1997 were $2,762,000, $1,987,000 and
$1,905,000, respectively. The $775,000, or 39% increase for 1999 compared to
1998 primarily resulted from increases in personnel and related expenses and
costs associated with hiring new employees. General and administrative expenses
increased $82,000, or 4%, for 1998 compared to 1997. The increase in fiscal 1998
expense was primarily related to personnel and related expenses. General and
administrative expenses in fiscal 1997 included approximately $300,000 of
financing costs related to a planned public financing which was withdrawn due to
market conditions. We expect general and administrative expenses to increase in
fiscal 2000.
Interest Income, Net of Interest Expense. Interest income, net of interest
expense, was $3,364,000 $2,754,000 and $1,254,000 for the years ended June 30,
1999, 1998 and 1997, respectively. The increase in each of 1999 and 1998 was
primarily the result of interest earned on higher average cash balances from a
public equity offering completed in February 1998. Our cash equivalents and
investments consist primarily of fixed rate instruments that are not subject to
interest rate risk.
Income Taxes. At June 30, 1999, we had net operating loss carryforwards of
approximately $58.0 million for federal income tax reporting purposes and tax
credit carryforwards of approximately $2.9 million for federal reporting
purposes. These amounts expire at various times through 2019. As a result of
ownership changes that have occurred during the past four fiscal years, we
believe that utilization of our net operating loss and tax credit carryforwards
is subject to annual limitations. See Note 6 of "Notes to Financial Statements."
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of working capital have been primarily 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. Since inception, we have used approximately
$57,750,000 of cash for operating activities and approximately $7,427,000 of
cash for the purchase of laboratory and office equipment and payments under
capital lease agreements.
As of June 30, 1999, we had approximately $51,472,000 in cash, cash
equivalents and investments. Net cash used in operating activities was
$17,243,000, $6,545,000 and $8,553,000 for the years ended June 30, 1999, 1998
and 1997, respectively, and resulted primarily from operating losses adjusted
for non-cash expenses and changes in accounts payable. Net cash provided by
investing activities was $7,414,000 in the year ended June 30, 1999 and
consisted primarily of proceeds from the sale of investments, partially offset
by purchase of investments and property and equipment. Net cash used in
investing activities was $36,629,000 and $13,291,000 for the years ended June
30, 1998 and 1997, respectively, and consisted primarily of net purchases of
investments. Net cash provided by financing activities was $303,000, $40,761,000
and $23,763,000 for the years ended June 30, 1999, 1998 and 1997, respectively,
and consisted primarily of proceeds from the sale of equity securities.
In February 1998, we sold 2,012,500 shares of our common stock at a price
of $21.75 per share which resulted in net proceeds to us of approximately $40.8
million. In February 1997, we completed a private placement of 862,190 shares of
common stock at $19.05 per share for net proceeds of $16.3 million. In November
1996, we completed a private placement of 580,000 shares of common stock at
$14.00 per share for
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<PAGE> 21
proceeds of $8.1 million. We filed and had declared effective on April 22, 1997,
a registration statement on Form S-3 covering resales of the securities
purchased in both private placements.
Based upon the current status of our product development and
commercialization plans, we believe that the net proceeds of this offering,
together with our existing cash, cash equivalents and investments, will be
adequate to satisfy our capital needs through at least the calendar year 2001.
However, our 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
our ability to market and distribute our products and establish new
collaborative and licensing arrangements. At June 30, 1999 we had approximately
$7.4 million in cancellable purchase commitments with three suppliers of drug
components and final bulk drug substance and one supplier of lasers.
Our forecast of the period of time through which our financial resources
will be adequate to support our operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary materially. The
factors described above will impact our future capital requirements and the
adequacy of our available funds. We may be required to raise additional funds
through public or private financings, collaborative relationships or other
arrangements. We cannot be certain that such additional funding, if needed, will
be available on terms attractive to us, 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 us to relinquish rights to
certain of our technologies, products or marketing territories. Our failure to
raise capital when needed could have a material adverse effect on our business,
financial condition and results of operations. See "Risk Factors -- Risks
Related to Pharmacyclics -- Our capital requirements are uncertain and we may
have difficulty raising capital in the future."
IMPACT OF YEAR 2000
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead, the so-called "Year 2000" problem. If not corrected, those
programs could cause date-related transaction failures.
We have assessed our exposure for Year 2000-related problems focusing on
four potential areas of exposure -- internal information systems, scientific
equipment, facility support systems and the readiness of significant third
parties with whom we have material business relationships.
Internal Information Systems
We are using a number of computers and computer programs across all of our
operations. We have performed an inventory of our computer equipment and
computer programs. To date, we have identified no significant internal
information systems as non-Year 2000-compliant and we have enacted procedures to
assure that all purchases of new systems are Year 2000-compliant.
Scientific Equipment
We have taken an inventory of the major pieces of our scientific equipment.
We believe all major pieces of our scientific equipment to be Year
2000-compliant.
Facility Support Systems
We have also taken an inventory of our major facility support systems such
as communications, security and building maintenance systems. We believe all
major systems to be Year 2000-compliant.
Third Parties With Major Business Relationships
We depend upon a large number of third parties that provide information,
goods and services to us. These include financial institutions, suppliers,
vendors, research partners and governmental entities. We have begun
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<PAGE> 22
surveying all of our major vendors and other third party interests to determine
whether their systems are Year 2000-compliant. We cannot guarantee that all of
our key suppliers, partners and others will achieve Year 2000 compliance in a
timely manner. The failure of our vendors and partners to successfully address
the Year 2000 issue could have a material adverse effect on our ability to fully
address our Year 2000 issue. Such failures could materially affect our results
of operations, liquidity and financial condition.
Our contingency plan to minimize the risks associated with Year 2000 issues
consists primarily of arranging for adequate supplies of bulk drug substances to
ensure that our ongoing clinical trials are not interrupted. Our contingency
plan has been substantially implemented as of August 1999.
We expense external and internal costs specifically associated with
addressing Year 2000 issues as incurred. To this point, these costs have not
been material and we do not expect such costs to be material in the future. We
cannot be certain, however, that our assessment of Year 2000's potential impact
on us will not change as we complete our assessment, or that Year 2000 will not
ultimately cause a material disruption in our business.
MARKET RISK
Our cash and cash equivalents, investments and debt are comprised primarily
of short-term fixed rate instruments. Accordingly, we are not subject to
interest rate risk to any significant degree.
One of our cancellable drug supply agreements is denominated in a foreign
currency. We have not entered into any agreements or transactions to hedge the
risk associated with potential fluctuations in currencies; accordingly, we are
subject to foreign currency exchange risk related to this contract. While we may
enter into hedge or other agreements in the future to actively manage this risk,
we do not believe this risk is material to our financial statements.
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<PAGE> 23
BUSINESS
OVERVIEW
We are a pharmaceutical company developing products to improve upon current
therapeutic approaches to the treatment of cancer, atherosclerosis and retinal
disease. We use our expertise in the chemistry of biologically-active
metal-containing compounds to develop patented molecules called texaphyrins
which, when injected, accumulate in tumor growths, in the diseased portions of
major blood vessels and in small blood vessel growths in the retina. When we
expose these molecules to various energy sources, such as X-ray, light or
chemical, these metallic molecules energize and by doing so are able to destroy
diseased tissue with minimal damage to surrounding healthy cells. Our lead
texaphyrin-based product candidates are:
- XCYTRIN, a molecule to enhance the effects of radiation and chemotherapy
in treating cancer;
- LUTRIN, a molecule for use in photodynamic therapy of cancer;
- ANTRIN, a molecule to treat atherosclerosis via photoangioplasty; and
- OPTRIN, a molecule to treat age-related macular degeneration, a disease
of the retina caused by growth of small blood vessels, which can lead to
blindness.
Our technology is based upon our expertise in developing
biologically-active molecules that are capable of being activated by energy. In
nature, a class of molecules called porphyrins, including heme found in
hemoglobin and chlorophyll found in plants, is found in tissues or organs
responsible for energy production, metabolism or transport functions. Our
texaphyrins, which are synthetic, expanded porphyrins, are designed to take
advantage of two key characteristics of naturally-occurring porphyrins:
interaction with energy and accumulation in tissues with high energy demands.
Texaphyrins are capable of binding larger metal atoms and of capturing, focusing
and transforming X-ray, light or chemical energy into other energy forms. This
allows them to be used for targeted destruction of diseased tissues. In each
case, the type of metal inserted and the form of energy applied determines the
physical, chemical and therapeutic characteristics of the texaphyrin.
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<PAGE> 24
Following accumulation at the disease site, which generally occurs in
minutes to a few hours, the appropriate energy form can activate the
texaphyrins' therapeutic effects. Texaphyrins are water soluble, which may make
them safer and easier to administer to patients. The diagram below depicts some
of our texaphyrin-based products under development:
[TEXAPHYRIN-BASED PRODUCTS UNDER DEVELOPMENT]
MARKET OVERVIEW
Cancer
Cancer results from the uncontrolled multiplication of cells which invade
and interfere with the normal function of adjacent tissues and organs.
Frequently, cancer cells become dislodged from their primary site and spread, or
metastasize, to other places in the body. Approximately 1.2 million new cases of
cancer are diagnosed annually in the United States. The appropriate cancer
therapy for each patient depends on the cancer type and careful assessment of
the size, location and existence of spread of the tumor using diagnostic imaging
procedures. Therapy typically includes some combination of surgery, radiation
therapy or chemotherapy.
Chemotherapy and radiation therapy tend to indiscriminately destroy both
healthy and diseased cells and cause serious side effects. As a result,
substantial cancer research has been directed toward improving the effectiveness
of existing therapy while reducing toxicity. These approaches seek to identify
drugs which are capable of targeting the tumor and making the cancer cells more
sensitive and responsive to radiation therapy or chemotherapy. The following are
therapies used in the treatment of cancer:
Radiation Therapy. Approximately 3,000 physicians specializing in radiation
oncology administer radiation therapy to more than 700,000 patients annually in
the United States. The radiation is usually applied to the tumor site several
times per week over a period of two to six weeks. Radiation therapy often has
toxic effects on healthy tissue surrounding the tumor because the energy cannot
be adequately targeted. An
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<PAGE> 25
estimated 50% of newly diagnosed cancer patients, including those with cancers
of the lung, breast, prostate, or head and neck region, will receive radiation
therapy as part of their initial treatment. In addition, approximately 150,000
patients with persistent or recurrent cancer also will receive radiation
therapy. Depending on the complexity and duration of treatment, a course of
radiation therapy for cancer can cost between $10,000 and $25,000.
Chemotherapy. More than 350,000 patients each year in the United States
receive chemotherapy for treatment of many types of cancer. The serious or
life-threatening side effects of chemotherapy agents, many of which are due to
the drug's lack of selectivity, limit the effectiveness of this treatment.
Chemotherapy drugs tend to distribute themselves throughout the body in normal
tissues as well as in the tumor. Because of their toxicity to normal tissues,
chemotherapy drugs can be administered only in small dosages and accordingly,
the therapeutic benefits may be limited.
Photodynamic Therapy. Photodynamic therapy is a new cancer treatment based
on the use of light energy to activate certain types of drugs known as
photosensitizers. In this procedure, the photosensitizer, ideally one which
accumulates more readily in tumor cells, is injected into the patient. The tumor
site is then illuminated with visible light of a strength and wavelength that is
absorbed by the photosensitizer. Once so activated, the photosensitizer causes
tumor cell death. The FDA approved the first photosensitizing agent in early
1996 for the treatment of obstructing cancers of the esophagus and more recently
for the treatment of particular types of lung cancer. To date, use of such drugs
has been restricted to treatment of superficial or small lesions because these
photosensitizers have been unable to absorb light of a wavelength capable of
penetrating deeply into tissues. Other limitations of photosensitizers have
included unfavorable distribution, prolonged retention in the body, skin
toxicity and insolubility in water, complicating intravenous administration.
Atherosclerosis
Atherosclerosis, or hardening of the arteries, is a disease in which
cholesterol, other fatty materials and inflammatory cells are deposited in the
walls of blood vessels, forming a build-up known as plaque. The accumulation of
plaque narrows the interior of the blood vessels, reducing blood flow.
Atherosclerosis in the coronary arteries can lead to heart attack and death. In
other blood vessels, atherosclerosis can lead to decreased mobility, loss of
function, loss of limbs and other complications such as stroke. Current
treatments for atherosclerosis include surgery and other techniques aimed at
removing or relieving the plaque. Balloon angioplasty is a procedure using
catheter devices inserted inside the vessels to mechanically compress or remove
the obstruction. Currently, more than 600,000 patients per year in the United
States undergo these procedures for treatment of atherosclerosis in the coronary
arteries. These procedures require the use of anti-clotting drugs and,
frequently, the use of devices inserted inside the vessels to reduce the
incidence of reclosure, which results from traumatic damage to the vessel wall.
Generally, these techniques have been limited to treating only short sections of
the diseased vessel.
Blindness Caused by Retinal Degeneration
Age-related degeneration of the retina is the major cause of severe visual
loss in the elderly. There are approximately 1.1 million people with age-related
macular degeneration in the United States, with approximately 200,000 new cases
diagnosed annually. Patients with this disease develop blurred vision and
distortion, decreased vision and blind spots in the center of the visual field.
This disease is caused by the abnormal growth and proliferation of small blood
vessels in the retina. Although laser treatment can slow progression of disease
in some patients, it generally fails to prevent progression of the disease,
which ultimately leads to blindness.
OUR BUSINESS STRATEGY
The key elements of our business strategy include:
- Focusing on drugs that address the large markets for the treatment of
cancer and atherosclerosis. Although our technology platform can be used
to develop a wide range of drug substances, we have
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focused our initial efforts on cancer and atherosclerosis, and
particularly on the treatment of life-threatening cancers in which
accelerated regulatory approval and favorable pricing may be possible.
- Improving upon existing medical procedures. Our products are designed to
be used in conjunction with and to enhance the safety and effectiveness
of, standard medical treatments. We believe this increases their
likelihood of being rapidly adopted by physicians.
- Creating diverse product opportunities based on our texaphyrin
technology. Our texaphyrin-based technology platform can incorporate a
variety of metals and can be used to target many different types of
disease. Our research and development efforts are focused on developing
new uses for texaphyrins.
- Retaining rights to key products in advanced clinical testing. We have
retained worldwide rights to our XCYTRIN radiation enhancer, U.S.,
Canadian and Japanese rights to our LUTRIN photosensitizer for cancer
treatment and worldwide rights to ANTRIN for photoangioplasty of
atherosclerosis. By maintaining product rights through late-stage
clinical development, we believe that we can create greater value for our
products and retain the opportunity to sell and market our products.
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PRODUCTS UNDER DEVELOPMENT
The table below summarizes our product candidates and their stage of
development:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PRODUCT TARGETED DISEASE REGULATORY STATUS(1) MARKETING RIGHTS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CANCER THERAPY
XCYTRIN Brain metastases Phase III Pharmacyclics
Radiation Enhancer
Primary brain tumor Phase I, National Cancer Pharmacyclics
Pancreatic cancer Institute
Lung cancer Pending, National Cancer Pharmacyclics
Prostate Cancer Institute(2)
Childhood gliomas
- ----------------------------------------------------------------------------------------------------------------
XCYTRIN A variety of cancers Preclinical Pharmacyclics
Chemotherapy Enhancer
- ----------------------------------------------------------------------------------------------------------------
LUTRIN Breast cancer Phase II Pharmacyclics in the U.S.,
Photosensitizer Canada and Japan;
Nycomed in rest of world
Esophageal cancer Pending, National Cancer Pharmacyclics
Cervical cancer Institute(2)
Head and neck cancer
Prostate cancer
Lung cancer
Ovarian cancer
ATHEROSCLEROSIS THERAPY
ANTRIN Peripheral Phase II Pharmacyclics
Photosensitizer vascular disease
Coronary artery disease Preclinical Pharmacyclics
MACULAR DEGENERATION
OPTRIN Degenerative disease Phase I/II Alcon
Photosensitizer of the retina
DIAGNOSTIC IMAGING
CITRA VU Oral magnetic resonance FDA approvable letter E-Z-EM in Europe and North
imaging contrast agent received December 1996 America;
for abdomen and pelvis Pharmacyclics in rest of
world
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As used in this prospectus, "Preclinical" means testing on animal models for
indications of safety and efficacy prior to the initiation of human clinical
trials. "Phase I" means initial human clinical trials designed to establish
the safety, dose tolerance and sometimes distribution of a compound. "Phase
I/II" means initial human clinical trials designed to establish the safety,
dose tolerance and, sometimes, distribution of a compound and which are, in
contrast to Phase I clinical trials, performed on patients with the targeted
disease. "Phase II" means human clinical trials designed to establish
safety, optimal dosage and preliminary activity of a compound. "Phase III"
means human clinical trials designed to lead to accumulation of data
sufficient to support a new drug application, including substantial evidence
of safety and efficacy. "FDA approvable letter" means that the FDA has
deemed the drug capable of registration for commercial use provided that
certain conditions relating to product formulation, stability and
manufacturing can be resolved to the agency's satisfaction.
(2) The National Cancer Institute intends to sponsor clinical studies for these
cancer types and is currently in the process of establishing protocols for
these studies for submission to the FDA.
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CANCER THERAPY
XCYTRIN for Radiation Enhancement
Radiation therapy of cancer destroys cancer cells through exposure to
relatively high doses of externally applied radiation. While cancer cells are
somewhat more sensitive to radiation exposure than healthy tissues, radiation
therapy has toxic effects on healthy tissue surrounding the tumor because the
energy cannot be adequately targeted. Our preclinical studies indicate that
XCYTRIN both accumulates in tumors and increases the local destructive effect of
radiation therapy in those targeted tissues. XCYTRIN's uptake in tumor cells
occurs within minutes of administration and persists for hours, effectively
concentrating the drug's effect on the tumor. XCYTRIN interacts with X-rays
forming substances that enhance the destruction of tumor cells. In preclinical
studies, animals receiving XCYTRIN in conjunction with radiation therapy had
greater tumor response rates as compared to the control group receiving
equivalent doses of radiation therapy alone. Preclinical studies further
indicate that XCYTRIN increases the effect of radiation therapy at the tumor
site, with no increased damage to surrounding healthy tissues. An additional
feature of XCYTRIN is that it is detectable by magnetic resonance imaging
scanning, providing an ongoing method of monitoring its distribution in
patients.
Initially, we intend to seek FDA approval of XCYTRIN for treatment of
patients with tumors which have spread to the brain who are receiving radiation
therapy. This condition occurs in approximately 15% to 20% of all cancer
patients, often in patients with primary lung or breast cancer, and is usually
treated with radiation therapy delivered to the whole brain. The median survival
of patients with tumors which have spread to the brain is about four months.
Patients with this condition develop devastating complications, including severe
headache, seizures, paralysis, blindness and impaired ability to think.
Radiation therapy for treatment of this problem is performed on approximately
170,000 patients per year in the United States and is intended to prevent or
reduce these complications. We believe that XCYTRIN could eventually be used in
many other tumor types and clinical situations requiring radiation therapy.
Clinical Status. We have completed a Phase I clinical trial of XCYTRIN in
38 adult patients with advanced cancer who received radiation therapy. This
trial was designed to determine the toxicity of a single dose of the drug.
Reversible kidney toxicity was found at the highest doses of drug tested.
Accumulation of XCYTRIN in lung cancer, breast cancer and other tumors has been
confirmed using magnetic resonance imaging.
We have also completed an international multicenter Phase Ib/II clinical
trial to evaluate the safety and efficacy of XCYTRIN in cancer patients
receiving radiation therapy for treatment of tumors which had spread to the
brain. We have compared the results from the Phase Ib/II trial to historical
data using a 528 patient database containing information on clinical features
and outcomes in comparable patients receiving treatment with identical doses of
radiation alone. After 6 months and 12 months, 41% and 25% of XCYTRIN-treated
patients were alive compared to 30% and 14% of the historical controls,
respectively. XCYTRIN treatment was a statistically significant independent
factor in determining survival. The effect of XCYTRIN treatment on neurologic
progression was determined by comparing the causes of death in the treated
patients to those of the control patients. Death due to tumor progression in the
brain was seen in 15% of XCYTRIN-treated patients compared to more than 35% in
the control group.
Statisticians from the Radiation Therapy Oncology Group, a large U.S.
cooperative clinical trial group, performed a similar analysis using its
database. Using a case-matched control analysis, they found that XCYTRIN-treated
patients had better survival than controls, with 30% of XCYTRIN-treated patients
surviving 12 months compared to 11% in the control groups. Forty-nine percent of
control patients died due to tumor progression in the head compared to 15% in
the XCYTRIN group.
We have initiated a controlled Phase III trial with XCYTRIN for the
treatment of patients with tumors that have spread to the brain undergoing whole
brain radiation therapy. We are now enrolling patients at approximately 30 sites
in the U.S., Canada, Netherlands and France. We expect that about 10 additional
centers will participate in the trial including four sites in the United
Kingdom.
We plan to enroll approximately 425 adult patients in this study. Patients
will be randomly assigned to treatment with either standard whole-brain
radiation therapy or treatment with XCYTRIN plus standard
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whole-brain radiation therapy. The XCYTRIN-treated group will receive ten
intravenous injections of XCYTRIN, each prior to ten daily doses of radiation
therapy. We will follow all patients for a minimum of 6 months after treatment
or until death. The study will measure survival, time-to-neurologic progression,
tumor response by magnetic resonance imaging and quality of life. The co-primary
end-points of the study are survival and time-to-neurologic progression assessed
by neurological examinations and neurocognitive testing. Statistically
significant improvement in either survival or time-to-neurologic progression
will be considered as satisfying the primary end point of the trial, and may
provide the basis of a marketing approval. An outside, independent Data Safety
Monitoring Board will monitor the study by reviewing and analyzing interim data
two-thirds of the way into the study for possible early termination of the trial
in the event of significant efficacy or unacceptable toxicity. The FDA has
indicated that the proposed Phase III trial will qualify for "Fast Track"
review.
The median survival of patients with tumors that have spread to the brain
is approximately 3 to 4 months and depends on various clinical features such as
tumor type, performance status, age and presence of disease outside the brain.
Although most patients die from disease progression in the brain, many patients
will die due to progression of their disease in other locations in the body. The
trial's patient eligibility requirements are designed to enroll those patients
most likely to succumb to tumor growth in the brain. Improved local control of
tumor growth from radiation therapy in XCYTRIN-treated patients could result in
prolonged survival or time-to-progression compared to radiation therapy alone.
In addition to our studies in patients with tumors that have spread to the
brain, the National Cancer Institute has agreed to sponsor several clinical
trials with XCYTRIN for additional cancer types:
<TABLE>
<CAPTION>
TARGETED DISEASE LOCATION STATUS
---------------- -------- ------
<S> <C> <C>
Primary Brain Tumor UCLA Medical Center and University of Enrolling patients
Southern California
Primary Brain Tumor NABTT (New Approaches to Brain Tumor Pending
Therapy Consortium, comprised of ten
centers)
Primary Brain Tumor University of Chicago Pending
Pediatric Brain Tumors, Children's Cancer Group (CCG), a Pending
including Childhood consortium of U.S. Children's Hospitals
Glioma
Lung Cancer Ohio State University Pending
Pancreatic Cancer University of Pittsburgh Enrolling patients
Pancreatic Cancer Johns Hopkins University Oncology Center Pending
Pancreatic Cancer University of Chicago Enrolling patients
Prostate Cancer Joint Center for Radiation Therapy, Pending
Harvard Medical School
</TABLE>
XCYTRIN for Chemotherapy Enhancement
We are conducting preclinical studies with XCYTRIN as a chemotherapy
enhancer for use in conjunction with certain chemotherapy agents. Chemotherapy
destroys cancer cells by interfering with their metabolism, protein synthesis or
cell division. Because these agents are not tissue-selective, cancer
chemotherapy agents produce serious or life-threatening side effects which
compromise quality of life and increase medical costs for cancer patients.
Preclinical studies conducted by us and our collaborators indicate that XCYTRIN
increases the activity of certain chemotherapy agents in tumors. We believe this
effect is related to XCYTRIN's ability to increase formation of cytotoxic
substances produced by certain chemotherapy agents, such as bleomycin and
doxorubicin. XCYTRIN's uptake in tumors enhances the activity of cancer
chemotherapy agents in tumor cells but not in normal tissues, thereby increasing
the therapeutic margin. In preclinical studies, animals receiving XCYTRIN and
chemotherapy with either bleomycin or doxorubicin had
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<PAGE> 30
enhanced tumor responses and survival rates as compared to control groups
receiving equivalent doses of chemotherapy alone.
LUTRIN for Photodynamic Therapy of Cancer
To date, photodynamic therapy has been approved for the treatment of
superficial or small lesions because existing photosensitizers have been unable
to absorb light capable of penetrating deeply into tissues. LUTRIN is activated
by light of 720 to 760 nanometers, wavelengths that are optimal for penetrating
through tissue, blood and skin pigmentation such as melanin. After absorbing
light of this wavelength, LUTRIN becomes activated to its tumor cell killing
state. Preclinical studies indicate that LUTRIN selectively accumulates in a
variety of cancer cells.
In October 1997, we entered into an agreement with Nycomed, which acquired
sales and marketing rights to LUTRIN for use in cancer treatment outside the
United States, Canada and Japan. In return for these rights, we received an
up-front licensing fee and will receive future payments based on achievement of
regulatory milestones and royalties on LUTRIN sales. See "-- Research, Clinical
Development and Marketing Collaborations" and "-- Manufacturing and
Suppliers -- Photodynamic Therapy Light Production and Delivery Devices."
We intend initially to seek FDA approval for the use of LUTRIN in
photodynamic therapy for patients with invasive surface cancers that are
accessible to externally applied light, such as recurrent breast cancer to the
chest wall. This disease affects more then 10,000 patients per year in the
United States. Additional potential uses for LUTRIN include internal cancers
such as cancer of the lung, esophagus, cervix, colon, rectum, prostate, head and
neck region, ovary and genitourinary tract.
Clinical Status. At the May 1999 meeting of the American Society of
Clinical Oncology, we reported results from our Phase II study of LUTRIN. The
Phase II study was designed to evaluate the safety, tolerability and efficacy of
LUTRIN photosensitizer for photodynamic therapy in women with recurrent breast
cancer to the chest wall, for whom previous chemotherapy and radiation therapy
had failed. Fifty-eight treatment courses were given to 52 patients with
advanced disease. Eighty-two percent of these patients had failed three or more
chemotherapy regimens and all the patients had recurring or persistent tumors
following radiation therapy to the chest wall. The study evaluated the
administration of different doses of LUTRIN, followed by illumination of the
chest wall with light delivered at either 3 hours, 6 hours, 24 hours, 48 hours,
72 hours or 96 hours after intravenous injection of the drug. Each patient, in
the 11 groups tested, received illumination with light to large areas of the
chest wall (up to 240 cm(2)) encompassing both the tumor and adjacent uninvolved
skin. The purpose of the study was to identify treatment regimens that
demonstrated anti-tumor activity with an acceptable level of toxicity.
Tumor response was based on physical examinations and photographs of the
diseased chest wall. All lesions within the treatment field were evaluated and
an overall assessment of efficacy was made for each patient. Reduction in tumor
size was seen in 64% of patients. In 42% of patients tumors were either not
detectable (20%) or had significant decreases which were evident on physical
examination or photographs (22%).
Safety and tolerability appeared to be dependent on both drug dose and the
time interval between LUTRIN administration and illumination of the chest wall
with light. Patients receiving chest wall illumination 24 hours or more
following intravenous administration of LUTRIN experienced pain at the treatment
site that was manageable with standard narcotic pain medications. Patients
treated with light given at shorter intervals experienced more severe pain,
sometimes requiring conscious sedation. Skin toxicity, including scab formation
or destruction of skin, was seen in the skin overlying the tumors in patients
treated with light at time intervals of less than 24 hours. Only 2 of 18
patients receiving light illumination 24 hours or more after receiving LUTRIN
experienced this toxicity. Skin toxicity was limited to the tumor-involved areas
of skin except in patients receiving the highest doses of LUTRIN followed by
photoillumination given at the shortest intervals.
In addition to our clinical studies in recurrent breast cancer to the chest
wall, the National Cancer Institute intends to sponsor several clinical trials
of LUTRIN for additional types including cancer of the
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<PAGE> 31
cervix, esophagus, head and neck region, pancreas, prostate, lung and ovary. We
expect some of these studies to begin in 1999.
ATHEROSCLEROSIS THERAPY
ANTRIN for Photoangioplasty of Atherosclerosis.
Preclinical studies conducted by Pharmacyclics and our collaborators have
demonstrated that texaphyrins also accumulate in vascular plaque caused by
atherosclerosis. Preclinical studies indicated that following intravenous
injection of ANTRIN, light delivered into the blood vessel using an optical
fiber resulted in non-mechanical reduction or elimination of the plaque without
damage to the lining of the vessel wall using a technique which we refer to as
photoangioplasty. Photoangioplasty with ANTRIN resulted in the elimination of
inflammatory cells from the diseased vessel wall. Current treatments of
atherosclerosis, such as balloon angioplasty, require anti-clotting drugs and
the use of devices inserted inside the vessels to reduce the incidence of
reclosure. We believe that these results suggest that photoangioplasty of
atherosclerosis with ANTRIN has the potential to eliminate or reduce plaque
without complications such as thrombosis and reclosure. Additional preclinical
studies further indicated that photoangioplasty of atherosclerosis with ANTRIN
could be used to treat longer segments of blood vessels, which is not possible
with other currently available techniques. ANTRIN's accumulation in plaque and
relatively rapid clearance from blood may provide advantages over alternative
treatments for atherosclerosis. Removal of inflammatory cells also suggests that
ANTRIN may reduce or stabilize vulnerable plaque. Vulnerable plaque is rich in
inflammatory cells and prone to rupture causing a sudden blood clot and closure
of the vessel. We also believe that photoangioplasty with ANTRIN has potential
use in peripheral arterial disease, coronary artery disease and in the treatment
of restenosis following balloon angioplasty.
Clinical Status. In April 1999, we completed enrollment in our Phase I
study with ANTRIN photoangioplasty for patients with peripheral arterial
disease. Fifty-one treatment courses were given to 47 patients with symptomatic
atherosclerosis of the major arteries of the lower extremities. The two-part
study was designed to first establish an optimum dose of ANTRIN by treating
successive groups of patients with increasing single doses of the drug. In the
second part of the study, we evaluated three doses of light at several drug dose
levels. We gave ANTRIN intravenously and delivered light to the inside of the
diseased vessel using a 0.89mm optical fiber. We evaluated patients for toxicity
and local arterial responses by follow-up angiograms and intravascular
ultrasound performed 28 days after photoangioplasty. In March 1999, we reported
that 12 of 14 evaluable patients in this trial responded to treatment, defined
as an increase of greater than 10% in the blood vessel opening or minimal
luminal diameter. We noted no adverse vascular responses. Patients treated at
higher drug doses experienced transient tingling of the fingertips.
We plan to begin a controlled 375-patient Phase II study with ANTRIN for
patients with peripheral arterial disease of the lower extremities later this
year. The study will be designed to evaluate both prevention of restenosis
following balloon angioplasty and primary treatment of atherosclerosis.
RETINAL DEGENERATION THERAPY
OPTRIN for Treatment of Retinal Degeneration.
Pharmacyclics and our collaborators have conducted preclinical studies with
OPTRIN for treatment of degeneration of the retina caused by abnormal growth of
blood vessels. These studies have indicated that OPTRIN selectively eliminates
abnormal retinal capillaries after activation by light of an appropriate
wavelength. We have entered into a development agreement with Alcon, a leading
ophthalmic products company. Under this agreement, we will provide OPTRIN to
Alcon for further preclinical and clinical development, regulatory submissions
and sales and marketing of OPTRIN for the treatment of ophthalmic diseases.
Clinical Status. Alcon is currently conducting a Phase I/II clinical trial
with OPTRIN for the photodynamic therapy of patients with retinal degeneration.
Alcon presented interim results from this trial at the June 1999 European
Society of Ophthalmology meeting in Stockholm, Sweden.
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Alcon treated 58 patients with the wet form of macular degeneration in the
Phase I/II study, which was designed to evaluate various treatment regimens in
successive groups of patients. Clinical investigators examined increasing doses
of drug and light, and varying time intervals between drug administration and
light delivery in order to define the optimum treatment parameters. Although
primarily a safety study to establish the highest tolerated dose, clinical
investigators assessed clinical activity by angiography and measurements of
vision. Patients received a single intravenous injection of OPTRIN, followed by
light delivered to the retina at various times up to 180 minutes after injection
of the drug. In a subset of patients, clinical investigators performed
angiography to evaluate distribution and drug uptake in the diseased vessels and
clearance from normal retinal tissues.
Clinical investigators found that OPTRIN accumulated selectively in the
abnormal vessels and, depending on the dose of drug and light and the interval
between them, resulted in complete or partial closure of diseased vessels after
activation with light. In patients treated with doses of drug less than or equal
to 2mg/kg, we saw complete or partial closure of diseased vessels in 1 of 19
patients. In the combined groups of patients receiving 2.5 or 3.0 mg/kg of drug,
clinical investigators observed complete or partial closure of diseased vessels
in 9 of 13 patients. Twenty of 26 patients had complete or partial closure when
treated with 4 mg/kg of drug.
Light dose was also an important factor. Clinical investigators saw
complete or partial closure of diseased vessels in 3 of 18 patients treated with
light doses of 50 or 75 Joules/cm(2). At a light dose of 100 Joules/cm(2), 19 of
31 patients had complete or partial closure of diseased vessels. In the combined
group receiving light doses of 125 or 150 Joules/cm(2), 8 of 9 patients had
complete or partial closure of diseased vessels.
Complete or partial closure of diseased vessels is an indicator for
treatment effect. In a preliminary analysis of the patients with complete or
partial closure, vision had improved when measured one week after treatment. In
the patients without complete or partial closure, vision had decreased when
measured one week after treatment. The difference was statistically significant.
Patients receiving higher doses of OPTRIN experienced transient tingling of
the fingertips. For example, in patients receiving less than or equal to 2 mg/kg
of drug, 1 of 19 experienced transient tingling of the fingertips, while in the
combined group of patients treated with 2.5 or 3 mg/kg, 3 of 13 experienced
transient tingling of the fingertips. In patients treated with 4 mg/kg, 20 of 26
experienced transient tingling of the fingertips. One patient developed facial
skin toxicity following sun exposure. Clinical investigators observed no other
toxicities. In 5 patients, clinical investigators observed damage to normal
retina. These patients either received the highest dose of drug (4mg/kg) or
received light within a short interval following drug administration. Clinical
investigators observed no retinal damage in patients who had received high (125
or 150 Joules/cm(2)) doses of light.
DIAGNOSTIC IMAGING AGENT
CITRA VU for Imaging the Gastrointestinal Tract.
Our oral magnetic resonance imaging contrast agent, CITRA VU, is not a
texaphyrin, but is based on one of our patented compounds. CITRA VU is used for
imaging the gastrointestinal tract in patients undergoing MRI procedures of the
abdomen or the pelvis. CITRA VU is an orange-flavored oral formulation designed
to fill the bowel uniformly to improve diagnosis of abdominal or pelvic
diseases.
Clinical Status. We submitted a new drug application for CITRA VU in
September 1995, based upon two multicenter, controlled Phase III studies in
patients receiving MRI scans for known or suspected diseases of the abdomen or
pelvis. We received an approvable letter in December 1996 which required us to
conduct additional product manufacturing and product stability studies. We are
in the process of addressing these issues. We cannot be certain that the new
drug application will satisfy the FDA's criteria for approval. In 1996, we
received approval from the Medicines Control Agency to market CITRA VU in the
United Kingdom. In April 1998, we received approval from the Health Protection
Branch of Health Canada to market CITRA VU in Canada. However, we will not
market CITRA VU in Europe or Canada until we resolve product
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manufacturing and product stability issues. In addition, because we are changing
the level of preservatives in the formulation, we will not market CITRA VU in
Europe or Canada until we receive additional marketing approvals.
RESEARCH, CLINICAL DEVELOPMENT AND MARKETING COLLABORATIONS
We rely on relationships with third parties to expand certain research,
clinical development, process development, manufacturing, sales and marketing
functions. In the photodynamic therapy field, we have used outside
collaborations for development of light sources and delivery devices for use in
our preclinical studies and clinical trials so that we could focus on
development of our proprietary photosensitizing products.
National Cancer Institute Collaboration. In April 1997, the Decision
Network Committee of the National Cancer Institute Division of Cancer Treatment,
Diagnosis and Centers voted unanimously to sponsor and fund clinical development
of both XCYTRIN as a radiation enhancer and LUTRIN as a photosensitizer for
cancer treatment. Under this cooperative research and development agreement,
Pharmacyclics and the National Cancer Institute jointly select clinical trials
which will be conducted at leading medical centers for various types of cancer.
For XCYTRIN, the National Cancer Institute plans to conduct several separate
clinical trials for treatment of brain tumors and cancers involving the lung,
pancreas and prostate. For LUTRIN, the National Cancer Institute intends to
sponsor several separate clinical trials for the treatment of esophageal,
cervical, lung, prostate and ovarian cancers. We believe that these National
Cancer Institute-sponsored trials will supplement our own clinical development
efforts for both XCYTRIN and LUTRIN. Although third parties will be conducting
the trials, we will provide clinical supplies of our drugs and we intend to
monitor the progression and results of these trials.
The University of Texas Agreements. We collaborate with and sponsor
research and development programs at The University of Texas at Austin, through
a group headed by Jonathan Sessler, Ph.D., Professor of Chemistry at The
University of Texas at Austin. Such collaborations and programs extend our
research capabilities in the field of expanded porphyrin chemistry. We have
entered into two license agreements with The University of Texas at Austin that
grant us the worldwide, exclusive right to patents or patent applications that
relate to or result from research conducted at The University of Texas at Austin
on the use, development and syntheses of expanded porphyrin molecules, and
research conducted at The University of Texas at Dallas on the incorporation of
paramagnetic metals into zeolites for use as MRI contrast agents. These
agreements require us to pay royalties as a percentage of net sales to The
University of Texas for products incorporating the licensed technology,
including each of our current product candidates. In addition, we and The
University of Texas at Austin have entered into sponsored research agreements
which expand the products, inventions and discoveries developed by The
University of Texas at Austin to which our license rights apply. In connection
with The University of Texas license agreements, we also entered into a license
agreement with an individual co-inventor of CITRA VU, pursuant to which we have
been granted an exclusive royalty-bearing license to manufacture, use and sell
certain products that fall within the scope of The University of Texas at Dallas
license agreement.
Alcon Collaboration. In December 1997, we entered into an evaluation and
license agreement with Alcon Pharmaceuticals, Ltd. under which Alcon acquired
worldwide marketing rights to OPTRIN for ophthalmology uses. Alcon, a
wholly-owned subsidiary of Nestle S.A., is a global leader in the research,
development, manufacturing and marketing of ophthalmic products. Under the terms
of the agreement, we received an upfront fee for Alcon to evaluate OPTRIN for
ophthalmology uses for a specified time period. If the evaluation is successful,
we will receive an additional license fee, payments upon completion of certain
milestones and royalty payments on product sales. Alcon will conduct and bear
all costs for world-wide development and commercialization of OPTRIN for
ophthalmology uses, as well as costs for regulatory submissions, until the
agreement ends. We are required to supply bulk drug substance to Alcon, and
Alcon will be responsible for formulation and packaging.
E-Z-EM Marketing, Sales and Distribution Arrangement. In August 1995, we
entered into an agreement with E-Z-EM, Inc., a leading manufacturer and
worldwide distributor of oral contrast agents and other products for use in
gastrointestinal radiology, for the exclusive marketing and sale of CITRA VU in
North
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America. During fiscal 1997, we signed an additional agreement with E-Z-EM's
affiliate, E-Z-EM, Ltd., for marketing, sales and distribution in Europe.
Pharmacyclics and E-Z-EM will share equally in the operating profits from the
sale of CITRA VU in these regions, and we may also receive premium payments if
we achieve certain sales levels. During the term of the agreement, E-Z-EM is
prohibited from distributing products that are directly competitive with CITRA
VU, except for products that had been or were being developed by E-Z-EM as of
the date of our agreement with E-Z-EM and that contain specified chemical
compounds. E-Z-EM may terminate the agreement at any time upon six months'
notice.
Nycomed Collaboration. In October 1997, we entered into an agreement with
Nycomed, granting Nycomed exclusive sales and marketing rights to LUTRIN for
different types of cancer in all markets excluding the United States, Canada and
Japan. In exchange for these rights, Nycomed agreed to pay us up to
approximately $14.0 million in license fees and cost reimbursement, based upon
an agreed budget, milestone payments and development cost subsidies related to
the initial cancer uses for LUTRIN to be developed by us and Nycomed. In each
case, we must reach certain development, clinical or commercialization
milestones to receive payment. Nycomed may pay us approximately $14.0 million in
additional milestone payments and cost reimbursement, assuming similar costs and
agreement upon a similar budget, during the course of development for subsequent
cancer treatments, if such clinical trials are successfully completed. Nycomed
has agreed to bear a portion of the device and clinical development costs
required for regulatory submission for product approval in the United States. We
will then use this information as a basis for approvals in Europe. Pharmacyclics
and Nycomed will make regulatory submissions in our respective marketing
territories. We are required to supply bulk drug substance to Nycomed through
our manufacturing collaborations.
PATENTS AND PROPRIETARY TECHNOLOGY
We believe our success depends upon our ability to protect our proprietary
technology. We, therefore, aggressively pursue, prosecute, protect and defend
patent applications, issued patents, trade secrets, and licensed patent and
trade secret rights covering certain aspects of our technology.
Our patents, patent applications, and licensed patent rights cover various
compounds, pharmaceutical formulations and methods of use. We own or have
license rights to:
- 62 issued U.S. patents;
- 2 additional allowed patent applications in the U.S.; and
- 32 other pending U.S. patent applications.
The issued U.S. patents expire between 2006 and 2016. We also own or license 81
issued non-U.S. patents including 66 patents issued throughout Europe and 112
pending non-U.S. patent applications filed regionally under the Patent
Cooperation Treaty and with the European Patent Office, and nationally in
Canada, Japan, Australia and certain other countries.
We may be unsuccessful in prosecuting our patent applications or patents
may not issue from our patent applications. Even if patents are issued and
maintained, these patents may not be of adequate scope to benefit us, or may
held invalid and unenforceable against third parties.
We also rely upon trade secrets, technical know-how and continuing
technological innovation to develop and maintain our competitive position. We
require all of our employees, consultants, advisors and collaborators to execute
appropriate confidentiality and assignment-of-inventions agreements. These
agreements typically provide that all materials and confidential information
developed or made known to the individual during the course of the individual's
relationship with us is to be kept confidential and not disclosed to third
parties except in specific circumstances, and these agreements provide that all
inventions arising out of the relationship with Pharmacyclics shall be our
exclusive property.
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DRUG SUPPLY AGREEMENTS
We currently use third parties to manufacture various components of our
products under development.
Texaphyrin-based Products. In September 1996, we entered into an agreement
with Hoechst Celanese Corporation, a manufacturer of chemicals and
pharmaceutical intermediates, to optimize and scale up a manufacturing process
for and supply of our texaphyrin-based products. In October 1997, Hoechst
Celanese assigned the agreement to Celanese, Ltd., in connection with Hoechst
Celanese's corporate restructuring. This agreement presently grants Celanese
exclusive worldwide manufacturing rights and requires Celanese to supply all of
our texaphyrin drug substance for late stage clinical and commercial use. As a
result of the change in its business focus Celanese has requested that we pursue
alternative supply sources. The parties are presently negotiating the definitive
terms and conditions of an agreement pursuant to which Celanese will transfer
the manufacturing process it developed with us to other manufacturers. We have
entered into agreements with three new manufacturers to evaluate their ability
to supply us with the components of the texaphyrin products. They are currently
in the process of producing initial supplies, which include commercial
quantities, of such products for delivery to us during fiscal year 2000. We have
sufficient quantity of products to supply our current clinical trial plans.
Photodynamic Therapy Light Production and Delivery Devices. In connection
with our development of LUTRIN and ANTRIN as photosensitizers, we have developed
certain light sources and delivery methods, such as lasers and light emitting
diodes. We have purchased light emitting diode devices capable of producing the
required wavelength of light for use in photodynamic therapy with LUTRIN. We
have also used light emitting diode devices in preclinical animal studies and
Phase I and Phase II trials. In addition, we have acquired from CardioFocus,
Inc. cylindrically diffusing light fibers for animal studies and for use in
Phase I studies in cardiovascular disease. CardioFocus is also developing fibers
that we intend to use in future LUTRIN and ANTRIN trials. In October 1997, we
entered into a development agreement with Diomed, Inc. under which Diomed would
develop a diode laser system for use in photodynamic therapy. This effort was
successful and we have used Diomed lasers in our ANTRIN clinical trial and plan
to use them in future LUTRIN trials. In addition, we may seek other suppliers of
light delivery devices for clinical trials and commercial purposes, although we
cannot be certain that any agreements will be reached with such suppliers on
terms commercially reasonable to us, if at all.
COMPETITION
We face intense competition from pharmaceutical companies, universities,
governmental entities and others in the development of therapeutic and
diagnostic agents for the treatment of diseases which we target. Many of these
entities have significantly greater research and development capabilities than
us, as well as substantial marketing, manufacturing, financial and managerial
resources. Acquisitions of, or investments in, competing pharmaceutical
companies by large collaborating partners could increase such competitors'
financial, marketing, manufacturing and other resources. Developments by others
may render our products or technologies noncompetitive or obsolete, or we may be
unable to keep pace with technological developments or other market factors.
Competitors may be developing products that have an entirely different approach
or means of accomplishing similar diagnostic, imaging and therapeutic effects
than our products under development.
Although the FDA has not yet approved any agents for the enhancement of
radiation therapy or chemotherapy, we expect significant competition in these
fields, as we believe that one or more companies are developing and testing
products which compete directly with our products under development. These
companies may succeed in developing technologies and products that are more
effective than XCYTRIN or would render our products or technologies obsolete.
Moreover, certain existing chemotherapy agents also are used as radiation
enhancers. See "Risk Factors -- We face rapid technological change and intense
competition."
The FDA has approved Photofrin(R), a photosensitizer developed by QLT
Phototherapeutics, Inc., for the treatment of specific types of cancer. We are
aware of several other photosensitizers in various stages of development for a
number of uses. In addition to QLT Phototherapeutics, Inc., other companies are
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developing products in this area. Some companies developing photodynamic therapy
products are developing specialized light delivery devices for their products,
which, when combined with their product offering, may give them a competitive
advantage over our strategy of obtaining such devices from third-party sources.
We also face intense competition in the treatment of atherosclerosis which
currently includes the use of pharmaceutical agents and devices. Various drugs
also have been shown to reduce or prevent atherosclerosis. Balloon angioplasty
and stents are widely-used and generally accepted techniques to reduce the
narrowing of vessels by atherosclerosis. We believe that photoangioplasty with
ANTRIN may provide advantages over these techniques.
We face substantial competition in the treatment of macular degeneration.
Several other approaches to treatment are being investigated, including the use
of other photosensitizers and drugs. Recently, QLT Phototherapeutics, Inc.
reported that their photosensitizer, VISUDYNE, produced positive clinical
results in a controlled phase III clinical trial in patients with age-related
macular degeneration. Although we believe our photosensitizer has advantages
over VISUDYNE, we expect that VISUDYNE will receive regulatory approval sooner
than OPTRIN.
We also expect competition in the development of improved oral MRI contrast
agents to increase substantially.
GOVERNMENT REGULATION
FDA Regulation and Product Approval
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the clinical
development, manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our products. We believe that our products will be regulated as
drugs by the FDA rather than as biologics or devices.
The process required by the FDA before our products may be marketed in the
U.S. generally involves the following:
- preclinical laboratory and animal tests;
- submission of an IND application which must become effective before
clinical trials may begin;
- adequate and well-controlled human clinical trials to establish the
safety and efficacy of the proposed pharmaceutical in our intended use;
and
- FDA approval of a new drug application.
The testing and approval process requires substantial time, effort, and
financial resources and we cannot be certain that any approval will be granted
on a timely basis, if at all.
Preclinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as animal studies to assess the
potential safety and efficacy of the product. We then submit the results of the
preclinical tests, together with manufacturing information and analytical data,
to the FDA as part of an IND, which must become effective before we may begin
human clinical trials. The IND automatically becomes effective 30 days after
receipt by the FDA, unless the FDA, within the 30-day time period, raises
concerns or questions about the conduct of the trials as outlined in the IND. In
such a case, the IND sponsor and the FDA must resolve any outstanding concerns
before clinical trials can begin. Our submission of an IND may not result in FDA
authorization to commence clinical trials. Further, an independent Institutional
Review Board at the medical center proposing to conduct the clinical trials must
review and approve any clinical study.
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Human clinical trials are typically conducted in three sequential phases
which may overlap:
- PHASE I: The drug is initially introduced into healthy human subjects
or patients and tested for safety, dosage tolerance, absorption,
metabolism, distribution and excretion.
- PHASE II: Involves studies in a limited patient population to identify
possible adverse effects and safety risks, to determine the efficacy
of the product for specific targeted diseases and to determine dosage
tolerance and optimal dosage.
- PHASE III: When Phase II evaluations demonstrate that a dosage range
of the product is effective and has an acceptable safety profile,
Phase III trials are undertaken to further evaluate dosage, clinical
efficacy and to further test for safety in an expanded patient
population at geographically dispersed clinical study sites.
In the case of products for severe or life-threatening diseases such as
cancer, the initial human testing is often conducted in patients rather than in
healthy volunteers. Since these patients already have the target disease, these
studies may provide initial evidence of efficacy traditionally obtained in Phase
II trials and thus these trials are frequently referred to as Phase I/II trials.
We cannot be certain that we will successfully complete Phase I, Phase II or
Phase III testing of our product candidates within any specific time period, if
at all. Furthermore, the FDA or the Institutional Review Board or the sponsor
may suspend clinical trials at any time on various grounds, including a finding
that the subjects or patients are being exposed to an unacceptable health risk.
The results of product development, preclinical studies and clinical
studies are submitted to the FDA as part of a new drug application for approval
of the marketing and commercial shipment of the product. The FDA may deny a new
drug application if the applicable regulatory criteria are not satisfied or may
require additional clinical data. Even if such data is submitted, the FDA may
ultimately decide that the new drug application does not satisfy the criteria
for approval. Once issued, the FDA may withdraw product approval if compliance
with regulatory standards is not maintained or if problems occur after the
product reaches the market. In addition, the FDA may require testing and
surveillance programs to monitor the effect of approved products which have been
commercialized, and the agency has the power to prevent or limit further
marketing of a product based on the results of these post-marketing programs.
On November 21, 1997, President Clinton signed into law the Food and Drug
Administration Modernization Act. That act codified the FDA's policy of granting
"Fast Track" approval for cancer therapies and other therapies intended to treat
severe or life-threatening diseases. Previously, the FDA approved cancer
therapies primarily based on patient survival rates and/or data on improved
quality of life. The FDA considered evidence of partial tumor shrinkage, while
often part of the data relied on for approval, insufficient by itself to warrant
approval of a cancer therapy, except in limited situations. Under the FDA's new
policy, which became effective on February 19, 1998, the FDA has broadened
authority to consider evidence of partial tumor shrinkage or other clinical
outcomes for approval. This new policy is intended to facilitate the study of
cancer therapies and shorten the total time for marketing approvals; however, it
is too early to tell what effect, if any, these provisions may actually have on
product approvals.
In addition to the drug approval requirements applicable to our LUTRIN
product for photosensitization of certain cancers and ANTRIN for
photoangioplasty of atherosclerosis, we will also need to obtain FDA approval
for the laser and associated light delivery devices used in such treatments. To
obtain approval of such devices, Pharmacyclics and the manufacturers of such
devices must submit additional clinical data obtained from the use of such
devices with LUTRIN and ANTRIN, which may further delay or hinder the approval
process for these photosensitizers. Manufacturers of such light delivery devices
currently are under no obligation to us to file or pursue such applications, and
any delay or refusal on their part to do so could have a material adverse effect
on us.
Satisfaction of the above FDA requirements or similar requirements of
state, local and foreign regulatory agencies typically takes several years and
the actual time required may vary substantially, based upon the type, complexity
and novelty of the pharmaceutical product. Government regulation may delay or
prevent marketing of potential products for a considerable period of time and to
impose costly procedures upon our
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activities. We cannot be certain that the FDA or any other regulatory agency
will grant approval for any of our products under development on a timely basis,
if at all. Success in preclinical or early stage clinical trials does not assure
success in later stage clinical trials. Data obtained from preclinical and
clinical activities is not always conclusive and may be susceptible to varying
interpretations which could delay, limit or prevent regulatory approval. Even if
a product receives regulatory approval, the approval may be significantly
limited to specific indications. Further, even after regulatory approval is
obtained, later discovery of previously unknown problems with a product may
result in restrictions on the product or even complete withdrawal of the product
from the market. Delays in obtaining, or failures to obtain regulatory approvals
would have a material adverse effect on our business. Marketing our products
abroad will require similar regulatory approvals and is subject to similar
risks. In addition, we cannot predict what adverse governmental regulations may
arise from future U.S. or foreign governmental action.
Any products manufactured or distributed by us pursuant to FDA clearances
or approvals are subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experiences with
the drug. Drug manufacturers and their subcontractors are required to register
their establishments with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state agencies for
compliance with good manufacturing practices, which impose certain procedural
and documentation requirements upon us and our third party manufacturers. We
cannot be certain that we or our present or future suppliers will be able to
comply with the GMP regulations and other FDA regulatory requirements.
The FDA regulates drug labeling and promotion activities. The FDA has
actively enforced regulations prohibiting the marketing of products for
unapproved uses. Under the Modernization Act of 1997, the FDA will permit the
promotion of a drug for an unapproved use in certain circumstances, but subject
to very stringent requirements. We and our products are also subject to a
variety of state laws and regulations in those states or localities where our
products are or will be marketed. Any applicable state or local regulations may
hinder our ability to market our products in those states or localities. We are
also subject to numerous federal, state and local laws relating to such matters
as safe working conditions, manufacturing practices, environmental protection,
fire hazard control, and disposal of hazardous or potentially hazardous
substances. We may incur significant costs to comply with such laws and
regulations now or in the future.
The FDA's policies may change and additional government regulations may be
enacted which could prevent or delay regulatory approval of our potential
products. Moreover, increased attention to the containment of health care costs
in the U.S. and in foreign markets could result in new government regulations
which could have a material adverse effect on our business. We cannot predict
the likelihood, nature or extent of adverse governmental regulation which might
arise from future legislative or administrative action, either in the U.S. or
abroad.
EMPLOYEES
As of August 1, 1999, we had 103 employees, 3 of whom were part-time.
Ninety-four of our employees are engaged in research, development, preclinical
and clinical testing, manufacturing, quality assurance and quality control and
regulatory affairs and 9 in finance, administration and operations. Twenty-one
of our employees have an M.D. or Ph.D. degree. Our future performance depends in
significant part upon the continued service of our key scientific, technical and
senior management personnel, none of whom is bound by an employment agreement
requiring service for any defined period of time. The loss of the services of
one or more of our key employees could harm our business.
Our future success also depends on our continuing ability to attract, train
and retain highly qualified scientific and technical personnel. Competition for
these personnel is intense, particularly in the San Francisco Bay Area where we
are headquartered. Due to the limited number of people available with the
necessary scientific and technical skills, we can give no assurance that we can
retain or attract key personnel in the future. None of our employees is
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
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FACILITIES
Our corporate offices are located in Sunnyvale, California, where we lease
approximately 32,500 square feet under a lease that expires in January 2002. As
of August 1, 1999, the annual base rent for this facility was approximately
$384,000. This facility includes administrative and research and development
space. In April 1999, we entered into a 2 1/2 year lease, with a one year
automatic renewal option, for an 18,000 square feet facility also in Sunnyvale.
This facility is used for administrative space, and the annual base rent is
approximately $348,000. Both leases are non-cancelable operating leases. We
believe that the office space that we currently lease in Sunnyvale will be
sufficient to meet our needs through at least the next 12 months.
LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Executive officers and directors of the Company, and their ages as of June
30, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard A. Miller, M.D........ 48 President, Chief Executive Officer and Director
Marc L. Steuer................ 52 Senior Vice President, Business Development
Leiv Lea...................... 45 Vice President, Finance and Administration and
Chief Financial Officer
David A. Lowin, Esq........... 44 Vice President, Intellectual Property Counsel
Hugo Madden, Ph.D............. 50 Vice President, Chemical Operations
Phyllis I. Gardner, M.D....... 49 Director
Joseph S. Lacob(1)(2)......... 43 Director
Joseph C. Scodari(1).......... 46 Director
Craig C. Taylor(1)(2)......... 49 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Dr. Miller has served as President, Chief Executive Officer and a Director
since he co-founded the company in April 1991. Dr. Miller was a co-founder of
IDEC Pharmaceuticals Corporation and from 1984 to February 1992 served as Vice
President and a Director. Dr. Miller also is a Clinical Professor of Medicine
(Oncology) at Stanford University Medical Center. Dr. Miller received his M.D.,
summa cum laude, from the State University of New York Medical School and is
board certified in both Internal Medicine and Medical Oncology.
Mr. Steuer has served as Senior Vice President, Business Development since
December 1998. Prior to that, Mr. Steuer served as Senior Vice President,
Business Development and Chief Financial Officer from May 1998 to December 1998.
Prior to that, Mr. Steuer served as Vice President, Business Development and
Chief Financial Officer from November 1994 to May 1998. From April 1992 to
November 1994, he was Executive Vice President, Business Development and
Commercial Affairs for SciClone Pharmaceuticals, Inc. and also served as its
Chief Financial Officer. From 1985 to 1992, Mr. Steuer served in a variety of
roles in the Pilkington Visioncare Group ("PVG"), which developed, manufactured
and distributed medical devices, pharmaceuticals and equipment for the
ophthalmic field. Mr. Steuer received both B.S. and M.S. degrees in Electrical
Engineering from Columbia University and an M.B.A. from New York University.
Mr. Lea has served as Vice President, Finance and Administration and Chief
Financial Officer since December 1998. Prior to that, Mr. Lea served as Vice
President, Finance and Administration from December 1997 to December 1998. From
September 1996 through November 1997, he served as a financial consultant for
high technology companies and was Acting Chief Financial Officer for Global
Village Communications, Inc. From 1987 through June 1996 he served as Vice
President and Chief Financial Officer of Margaux, Inc., a public company that
manufactured refrigeration equipment. Mr. Lea received a B.S. degree in
Agricultural Economics from the University of California, Davis and an M.B.A.
from the University of California, Los Angeles.
Mr. Lowin has served as Vice President and Intellectual Property Counsel
since April 1998 and Assistant Secretary of the Company since July 1998. From
January 1995 to April 1998 he was Vice President, Intellectual Property, Chief
Patent Counsel and Assistant Secretary for Connetics Corporation, a public
biotechnology company. From 1982 to 1995, Mr. Lowin served at Syntex
Corporation, a pharmaceutical company, most recently as Assistant Director of
the Patent Law Department. He received a B.A. degree in Chemistry from Hobart
College and a J.D. from the Franklin Pierce Law Center, where he serves on the
Intellectual Property Law Advisory Committee.
39
<PAGE> 41
Dr. Madden has served as Vice President, Chemical Operations since June
1998. From 1995 to June 1998, he served as Plant Manager and as Director of
Process Development at Catalytica Pharmaceuticals, Inc., a contract
pharmaceutical manufacturer. From 1977 to 1995, Dr. Madden served in a variety
of positions with Syntex Corporation, a pharmaceutical company. His positions at
Syntex included Technical Director at the Bahamas Chemical Division and Manager
of Process Development and Engineering at the Technology Center in Boulder,
Colorado. Dr. Madden received a B.A. degree in Chemistry from the University of
Oxford and a Ph.D. from the University of London.
Dr. Gardner was elected as a Director of the Company in June 1999. She is
currently the Senior Associate Dean for Education and Associate Professor of
Molecular Pharmacology and Medicine at Stanford University School of Medicine,
where she has been a faculty member since 1984. From 1996 to 1998, she was the
vice president of research and head of ALZA Technology Institute of ALZA
Corporation in Palo Alto, California. Dr. Gardner received her M.D. from Harvard
Medical School in 1976.
Mr. Lacob was elected as a Director of the Company in June 1991. He is a
General Partner of Kleiner Perkins Caufield & Byers, a venture capital
investment firm, which he joined in 1987. Mr. Lacob is currently a Director of
Corixa Corporation, Sportsline USA, Inc., and Heartport, Inc., as well as
several private life sciences and internet companies. Mr. Lacob holds a B.S.
degree in Biochemistry from the University of California, Irvine, an M.S. in
Public Health from the University of California, Los Angeles, and an M.B.A. from
Stanford University.
Mr. Scodari was elected as a Director of the Company in December 1994. He
is President and Chief Operating Officer of Centocor, Inc., a biotechnology
company. Prior to joining Centocor, he was Senior Vice President and General
Manager, The Americas for Rhone-Poulenc Rorer Pharmaceuticals, Inc., a
pharmaceutical company, where he held various positions from 1989. From 1987 to
1989, Mr. Scodari was Executive Vice President of Sterling Drugs' U.S.
Diagnostic Imaging Division, where he held responsibilities for all marketing
and sales and business development activities for Sterling's imaging agent
business. Mr. Scodari received a B.A. degree in Political Science from
Youngstown State University.
Mr. Taylor was elected as a Director of the Company in June 1991. He is a
General Partner of AMC Partners 89, L.P., and the General Partner of Asset
Management Associates 1989, L.P., a private venture capital partnership. Mr.
Taylor has been with Asset Management Company, a venture management group, since
1977. Mr. Taylor is a Director of Metra BioSystems, Inc., and Lynx Therapeutics,
Inc., and several private companies. Mr. Taylor holds B.S. and M.S. degrees in
Physics from Brown University and an M.B.A. from Stanford University.
40
<PAGE> 42
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to Pharmacyclics
with respect to the beneficial ownership of the common stock as of June 30, 1999
by: (i) all persons known to Pharmacyclics to be beneficial owners of five
percent or more of our common stock, (ii) each director, (iii) each executive
officer and (iv) all directors and executive officers as a group. The number of
shares beneficially owned by each director or executive officer is determined
under rules of the Securities and Exchange Commission and the information is not
necessarily indicative of beneficial ownership for any other purpose. Shares of
common stock subject to convertible securities that are currently exercisable or
convertible or which will become exercisable or convertible within 60 days of
June 30, 1999 are deemed to be beneficially owned by the person holding such
convertible security for computing the percentage ownership of such person, but
are not treated as outstanding for computing the percentage of any other person.
Except as otherwise indicated, we believe that the beneficial owners of the
common stock listed below, based upon such information furnished by such owners,
have sole investment power with respect to such shares, subject to community
property laws where applicable.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)(2)
NUMBER OF SHARES ------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING(16)
---------------- ---------------- -------- ------------
<S> <C> <C> <C>
Wellington Management Company, LLP(3).......... 1,702,800 13.7% 12.0%
Entities affiliated with Integral Capital
Partners(4).................................. 1,599,868 12.9% 11.3%
Capital Research and Management Company(5)..... 815,000 6.6% 5.7%
Richard A. Miller, M.D.(6)..................... 478,703 3.8% 3.4%
Phyllis I. Gardner, M.D.(7).................... 1,000 * *
Joseph S. Lacob(8)............................. 154,698 1.2% 1.1%
Craig C. Taylor(9)............................. 97,176 * *
Joseph C. Scodari(10).......................... 30,000 * *
Marc L. Steuer(11)............................. 161,416 1.3% 1.1%
David A. Lowin(12)............................. 17,111 * *
Leiv Lea(13)................................... 19,084 * *
Hugo Madden(14)................................ 11,958 * *
All executive officers and directors as a group
(8 persons)(15).............................. 975,479 7.6% 6.9%
</TABLE>
- ---------------
* Less than one percent.
(1) Percentage of beneficial ownership is calculated assuming 12,428,871 shares
of common stock were outstanding as of June 30, 1999. Beneficial ownership
is determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities. Shares of common stock subject to options or warrants
currently exercisable or convertible, or exercisable or convertible within
60 days of June 30, 1999, are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated in the footnotes to this table and pursuant to applicable
community property laws, the persons named in the table have sole voting
and investment power with respect to all shares of common stock
beneficially owned.
(2) This table is based upon information supplied to Pharmacyclics by executive
officers, directors and principal stockholders. The address of each officer
and director identified in this table is that of Pharmacyclics executive
offices, 995 East Arques Avenue, Sunnyvale, CA 94086. Unless otherwise
indicated in the footnotes to this table and subject to applicable
community property laws, each of the stockholders named in this table has
sole voting and investment power with respect to the shares shown as
beneficially owned by it or him.
(3) Represents 1,702,800 shares held by Wellington Management Company, LLP,
based solely on a Schedule 13G filed April 9, 1999.
41
<PAGE> 43
(4) Includes 78,394 shares held by Integral Capital Management II, L.P.,
356,440 shares held by Integral Capital Management III, L.P., 363,350
shares held by Integral Capital Management IV, LLC, 1,750 shares held by
ICP MS Management, LLC, 78,394 shares held by Integral Capital Partners
International II C.V., 290,285 shares held by Integral Capital Partners
III, L.P., 66,155 shares held by Integral Capital Partners International
III, L.P., 363,350 shares held by Integral Capital Partners IV, L.P. and
1,750 shares held by Integral Capital Partners IV MS Side Fund, L.P, based
solely on a Schedule 13G filed March 16, 1999.
(5) Represents 815,000 shares held by Capital Research and Management Company,
based solely on a Schedule 13G filed February 11, 1999.
(6) Includes 13,334, 13,334, and 279,008 shares held in trust for Jordan Andrew
Miller, Jared David Miller and the Miller-Horning Family Trust,
respectively. Also, includes vested options exercisable for 173,027 shares
within 60 days of June 30, 1999.
(7) Includes 1,000 shares held in trust by the Perlman Gardner Family Trust.
(8) Includes 129,051 held directly by Mr. Lacob, 147 shares held in trust by
the Lacob Children's Trust and vested options exercisable for 25,500 shares
within 60 days of June 30, 1999.
(9) Includes 70,276 shares held by Mr. Taylor; 700 shares held by Mr. Taylor's
son and 700 shares held by Mr. Taylor's daughter. Mr. Taylor disclaims
beneficial ownership of the shares held by his children, also, includes
vested options exercisable for 25,500 shares within 60 days of June 30,
1999.
(10) Represents vested options exercisable for 30,000 shares within 60 days of
June 30, 1999.
(11) Represents vested options exercisable for 161,416 shares within 60 days of
June 30, 1999.
(12) Includes 777 shares held by Mr. Lowin and vested options exercisable for
16,334 shares within 60 days of June 30, 1999.
(13) Represents vested options exercisable for 19,084 shares within 60 days of
June 30, 1999.
(14) Represents vested options exercisable for 11,958 shares within 60 days of
June 30, 1999.
(15) Includes vested options exercisable for 468,152 shares, respectively.
(16) Assumes no exercise of the underwriters' over-allotment option.
To our knowledge, each beneficial owner of more than 10% of our capital
stock filed all reports and reported all transactions on a timely basis with the
Securities and Exchange Commission, the National Association of Securities
Dealers, Inc. and us.
42
<PAGE> 44
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement, the Underwriters named below (the "Underwriters"), for whom Morgan
Stanley & Co. Incorporated, Hambrecht & Quist LLC and Pacific Growth Equities,
Inc. are serving as Representatives (the "Representatives"), have severally
agreed to purchase, and Pharmacyclics has agreed to sell to the Underwriters,
severally, the respective numbers of shares of common stock set forth opposite
the names of such Underwriters below:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Hambrecht & Quist LLC.......................................
Pacific Growth Equities, Inc. ..............................
--------
Total.............................................
========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of common stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of common stock offered hereby (other than those
covered by the Underwriters' over-allotment option described below) if any such
shares are taken.
The Underwriters initially propose to offer part of the shares of common
stock offered hereby directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price that
represents a concession not in excess of $ per share under the public
offering price. Any Underwriter may allow, and such dealers may reallow, a
concession not in excess of $ per share to other Underwriters or to certain
dealers. After the initial offering of the shares of common stock, the offering
price and other selling terms may from time to time be varied by the
Representatives.
Pursuant to the Underwriting Agreement, Pharmacyclics has granted to the
Underwriters an option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate of 262,500 additional shares of
common stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, incurred in
connection with the offering of the shares of common stock offered hereby. To
the extent such option is exercised, each Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number set forth next to such Underwriter's name
in the preceding table bears to the total number of shares of common stock set
forth next to the names of all Underwriters in the preceding table.
Pharmacyclics and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
Pharmacylics has agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated, it will not offer, sell, contract to sell, or
otherwise dispose of any shares of common stock, for a period of 90 days after
the date of this prospectus, other than any shares of common stock issued upon
the exercise of options or warrants, rights to acquire shares issued pursuant to
equipment or lease financing activities in the ordinary course of Pharmacyclics'
business. In addition, in connection with the offering, Pharmacyclics (subject
to certain exceptions) and its executive officers and directors who will
beneficially own an aggregate of approximately 975,479 shares of common stock
after the offering, have agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, they will not
(a) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any
43
<PAGE> 45
option, right or warrant to purchase, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock (whether such shares or any
such securities are then owned by such person or are thereafter acquired
directly from Pharmacyclics) or (b) enter into any swap or similar arrangement
that transfers, in whole or in part, the economic risk of ownership of the
common stock, whether any such transaction described in clause (a) or (b) of
this paragraph is to be settled by delivery of such common stock or such other
securities, in cash or otherwise, for a period of 90 days after the date of this
prospectus, other than (i) transactions relating to shares of common stock or
other securities acquired in open market transactions after the completion of
this offering or (ii) with the prior written consent of Morgan Stanley & Co.
Incorporated.
In order to facilitate the offering of the common stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the Underwriters may bid for and purchase shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The Underwriters and dealers may engage in passive market making
transactions in the common stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for, or purchase, the common stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
common stock during a specified two month prior period, or 200 shares, whichever
is greater. A passive market maker must identify passive market making bids as
such on the Nasdaq electronic inter-dealer reporting system. Passive market
making may stabilize or maintain the market price of the common stock above
independent market levels. Underwriters and dealers are not required to engage
in passive market making, and may end passive market making activities at any
time.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Pharmacyclics by Brobeck, Phleger & Harrison LLP, Palo Alto,
California. Certain legal matters will be passed upon for the underwriters by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California.
EXPERTS
Statements in this prospectus in the penultimate paragraph under the
caption "Risk Factors" -- We may fail to adequately protect or enforce our
intellectual property rights or secure rights to third-party patents" have been
reviewed and approved by Brinks Hofer Gilson & Lione, A Professional
Corporation, our special patent counsel, as experts in such matters, and are
included herein in reliance upon and review and approval.
The financial statements as of June 30, 1999 and 1998 and for each of the
three years in the period ended June 30, 1999 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). You may
read and copy any document we file at the public reference facilities of the SEC
located at 450 Fifth Street, N.W., Washington D.C. 20549. You may obtain
44
<PAGE> 46
information on the operation of the SEC's public reference facilities by calling
the SEC at 1-800-SEC-0330. You can also access copies of such material
electronically on the SEC's home page on the World Wide Web at
http://www.sec.gov. Reports, proxy statements and other information concerning
us is also available for inspection at the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
This prospectus is part of a registration statement (Registration No.
333- ) we filed with the SEC. The SEC permits us to "incorporate
by reference" the information that we file with them, which means that we can
disclose important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus, and information that we file with the SEC after the date of this
prospectus will automatically update and supercede this information. We
incorporate by reference the following documents filed by us with the SEC (File
No. 0-27066). We also incorporate by reference any future filings made with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, after the date of this prospectus until the termination of this offering.
1. Our Annual Report on Form 10-K for the fiscal year ended June 30, 1998.
2. Our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
3. Our Definitive Proxy Statement dated November 9, 1998, filed in
connection with our 1998 Annual Meeting of Stockholders.
4. The description of our common stock which is contained in its
Registration Statement on Form 8-A filed under the Exchange Act on May 2, 1997,
including any amendment or reports filed for the purpose of updating such
description.
If you request a copy of any or all of the documents incorporated by
reference, then we will send to you the copies requested at no charge. However,
we will not send exhibits to such documents, unless such exhibits are
specifically incorporated by reference in such documents. You should direct
requests for such copies to Investor Relations, Pharmacyclics, Inc., at our
executive offices located at 995 East Arques Avenue, Sunnyvale, California
94086-4521, (408) 774-0330.
45
<PAGE> 47
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheet............................................... F-3
Statement of Operations..................................... F-4
Statement of Cash Flows..................................... F-5
Statement of Stockholders' Equity (Deficit)................. F-6
Notes to Financial Statements............................... F-8
</TABLE>
F-1
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Pharmacyclics, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of stockholders' equity (deficit) present
fairly, in all material respects, the financial position of Pharmacyclics, Inc.
(a development stage company) at June 30, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1999, and for the period from inception (April 1991) through June 30,
1999 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
July 23, 1999
F-2
<PAGE> 49
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 3,930 $ 13,456
Short-term investments.................................... 42,475 23,189
Accounts receivable....................................... 309 166
Prepaid expenses and other current assets................. 463 166
-------- --------
Total current assets.............................. 47,177 36,977
Long-term investments....................................... 5,067 33,736
Property and equipment, net................................. 3,228 2,253
Other assets................................................ 85 53
-------- --------
$ 55,557 $ 73,019
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 4,563 $ 3,377
Accrued liabilities....................................... 747 432
Current portion of capital lease obligations.............. 216 255
-------- --------
Total current liabilities......................... 5,526 4,064
Capital lease obligations................................... 59 275
Deferred rent............................................... 15 39
-------- --------
Total liabilities................................. 5,600 4,378
-------- --------
Commitments (Note 7)
Stockholders' equity:
Preferred stock, $0.0001 par value; 1,000,000 shares
authorized at June 30, 1999 and 1998; no shares issued
and outstanding........................................ -- --
Common stock, $0.0001 par value; 24,000,000 shares
authorized at June 30, 1999 and 1998; shares issued and
outstanding -- 12,428,871 at June 30, 1999 and
12,294,292 at June 30, 1998............................ 1 1
Additional paid-in capital................................ 117,178 116,531
Accumulated other comprehensive income.................... (85) --
Deficit accumulated during development stage.............. (67,137) (47,891)
-------- --------
Total stockholders' equity........................ 49,957 68,641
-------- --------
$ 55,557 $ 73,019
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 50
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
YEAR ENDED JUNE 30, (APRIL 1991)
-------------------------------- THROUGH JUNE 30,
1999 1998 1997 1999
-------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Revenues:
License and grant revenues............. $ 750 $ 2,700 $ 25 $ 6,855
Contract revenue....................... 1,291 831 -- 2,122
-------- -------- -------- --------
Total revenues................. 2,041 3,531 25 8,977
-------- -------- -------- --------
Operating expenses:
Research and development............... 21,889 13,973 9,632 73,022
General and administrative............. 2,762 1,987 1,905 10,824
-------- -------- -------- --------
Total operating expenses....... 24,651 15,960 11,537 83,846
-------- -------- -------- --------
Loss from operations..................... (22,610) (12,429) (11,512) (74,869)
Interest income.......................... 3,398 2,826 1,480 9,165
Interest expense......................... (34) (72) (226) (1,332)
-------- -------- -------- --------
Loss before income taxes................. (19,246) (9,675) (10,258) (67,036)
Provision for income taxes............... -- -- -- (101)
-------- -------- -------- --------
Net loss................................. $(19,246) $ (9,675) $(10,258) $(67,137)
======== ======== ======== ========
Basic and diluted net loss per share..... $ (1.55) $ (0.87) $ (1.11)
======== ======== ========
Shares used to compute basic and diluted
net loss per share..................... 12,378 11,061 9,264
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 51
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
YEAR ENDED JUNE 30, (APRIL 1991)
-------------------------------- THROUGH JUNE 30,
1999 1998 1997 1999
-------- -------- -------- ------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(19,246) $ (9,675) $(10,258) $(67,137)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 909 828 915 4,293
Stock compensation expense.................... 89 91 126 332
Write-down of fixed assets.................... -- 188 -- 306
Other......................................... -- -- -- (12)
Changes in assets and liabilities:
Accounts receivable......................... (143) (166) -- (309)
Prepaid expenses and other assets........... (219) 54 117 (548)
Accounts payable............................ 1,186 2,054 570 4,563
Accrued liabilities......................... 315 121 11 747
Deferred rent............................... (24) (40) (34) 15
-------- -------- -------- --------
Net cash used in operating activities.... (17,243) (6,545) (8,553) (57,750)
-------- -------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment............... (1,884) (765) (283) (3,821)
Proceeds from sale of property and equipment..... -- -- -- 112
Purchase of short-term investments............... (14,331) (28,517) (17,305) (50,603)
Purchase of long-term investments................ (7,704) (31,619) (6,103) (58,778)
Proceeds from maturities of short-term
investments................................... 4,547 20,286 10,400 27,429
Proceeds from maturities of long-term
investments................................... 26,586 3,986 -- 34,325
-------- -------- -------- --------
Net cash provided by
(used in) investing activities......... 7,414 (36,629) (13,291) (51,336)
-------- -------- -------- --------
Cash flows from financing activities:
Issuance of common stock, net of issuance
costs......................................... 558 41,529 24,711 93,108
Proceeds from notes payable...................... -- -- -- 3,000
Issuance of convertible preferred stock, net of
issuance costs................................ -- -- -- 20,514
Payments under capital lease obligations......... (255) (768) (948) (3,606)
-------- -------- -------- --------
Net cash provided by financing
activities............................. 303 40,761 23,763 113,016
-------- -------- -------- --------
Increase (decrease) in cash and cash equivalents... (9,526) (2,413) 1,919 3,930
Cash and cash equivalents at beginning of period... 13,456 15,869 13,950 --
-------- -------- -------- --------
Cash and cash equivalents at end of period......... $ 3,930 $ 13,456 $ 15,869 $ 3,930
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid................................ $ -- $ -- $ -- $ 101
Interest paid.................................... 34 72 226 1,250
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Property and equipment acquired under capital
lease obligations............................. -- -- 338 3,880
Warrants issued.................................. -- -- -- 49
Conversion of notes payable and accrued interest
into convertible preferred stock.............. -- -- -- 3,051
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 52
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (APRIL 1991) THROUGH JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER DURING
------------------- ------------------- PAID-IN COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME STAGE TOTAL
---------- ------ ---------- ------ ---------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
cash at $0.02 per share....... -- $-- 400,000 $-- $ 6 $ -- $ -- $ 6
---------- -- ---------- -- -------- ---- -------- --------
Balance at June 30, 1991........ -- -- 400,000 -- 6 -- -- 6
Issuance of common stock for
cash at an average price of
$0.02 per share............... -- -- 97,111 -- 2 -- -- 2
Issuance of convertible
preferred stock for cash, net
of issuance costs, at an
average price of $1.32 per
share......................... 2,040,784 -- -- -- 2,667 -- -- 2,667
Net loss........................ -- -- -- -- -- -- (523) (523)
---------- -- ---------- -- -------- ---- -------- --------
Balance at June 30, 1992........ 2,040,784 -- 497,111 -- 2,675 -- (523) 2,152
Issuance of common stock for
cash at an average price of
$0.06 per share............... -- -- 49,000 -- 3 -- -- 3
Issuance of convertible
preferred stock for cash, net
of issuance costs, at $4.88
per share..................... 1,580,095 -- -- -- 7,674 -- -- 7,674
Net loss........................ -- -- -- -- -- -- (3,580) (3,580)
---------- -- ---------- -- -------- ---- -------- --------
Balance at June 30, 1993........ 3,620,879 -- 546,111 -- 10,352 -- (4,103) 6,249
Issuance of common stock upon
exercise of stock options at
an average price of $0.12 per
share......................... -- -- 324,188 -- 38 -- -- 38
Issuance of convertible
preferred stock for cash, net
of issuance costs, at an
average price of $8.63 per
share......................... 886,960 -- -- -- 7,623 -- -- 7,623
Net loss........................ -- -- -- -- -- -- (5,141) (5,141)
---------- -- ---------- -- -------- ---- -------- --------
Balance at June 30, 1994........ 4,507,839 -- 870,299 -- 18,013 -- (9,244) 8,769
Issuance of common stock upon
exercise of stock options at
an average price of $0.24 per
share......................... -- -- 38,403 -- 9 -- -- 9
Issuance of warrants............ -- -- -- -- 49 -- -- 49
Net loss........................ -- -- -- -- -- -- (10,479) (10,479)
---------- -- ---------- -- -------- ---- -------- --------
Balance at June 30, 1995........ 4,507,839 -- 908,702 -- 18,071 -- (19,723) (1,652)
Issuance of convertible
preferred stock for notes
payable and accrued interest
at an average of $8.63 per
share......................... 353,483 -- -- -- 3,051 -- -- 3,051
Issuance of convertible
preferred stock for cash, net
of issuance costs, at an
average price of $8.63 per
share......................... 295,649 -- -- -- 2,550 -- -- 2,550
Issuance of common stock upon
initial public offering, net
of issuance costs, for cash at
$12 per share................. -- -- 2,383,450 1 26,042 -- -- 26,043
Conversion of convertible
preferred stock into common
stock......................... (5,156,971) -- 5,156,971 -- -- -- -- --
Issuance of common stock upon
exercise of stock options at
an average exercise price of
$1.33 per share............... -- -- 91,922 -- 122 -- -- 122
Issuance of common stock upon
exercise of purchase rights at
an exercise price of $10.20
per share..................... -- -- 8,379 -- 86 -- -- 86
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 53
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
FOR THE PERIOD FROM INCEPTION (APRIL 1991) THROUGH JUNE 30, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DEFICIT
CONVERTIBLE ACCUMULATED ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER DURING
------------------- ------------------- PAID-IN COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME STAGE TOTAL
---------- ------ ---------- ------ ---------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock compensation expense...... -- $-- -- $-- $ 26 $ -- $ -- $ 26
Net loss........................ -- -- -- -- -- -- (8,235) (8,235)
---------- -- ---------- -- -------- ---- -------- --------
Balance at June 30, 1996........ -- -- 8,549,424 1 49,948 -- (27,958) 21,991
Issuance of common stock, net of
issuance costs, for cash at an
average price of $16.93 per
share......................... -- -- 1,442,190 -- 24,420 -- -- 24,420
Issuance of common stock upon
exercise of stock options at
an average price of $2.74 per
share......................... -- -- 96,283 -- 264 -- -- 264
Issuance of common stock upon
exercise of purchase rights at
an exercise price of $10.51
per share..................... -- -- 14,557 -- 153 -- -- 153
Stock compensation expense...... -- -- -- -- 126 -- -- 126
Net loss........................ -- -- -- -- -- -- (10,258) (10,258)
---------- -- ---------- -- -------- ---- -------- --------
Balance at June 30, 1997........ -- -- 10,102,454 1 74.911 -- (38,216) 36,696
Issuance of common stock, net of
issuance costs, for cash at
$21.75 per share.............. -- -- 2,012,500 -- 40,796 -- -- 40,796
Issuance of common stock upon
exercise of stock options at
an average price of $6.57 per
share......................... -- -- 88,933 -- 584 -- -- 584
Issuance of common stock upon
exercise of purchase rights at
an exercise price of $14.36
per share..................... -- -- 10,372 -- 149 -- -- 149
Issuance of common stock upon
exercise of warrants.......... -- -- 80,033 -- -- -- -- --
Stock compensation expense...... -- -- -- -- 91 -- -- 91
Net loss........................ -- -- -- -- -- -- (9,675) (9,675)
---------- -- ---------- -- -------- ---- -------- --------
Balance at June 30, 1998........ -- -- 12,294,292 1 116,531 -- 47,891 68,641
---------- -- ---------- -- -------- ---- -------- --------
Issuance of common stock upon
exercise of stock options at
an average price of $5.10 per
share......................... -- -- 75,275 -- 384 -- -- 384
Issuance of common stock upon
exercise of purchase rights at
an exercise price of $12.77
per share..................... -- -- 13,643 -- 174 -- -- 174
Issuance of common stock upon
exercise of warrants.......... -- -- 45,661 -- -- -- -- --
Stock compensation expense...... -- -- -- -- 89 -- -- 89
Comprehensive income:
Unrealized loss on
investments................. -- -- -- -- -- (85) -- (85)
Net loss........................ -- -- -- -- -- -- (19,246) (19,246)
---------- -- ---------- -- -------- ---- -------- --------
Balance at June 30, 1999........ -- $-- 12,428,871 $1 $117,178 $(85) $(67,137) $ 49,957
========== == ========== == ======== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 54
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
Description of the Company
Pharmacyclics, Inc. was incorporated in Delaware in 1991 and commenced
operations during 1992 to develop and market pharmaceutical products to improve
upon current therapeutic approaches to the treatment of cancer, atherosclerosis
and retinal disease. Since inception, the company has been in the development
stage, principally involved in research and development and other business
planning activities, with no commercial revenues from product sales. Successful
future operations depend upon the company's ability to develop, to obtain
regulatory approval for and to commercialize its products. The company expects
that additional funds will be required to complete the development of its
products and to fund operating losses that are expected to be incurred in the
next several years. The company operates in one business segment.
Management's use of estimates and assumptions
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could differ from those
estimates.
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 the
incremental common shares issuable upon conversion of outstanding convertible
preferred stock (using the if-converted method) and shares issuable upon the
exercise of stock options and warrants (using the treasury stock method).
Potential common shares have been excluded from the computation of dilutive
earnings per share because their effect is anti-dilutive.
Cash equivalents and investments
All highly liquid investments purchased with maturity at the date of
purchase of three months or less are considered to be cash equivalents. The
company has classified its investments as "available-for-sale." For all periods
presented, the cost of investments approximates their fair market value. Gains
and losses on securities sold are recorded based on the specific identification
method and are included in the results of operations.
F-8
<PAGE> 55
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The company's cash, cash equivalents and investments consisted of the
following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
INVESTMENT TYPE 1999 1998
--------------- ------- -------
<S> <C> <C>
Cash in bank............................................. $ 320 $ 321
Money market............................................. 3,610 13,135
Debt (state or political subdivision).................... -- --
Debt (corporate)......................................... -- --
------- -------
Cash and cash equivalents.............................. $ 3,930 $13,456
======= =======
Debt (state or political subdivision).................... $ 2,030 $ 3,008
Debt (corporate)......................................... 40,445 20,181
------- -------
Short-term investments................................. $42,475 $23,189
======= =======
Debt (state or political subdivision).................... $ 1,010 $ 2,032
Debt (corporate)......................................... 4,057 31,704
------- -------
Long-term investments.................................. $ 5,067 $33,736
======= =======
</TABLE>
At June 30, 1999 the company's long-term investments were scheduled to
mature at various dates through February 2001.
Concentration of credit risk
Financial instruments that potentially subject the company to credit risk
consist principally of cash, cash equivalents and investments. The company
places its cash, cash equivalents and investments with high-credit quality
financial institutions and invests in debt instruments of financial
institutions, corporations and government entities with strong credit ratings.
Management of the company believes they have established guidelines relative to
diversification and maturities that maintain safety and liquidity.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the shorter of the estimated useful lives of the
assets, generally four to eight years, or the lease term of the respective
assets, if applicable. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of their estimated useful lives or
lease terms.
Long-lived assets
The company identifies and records impairment losses on long-lived assets
when events and circumstances indicate that the assets might be impaired. No
significant impairment losses have been recorded to date with respect to the
company's long-lived assets, which consist primarily of property and equipment
and leasehold improvements.
Revenue recognition
License fees are recognized as revenue when earned, as evidenced by
achievement of the specified milestones and the absence of any on-going
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 not subject to repayment. Any amounts received in advance of performance are
recorded as deferred revenue.
F-9
<PAGE> 56
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Research and development
Research and development costs are expensed as incurred and include costs
associated with contract research performed pursuant to 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.
Research and development expenses incurred in connection with research contracts
were $3.2 million and $2.2 million for the years ended June 30, 1999 and 1998,
respectively.
Income taxes
The company provides for income taxes using the liability method. This
method requires that deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the tax bases
of assets and liabilities and their financial statement reported amounts.
Fair value of financial instruments
The carrying value of the company's financial instruments including cash
and cash equivalents, short- and long-term investments, accounts receivable and
accrued liabilities approximate fair value due to their short maturities. The
carrying value of the company's capital lease obligations approximate fair value
based on borrowing rates currently available to the company.
Stock-based compensation
The company accounts for employee stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. The
Company provides additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation."
NOTE 2 -- AGREEMENTS:
University of Texas License. The company has entered into two exclusive
patent license agreements with The University of Texas which permit the company
to exclusively manufacture, use and sell products covered by patents that result
from certain research conducted by The University of Texas. Each agreement
requires the company to pay royalties to The University of Texas. Royalties
totaling $275,000 were paid under the agreements through June 30, 1997 in
connection with the E-Z-EM, Inc. agreement described below. No royalties were
paid during either of the years ended June 30, 1999 and 1998. In connection with
The University of Texas license agreement, the company has entered into a
license agreement with Dr. Stuart W. Young, a co-inventor of CITRA VU(TM),
pursuant to which the company has been granted an exclusive, royalty-bearing
license to manufacture, use and sell certain products that fall within the scope
of The University of Texas agreements.
Alcon Collaboration. In December 1997, the company entered into an
evaluation and license agreement with Alcon Pharmaceuticals Ltd., under which
Alcon acquired worldwide marketing rights to OPTRIN(TM) photosensitizer for
ophthalmology uses. OPTRIN is a lutetium texaphyrin molecule being developed as
a photosensitizer for the use in photodynamic therapy of retinal degeneration.
Alcon will conduct and be responsible for all costs associated with its
worldwide development and regulatory submissions for ophthalmology uses of
OPTRIN. In accordance with the terms of this agreement, the company received a
non-refundable, up-front payment and may receive additional amounts based on
Alcon reaching certain milestones, as well as royalties on any future product
sales. The company is required to supply Alcon with bulk
F-10
<PAGE> 57
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
drug substance through its manufacturing collaboration with Celanese; Alcon will
be responsible for formulation and packaging of finished products.
E-Z-EM License. In August 1995, the company entered into an agreement with
E-Z-EM, Inc., a leading manufacturer and worldwide distributor of oral contrast
agents and other products for use in gastrointestinal radiology, for the
exclusive marketing and sale of the company's CITRA VU product in the United
States. In fiscal 1997, the company entered into a similar agreement with
E-Z-EM, Ltd., an affiliate of E-Z-EM. The company and E-Z-EM will share equally
in profits from the sale (if any) of CITRA VU, and the company may also receive
premium payments if certain sales levels are achieved. During the year ended
June 30, 1997, the company recorded revenue of $25,000 (net of royalties aid to
The University of Texas) upon signing these agreements. There were no revenues
associated with these agreements for the years ended June 30, 1999 and 1998.
Nycomed Collaboration. In October 1997, the company entered into an
agreement with Nycomed Imaging A/S, in which Nycomed acquired exclusive sales
and marketing rights to LUTRIN(TM) photosensitizer for cancer treatments in all
markets of the world excluding the United States, Canada and Japan. LUTRIN is a
lutetium texaphyrin molecule being developed as a photosensitizer for use in the
photodynamic therapy of cancer. In exchange for these rights, Nycomed has agreed
to pay the company up to approximately $14.0 million as a combination of license
fees, a portion of the company's development costs, based upon an agreed budget,
and milestone payments related to the initial cancer treatments 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 treatments, if such treatments
are successfully completed. Upon receipt of marketing approval by Nycomed for
any products developed pursuant to this agreement, Nycomed will pay the company
a royalty on any future product sales. The company is required to supply Nycomed
with bulk drug substance. Nycomed is required to produce finished product for
use by it and the company.
Hoechst Celanese Agreement. In September 1996, the company entered into an
agreement with Hoechst Celanese Corporation, a manufacturer of chemicals and
pharmaceutical intermediates, to optimize and scale up a manufacturing process
for and supply of drug substance. In October 1997, Hoechst Celanese assigned the
agreement to Celanese, Ltd., in connection with Hoechst Celanese's corporate
restructuring. As a result of the change in its business focus Celanese has
requested that Pharmacyclics pursue alternative supply sources. Celanese and the
company are presently negotiating the definitive terms and conditions of an
agreement pursuant to which Celanese will transfer the manufacturing process it
developed with the company to other manufacturers. The company has entered into
agreements with three new manufacturers to evaluate their ability to supply the
company with components of bulk drug substance. These new manufacturers are
currently in the process of producing initial supplies, which include commercial
quantities, of such products for delivery to the company during fiscal year
2000.
F-11
<PAGE> 58
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- BALANCE SHEET COMPONENTS:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1999 1998
------- -------
<S> <C> <C>
Equipment................................................ $ 4,008 $ 2,959
Leasehold improvements................................... 2,688 1,993
Furniture and fixtures................................... 618 478
------- -------
7,314 5,430
Less accumulated depreciation and amortization........... (4,086) (3,177)
------- -------
$ 3,228 $ 2,253
======= =======
</TABLE>
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------
1999 1998
---- ----
<S> <C> <C>
Employee compensation....................................... $683 $358
Other....................................................... 64 74
---- ----
$747 $432
==== ====
</TABLE>
NOTE 4 -- STOCKHOLDERS' EQUITY:
Common stock
In November 1996, the company 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, which resulted in proceeds of $8.1 million. In
February 1997, the company sold 862,190 shares of unregistered common stock to
four purchasers in a private placement. The shares were sold at $19.05 per
share, which resulted in net proceeds of $16.3 million. The company filed a
registration statement on Form S-3 related to these shares, which was declared
effective on April 22, 1997. 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 of approximately $40.8 million.
Preferred stock
In September 1995, the company amended its Certificate of Incorporation
effective upon the conversion of the Convertible Preferred Stock to authorize
1,000,000 shares of Preferred Stock, par value $0.0001 per share. The Board of
Directors is authorized to issue the preferred stock in one or more series and
to fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further vote
or action by the stockholders.
The ability of the company's Board of Directors to issue shares of
preferred stock without stockholder approval, and the adoption of a stockholder
rights plan, may alone or in combination have certain anti-takeover effects. The
company is also subject to provisions of the Delaware General Corporation Law
which may make certain business combinations more difficult.
Shareholder rights plan
In April 1997, the Board of Directors approved a shareholder rights plan
under which stockholders of record on May 1, 1997 received a right to purchase
(a "Right") one one-hundredth of a share of Series A Junior Participating
Preferred Stock, par value $.001 per share (the "Series A Preferred Stock"), at
an
F-12
<PAGE> 59
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
exercise price of $125 per one one-hundredth of a share, subject to adjustment.
The Rights will separate from the common stock and Rights certificates will be
issued and will become exercisable upon the earlier of (i) 10 business days
following a public announcement that a person or group of affiliated or
associated persons has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the company's outstanding common stock or (ii) 10
business days or such later date as may be determined by a majority of the Board
of Directors following the commencement of, or announcement of, an intention to
make a tender offer or exchange offer, the consummation of which would result in
the beneficial ownership by a person or group of 15% or more of the outstanding
common stock of the Company. The Rights expire at the close of business on April
30, 2007. The company has designated 120,000 shares of its Preferred Stock as
Series A Junior Participating Preferred Stock in connection with this plan.
Warrants
In connection with entering into certain capital leases, the company issued
to lessors warrants to purchase 73,042 shares of convertible preferred stock at
a weighted average exercise price of $4.49 per share. In July 1995, in
connection with certain short-term note agreements entered into prior to the
company's initial public offering, the company issued to the holders of such
notes warrants to purchase 57,976 shares of common stock at an exercise price of
$8.63 per share. Also in July 1995, the company issued warrants to purchase
66,522 shares of convertible preferred stock at an exercise price of $8.63 per
share to certain holders of such stock, in exchange for an agreement by the
holders to modify certain rights received in connection with the Series C
preferred stock financing which occurred in June 1994. Management ascribed a
nominal value to these warrants.
In connection with the company's initial public offering, the above
warrants were converted into warrants to purchase shares of common stock. In
fiscal 1998, holders of all of the warrants granted in July 1995 elected "net
issue exercises" at an average market price of $24.15 per share, resulting in
the issuance of 80,033 shares of common stock and the cancellation of warrants
to purchase 44,465 shares of common stock. In fiscal 1999, warrants for 45,661
shares were exercised. The remaining 14,706 warrants are exercisable at $4.88
per share and expire in 2000. At June 30, 1999, the company has reserved 14,706
shares of common stock for future issuance upon the exercise of the remaining
outstanding warrants.
Stock option plans
1992 Stock Option Plan. The 1992 Stock Option Plan (the "1992 Plan"), as
amended, authorizes the Board of Directors to grant incentive stock options and
non-statutory stock options to employees, directors and consultants to purchase
up to 1,233,334 shares of common stock. Under the 1992 Plan, incentive stock
options are granted at a price not less than 100% of the estimated fair value of
the stock on the date of grant, as determined by the Board of Directors.
Nonqualified stock options are granted at a price not less than 85% of the
estimated fair value of the stock on the date of grant, as determined by the
Board of Directors. To date, all options granted under the 1992 Plan have been
granted at 100% of the estimated fair value of the common stock as determined by
the Board of Directors.
Generally, options granted under the 1992 Plan are exercisable on and after
the date of grant, subject to the company's right to repurchase from the
optionee, at the optionee's original cost per share, any unvested shares which
the optionee has purchased and holds in the event the optionee attempts to
dispose of such shares or in the event of the optionee's termination of
employment with or without cause. The company's right to repurchase lapses as
the shares become vested. Generally, shares subject to options granted under the
1992 Plan vest at the rate of 1/4th of the shares on the first anniversary of
the grant date of the option, and an additional 1/48th of the shares upon
completion of each succeeding month of continuous employment thereafter. Options
are exercisable for a period of ten years.
F-13
<PAGE> 60
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1995 Stock Option Plan. The company's 1995 Stock Option Plan (the "1995
Plan") was adopted by the Board of Directors on August 2, 1995, as the successor
to the 1992 Plan. The 1995 Plan authorizes for issuance 2,052,579 shares of
common stock. Beginning on January 1, 1996, the 1995 Plan also allows for an
annual increase to the number of shares available for issuance equal to 1% of
the number of shares of common stock outstanding on the last day of the
preceding calendar year, not to exceed 500,000 shares per year. Shares of common
stock subject to outstanding options, including options granted under the 1992
Plan, that expire or terminate prior to exercise will be available for future
issuance under the 1995 Plan.
Under the 1995 Plan, employees (including officers), non-employee members
of the Board of Directors (other than those serving as members of the
Compensation Committee) and independent consultants may, at the discretion of
the plan administrator, be granted options to purchase shares of common stock at
an exercise price not less than 85% of the fair market value of such shares on
the grant date. Non-employee members of the Board of Directors will also be
eligible for automatic option grants under the company's 1995 Non-Employee
Directors Stock Option Plan. Generally, shares subject to options under the 1995
Plan vest over a five-year period and are exercisable for a period of ten years.
In the event the company is acquired by merger, consolidation or asset
sale, options outstanding under the 1995 Plan will immediately vest in full,
except to the extent the options are assumed by the acquiring entity. Any
assumed options will accelerate upon the optionee's involuntary termination
within 18 months following the acquisition. The Compensation Committee also has
discretion to provide for the acceleration of one or more outstanding options
under the 1995 Plan (including options incorporated from the 1992 Plan) and the
vesting of shares subject to outstanding options upon the occurrence of certain
hostile tender offers. Such accelerated vesting may be conditioned upon the
subsequent termination of the affected optionee's service.
The Board may amend or modify the 1995 Plan at any time. The 1995 Plan will
terminate on August 1, 2005, unless terminated earlier by the Board.
1995 Non-Employee Directors Stock Option Plan. The Company's 1995
Non-Employee Directors Stock Option Plan (the "Directors Plan"), was adopted by
the Board of Directors on August 2, 1995. Automatic option grants are made at
periodic intervals to eligible non-employee Board members under the Directors
Plan. The Directors Plan became effective as of the effective date of the
Company's initial public offering. A total of 166,667 shares of common stock
have been reserved for issuance under the Directors Plan.
Each individual serving as a non-employee Board member on the effective
date of the company's initial public offering was automatically granted a
non-statutory option to purchase 5,000 shares of common stock, vesting in equal
monthly installments for one year after the grant date. Each individual first
elected or appointed as a non-employee Board member after the effective date of
the company's initial public offering will automatically be granted, on the date
of such election or appointment, a non-statutory option to purchase 10,000
shares of common stock vesting over five years. In addition, on the date of each
annual stockholders meeting, beginning with the 1996 Annual Meeting, each
individual who is to continue to serve as a nonemployee Board member after that
annual meeting and has been a member of the Board for at least six months will
automatically be granted a non-statutory option to purchase 5,000 shares of
common stock, vesting in equal monthly installments for one year after the grant
date. There will be no limit on the number of such annual 5,000-share option
grants any one non-employee Board member may receive over his or her period of
continued Board service. The exercise price per share of each automatic option
grant will be equal to the fair market value of the common stock on the
automatic grant date. Each automatic option will be immediately exercisable;
however, any shares purchased upon exercise of the option will be subject to
repurchase should the optionee's service as a non-employee Board member cease
prior to vesting in the shares. Each 10,000-share grant will vest in five equal
and successive annual installments over the optionee's period of Board service.
Each 5,000-share grant will vest in twelve equal and successive monthly
installment over the optionee's period of Board service.
F-14
<PAGE> 61
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In the event of the optionee's death or permanent disability or in the
event the company is acquired by a merger or asset sale and in the event of
certain hostile tender offers, each outstanding option will become fully vested.
Upon the acquisition of 50% or more of the Company's outstanding voting stock
pursuant to a hostile tender offer, each automatic option grant outstanding for
at least six months may be surrendered automatically or be cancelled in exchange
for cash distribution to the director based upon the tender offer price. The
Directors Plan will terminate on August 1, 2005.
The following table summarizes activity under the company's stock option
plans (in thousands, except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE EXERCISE
FOR GRANT NUMBER PRICE PER SHARE
---------- ------ ---------------
<S> <C> <C> <C>
Balance at June 30, 1996........................... 210 820 $ 9.20
Authorized......................................... 842 -- --
Exercised.......................................... -- (96) 2.74
Granted............................................ (569) 569 16.69
Canceled........................................... 31 (31) 12.21
---- -----
Balance at June 30, 1997........................... 514 1,262 11.58
Authorized......................................... 602 -- --
Exercised.......................................... -- (89) 6.57
Granted............................................ (577) 577 25.33
Canceled........................................... 158 (158) 15.41
---- -----
Balance at June 30, 1998........................... 697 1,592 16.43
Authorized......................................... 524 -- --
Exercised.......................................... -- (75) 5.10
Granted............................................ (671) 671 19.25
Canceled........................................... 221 (221) 20.37
---- -----
Balance at June 30, 1999........................... 771 1,967 17.38
==== =====
</TABLE>
A summary of outstanding and vested stock options as of June 30, 1999 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
---------------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE PRICE PER SHARE NUMBER PRICE PER SHARE
- --------------- --------- ---------------- --------------- ------- ---------------
<S> <C> <C> <C> <C> <C>
$ 0.08 - $ 5.25 144,230 5.17 $ 3.62 144,230 $ 3.62
7.50 - 12.00 258,435 6.14 8.30 186,522 8.43
13.25 - 17.50 571,265 8.61 16.28 118,258 15.07
17.75 - 20.25 474,115 8.22 19.05 156,201 18.37
20.63 - 24.25 237,550 8.83 23.57 58,625 23.54
26.13 - 27.50 281,400 8.78 26.94 47,327 26.92
--------- -------
1,966,995 7.69 17.38 711,163 13.22
========= =======
</TABLE>
Employee Stock Purchase Plan. The company adopted an Employee Stock
Purchase Plan in August 1995. Qualified employees may elect to have a certain
percentage of their salary withheld to purchase shares of the company's common
stock under the Purchase Plan. The purchase price per share is equal to 85% of
the
F-15
<PAGE> 62
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
fair market value of the stock on specified dates. The company has reserved
100,000 shares of common stock under the Purchase Plan. Sales under the Purchase
Plan in fiscal 1999, 1998 and 1997 were 13,643, 10,372 and 14,557 shares of
common stock at an average price of $12.77, $14.36 and $10.51 per share,
respectively. Shares available for future purchase under the Purchase Plan are
53,049 at June 30, 1999. The Purchase Plan will terminate in October 2005.
Pro forma disclosure
The weighted average estimated grant date fair value, as defined by SFAS
123, for options granted under the company's stock option plans during fiscal
1999, 1998 and 1997 was $13.74, $15.54 and $9.22 per share, respectively. The
weighted average estimated grant date fair value of purchase awards under the
company's Purchase Plan during fiscal 1999, 1998 and 1997 was $13.46, $6.85 and
$5.51, respectively. The estimated grant date fair value is calculated using the
Black-Scholes model.
The following assumptions are included in the estimated grant date fair
value calculations for the company's stock option and purchase awards:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Stock option plans:
Expected dividend yield..................................... 0% 0% 0%
Expected stock price volatility............................. 86% 60% 49%
Risk free interest rate..................................... 5.15% 5.66% 6.52%
Expected life (years)....................................... 5.10 6.05 5.95
Stock purchase plan:
Expected dividend yield..................................... 0% 0% 0%
Expected stock price volatility............................. 86% 60% 48%
Risk free interest rate..................................... 4.68% 5.28% 5.30%
Expected life (years)....................................... 1.28 1.45 0.25
</TABLE>
Pro forma net loss and net loss per share
Had the company recorded compensation based on the estimated grant date
fair value, as defined by SFAS 123, for awards granted under its stock option
plans and stock purchase plan, the company's net loss and net loss per share
would have been increased to the pro forma amounts below (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported...................................... $(19,246) $ (9,675) $(10,258)
Pro forma........................................ (22,500) (12,085) (11,314)
Net loss per share:
As reported...................................... $ (1.55) $ (0.87) $ (1.11)
Pro forma........................................ (1.82) (1.09) (1.22)
</TABLE>
The pro forma effect on the net loss and net loss per share for fiscal
1999, 1998 and 1997 is not representative of the pro forma effect in future
years because it does not take into consideration pro forma compensation expense
related to grants made prior to fiscal year 1996.
F-16
<PAGE> 63
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- COMPREHENSIVE INCOME (LOSS)
Effective July 1, 1998, the company 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 financial statements. Comprehensive income (loss) as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income (loss), which
are excluded from the results of operations, include foreign currency
translation adjustments and unrealized gains (losses) on available-for-sale
securities.
The company did not record comprehensive income during fiscal 1998 and 1997
as such amounts were not material. During fiscal 1999, comprehensive income
(loss) consisted of net unrealized losses on available-for-sale securities of
$85,000, resulting in comprehensive net loss of $19,331,000.
NOTE 6 -- INCOME TAXES:
Deferred tax assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Net operating loss carryforwards....................... $ 22,830 $ 15,822
Tax credit carryforwards............................... 3,666 2,074
Capitalized start-up costs............................. 501 830
Accounts payable and other............................. 1,537 1,259
-------- --------
Gross deferred tax assets.............................. 28,534 19,985
Less valuation allowance............................... (28,534) (19,985)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
</TABLE>
A full valuation allowance has been established for the company's deferred
tax assets since realization of such assets through the generation of future
taxable income is uncertain.
The provision for income taxes differs from the amount determined by
applying the U.S. statutory income tax rate to the loss before income taxes as
summarized below (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Tax benefit at statutory rate..................... $ 6,736 $ 3,386 $ 3,590
Net operating loss carryforward for which no
benefit was available........................... (6,736) (3,386) (3,590)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
At June 30, 1999 Company had net operating loss carryforwards of
approximately $58.0 million for federal income tax reporting purposes and tax
credit carryforwards of approximately $2.9 million for federal reporting
purposes. These amounts expire at various times through 2019.
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses and tax credit carryforwards that can be carried forward may be
impaired or limited in certain circumstances. These circumstances include, but
are not limited to, a cumulative stock ownership change of greater than 50%, as
defined, over a three year period. As a result of ownership changes that have
occurred during the past four
F-17
<PAGE> 64
PHARMACYCLICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
fiscal years, management believes that utilization of the company's net
operating loss and tax credit carryforwards is subject to certain annual
limitations.
NOTE 7 -- COMMITMENTS:
The company leases its facilities under non-cancelable operating leases
that expires in 2001. The company also leases certain assets under long-term
lease agreements that are classified as capital leases. The total amount of
assets acquired under capital lease arrangements that are included in property
and equipment (Note 3) is as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1999 1998
------- -------
<S> <C> <C>
Equipment................................................ $ 2,273 $ 2,273
Leasehold improvements................................... 1,050 1,050
Furniture and fixtures................................... 278 278
------- -------
3,601 3,601
Less accumulated depreciation and amortization........... (3,020) (2,590)
------- -------
$ 581 $ 1,011
======= =======
</TABLE>
The capital lease agreements require the company, among other things, to
pay insurance and maintenance costs.
Future minimum lease payments under non-cancelable operating and capital
leases are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JUNE 30, LEASES LEASES
-------------------- ------- ---------
<S> <C> <C>
2000...................................................... $ 229 $ 708
2001...................................................... 61 751
2002...................................................... -- 313
----- ------
290 $1,772
======
Less amount representing interest......................... (15)
-----
275
Less current portion...................................... (216)
-----
Long-term portion of capital lease obligations............ $ 59
=====
</TABLE>
Rent expense for the years ended June 30, 1999, 1998, and 1997 was
$457,000, $366,000 and $371,000, respectively, and $2,269,000 for the period
from inception through June 30, 1999. The terms of the facility leases provide
for rental payments on a graduated scale. The company recognizes rent expense on
a straight-line basis over the lease period and has accrued for rent expense
incurred but not paid at June 30, 1999.
At June 30, 1999, the company had approximately $7.4 million in cancellable
purchase commitments with three suppliers of drug components and final bulk drug
substance and one supplier of lasers.
F-18
<PAGE> 65
LOGO
<PAGE> 66
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all costs and expenses, other than the
underwriting discounts and commissions, payable by the company in connection
with the sale of common stock being registered hereby. All of the amounts shown
are estimates except the SEC registration fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 14,022
NASD filing fee............................................. 5,544
Nasdaq additional listing of shares fee..................... 17,500
Accounting fees and expenses................................ 50,000
Legal fees and expenses..................................... 125,000
Printing and engraving expenses............................. 75,000
Transfer Agent and registrar fees........................... 25,000
Miscellaneous............................................... 37,934
--------
Total............................................. $350,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, as amended (the
"DGCL"), provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145 further provides that a corporation similarly may indemnify any such
person serving in any such capacity who was or is a party or is threatened to be
made a party to any threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor, against expenses
actually and reasonably incurred in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Delaware Court of Chancery or
such other court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
shall not eliminate or limit the liability of a director (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL (relating to
unlawful payment of dividends and
II-1
<PAGE> 67
unlawful stock purchase and redemption) or (iv) for any transaction from which
the director derived an improper personal benefit.
The Registrant's Amended and Restated Certificate of Incorporation provides
that the Registrant's directors shall not be liable to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent that exculpation from liabilities is not permitted under
the DGCL as in effect at the time such liability is determined. The Registrant
has entered into indemnification agreements with all of its officers and
directors, as permitted by the DGCL. Reference is also made to Section 7 of the
Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers
and directors of the Registrant against certain liabilities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TABLE
- ------- -------------
<C> <S>
1.1* Form of Underwriting Agreement
4.1(1) Form of Stock Certificate
5.1* Opinion of Brobeck, Phleger & Harrison LLP
23.1 Consent of Independent Accountants
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1)
23.3 Consent of Brinks, Hofer, Gilson & Lione, A Professional
Corporation
24.1 Power of Attorney (included in the signature page of this
Registration Statement)
</TABLE>
- ---------------
* To be filed by amendment.
(1) Incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1, Commission File No. 33-96048
(b) FINANCIAL STATEMENT SCHEDULES
None.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the Prospectus, to each person to whom the Prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the Prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the Prospectus, to deliver, or
cause to be delivered to each person to whom the Prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the Prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described in Item 15, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission
II-2
<PAGE> 68
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(b) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 69
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Sunnyvale, State of California on this 11th day
of August, 1999.
PHARMACYCLICS, INC.
By: /s/ RICHARD A. MILLER
------------------------------------
Richard A. Miller, M.D.
President and Chief Executive
Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
does hereby constitute and appoint jointly and severally, Richard A. Miller and
Leiv Lea, or either of them, as his or her true and lawful attorneys-in-fact and
agents, with full power of substitutions and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign the
Registration Statement filed herewith and any and all amendments to said
Registration Statement (including post-effective amendments and registration
statements filed pursuant to Rule 462 and otherwise), and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or his or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undesigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD A. MILLER President and Chief Executive August 12, 1999
- --------------------------------------------- Officer and Director (Principal
Richard A. Miller Executive Officer)
/s/ LEIV LEA Vice President, Finance and August 12, 1999
- --------------------------------------------- Administration and Chief Financial
Leiv Lea and Accounting Officer (Principal
Financial Officer)
/s/ PHYLLIS I. GARDNER Director August 12, 1999
- ---------------------------------------------
Phyllis I. Gardner
/s/ JOSEPH S. LACOB Director August 12, 1999
- ---------------------------------------------
Joseph S. Lacob
/s/ JOSEPH C. SCODARI Director August 12, 1999
- ---------------------------------------------
Joseph C. Scodari
/s/ CRAIG C. TAYLOR Director August 12, 1999
- ---------------------------------------------
Craig C. Taylor
</TABLE>
II-4
<PAGE> 70
PHARMACYCLICS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
4.1(1) Form of Stock Certificate
5.1* Opinion of Brobeck, Phleger & Harrison LLP
23.1 Consent of Independent Accountants
23.2* Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1)
23.3 Consent of Brinks Hofer Gilson & Lione, A Professional
Corporation
24.1 Power of Attorney (included in the signature page of this
Registration Statement)
</TABLE>
- ---------------
* To be filed by amendment.
(1) Incorporated by reference to Exhibit 4.2 to the Company's Registration
Statement on Form S-1, Commission File No. 33-96048
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-3 of our
report dated July 23, 1999 relating to the financial statements of
Pharmacyclics, Inc., which appear in such Registration Statement. We also
consent to the reference to us under the heading "Experts" in such Registration
Statement.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
August 11, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF SPECIAL PATENT COUNSEL
We hereby consent to the reference to our firm under the caption "Experts"
in the Registration Statement on Form S-3 and related Prospectus of
Pharmacyclics, Inc. for the registration of 2,012,500 shares of its Common
Stock.
By: /s/ BRINKS HOFER GILSON & LIONE
--------------------------------
BRINKS HOFER GILSON & LIONE
Chicago, Illinois
August 10, 1999
