<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File Number: 0-27066
PHARMACYCLICS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-3148201
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
995 E. Arques Avenue, Sunnyvale, CA 94085-4521
(Address of principal executive offices) (zip code)
</TABLE>
Registrant's telephone number, including area code: (408) 774-0330
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of October 31, 2000, there were 16,052,415 shares of the Registrant's Common
Stock outstanding, par value $0.0001 per share.
This quarterly report on Form 10-Q consists of 22 pages of which this is page 1.
The Exhibit Index is located at page 21.
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PHARMACYCLICS, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets as of September 30, 2000 and June 30, 2000 ................. 3
Condensed Statements of Operations for the three months ended September 30,
2000 and 1999 ................................................................... 4
Condensed Statements of Cash Flows for the three months ended September 30,
2000 and 1999 ................................................................... 5
Notes to Condensed Financial Statements ............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations and Factors that May Affect Future Operating Results ................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................................................... 21
Item 2. Changes in Securities ................................................................ 21
Item 3. Defaults Upon Senior Securities ...................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders .................................. 21
Item 5. Other information .................................................................... 21
Item 6. Exhibits and Reports on Form 8-K ..................................................... 21
SIGNATURES ........................................................................................... 22
</TABLE>
PHARMACYCLICS(R), the "pentadentate" logo, XCYTRIN(R) , ANTRIN(R), and
LUTRIN(R), are registered U.S. trademarks; OPTRIN(TM) is a trademark of
Pharmacyclics, Inc. Other trademarks, trade names or service marks used
herein are the property of their respective owners.
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHARMACYCLICS, INC.
(a development stage company)
CONDENSED BALANCE SHEETS
(unaudited; in thousands)
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 33,022 $ 43,536
Short-term marketable investments ......................... 79,473 65,174
Accounts and other receivables ............................ 116 15
Prepaid expenses and other current assets ................. 3,707 2,925
--------- ---------
Total current assets ................................ 116,318 111,650
Long-term marketable investments ............................. 60,333 69,537
Property and equipment, net .................................. 3,824 3,796
Other assets ................................................. 140 140
--------- ---------
$ 180,615 $ 185,123
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................... $ 5,083 $ 2,851
Accrued liabilities ....................................... 1,093 764
Current portion of capital lease obligations .............. 32 59
--------- ---------
Total current liabilities ........................... 6,208 3,674
Deferred rent ................................................ 32 35
--------- ---------
Total liabilities ................................... 6,240 3,709
--------- ---------
Stockholders' equity:
Preferred stock ........................................... -- --
Common stock .............................................. 2 2
Additional paid-in capital ................................ 273,328 272,685
Accumulated other comprehensive income (loss) ............. 27 (506)
Deficit accumulated during development stage .............. (98,982) (90,767)
--------- ---------
Total stockholders' equity .......................... 174,375 181,414
--------- ---------
$ 180,615 $ 185,123
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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PHARMACYCLICS, INC.
(a development stage company)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Contract revenue .................................... $ 110 $ 135
-------- --------
Operating expenses:
Research and development ....................... 10,039 3,509
General and administrative ..................... 1,234 938
-------- --------
Total operating expenses .................... 11,273 4,447
-------- --------
Loss from operations ................................ (11,163) (4,312)
Interest income, net ................................ 2,948 670
-------- --------
Net loss ............................................ $ (8,215) $ (3,642)
======== ========
Basic and diluted net loss per share (Note 2) ....... $ (0.51) $ (0.29)
======== ========
Shares used to compute basic and diluted net
loss per share .................................. 16,031 12,512
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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PHARMACYCLICS, INC.
(a development stage company)
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................... $ (8,215) $ (3,642)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ......................... 318 283
Stock compensation expense ............................ 22 22
Changes in assets and liabilities:
Accounts and other receivables ..................... (101) 139
Prepaid expenses and other assets .................. (782) (253)
Accounts payable ................................... 2,232 (1,680)
Accrued liabilities ................................ 329 (103)
Deferred rent ...................................... (3) (1)
-------- --------
Net cash used in operating activities ...................... (6,200) (5,235)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment ................... (346) (51)
Purchases of marketable investments ................... (12,700) (4,005)
Proceeds from maturities of marketable investments .... 8,138 8,561
-------- --------
Net cash provided by (used in) investing activities ........ (4,908) 4,505
-------- --------
Cash flows from financing activities:
Payments under capital lease obligations .............. (27) (55)
Proceeds from sale of stock ........................... 621 84,136
-------- --------
Net cash provided by financing activities .................. 594 84,081
-------- --------
Net increase (decrease) in cash and cash equivalents ....... (10,514) 83,351
Cash and cash equivalents at the beginning of the period ... 43,536 3,930
-------- --------
Cash and cash equivalents at the end of the period ......... $ 33,022 $ 87,281
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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PHARMACYCLICS, INC.
(a development stage company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Pharmacyclics,
Inc. (the "company" or "Pharmacyclics") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited, condensed financial
statements reflect all adjustments (consisting of normal, recurring adjustments)
considered necessary for a fair presentation of the company's interim financial
information. These financial statements and notes should be read in conjunction
with the audited financial statements of the company included in the company's
Annual Report on Form 10-K for the year ended June 30, 2000 filed with the
Securities and Exchange Commission on September 27, 2000.
The results of operations for the three months ended September 30, 2000 are
not necessarily indicative of the operating results that may be reported for the
fiscal year ending June 30, 2001 or for any other future period.
REVENUE RECOGNITION
License fees are recognized as revenue when earned, as evidenced by
achievement of the specified milestones and the absence of any ongoing
performance obligation. Contract revenue is recognized as earned, primarily
based on costs incurred to total estimated costs at completion, pursuant to the
terms of each agreement. License and contract revenues are not subject to
repayment. Any amounts received in advance of performance are recorded as
deferred revenue.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and include costs
associated with 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.
CASH EQUIVALENTS AND INVESTMENTS
All highly liquid investments purchased with an original maturity date of
three months or less are considered to be cash equivalents. The company has
classified all its investments as "available-for-sale." Unrealized gains and
losses are included in other comprehensive loss. Gains and losses on securities
sold are recorded based on the specific identification method and are included
in the results of operations.
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PHARMACYCLICS, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss 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 the exercise of stock options and
warrants (using the treasury stock method). Options and warrants to purchase
2,572,442 and 1,939,646 shares of common stock were outstanding at September 30,
2000 and 1999, respectively. However, such amounts have been excluded from the
computation of dilutive earnings per share because their effect is
anti-dilutive.
NOTE 3 - EQUITY
In March 2000, the company sold 820,000 shares of its common stock at
$73.25 per share resulting in net cash proceeds of approximately $57,600,000. In
September and October 1999, the company sold a total of 2,645,000 shares of its
common stock at $38.75 per share which resulted in net proceeds to the company
of approximately $96,200,000.
NOTE 4 - COMPREHENSIVE LOSS
Comprehensive loss includes unrealized gains (losses) on available-for-sale
securities which are excluded from the results of operations.
The company's total comprehensive losses were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
2000 1999
------- -------
<S> <C> <C>
Net loss ........................................... $(8,215) $(3,642)
Change in net unrealized gains on available-for-sale
securities ......................................... 533 18
------- -------
Comprehensive net loss ............................. $(7,682) $(3,624)
======= =======
</TABLE>
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation-an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the definition of an employee for the purpose of applying Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," the
criteria for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is generally effective
July 1, 2000. The adoption of FIN 44 did not have a material effect on the
company's financial statements.
7
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In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 requires that license and other upfront fees received from
research collaborators be recognized over the term of the agreement unless the
fee is in exchange for products delivered or services performed that represent
the culmination of a separate earning process. SAB 101, as amended, is effective
in the fourth quarter of fiscal 2001. The company does not expect such adoption
to have a material effect on its financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
July 1999, the FASB issued Statement of Financial Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 deferred the
effective date of SFAS 133 until fiscal years beginning after June 15, 2000. The
adoption of SFAS No. 133 did not have a material effect on the company's
financial statements.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS AND FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
In addition to historical information, this report contains predictions,
estimates and other forward looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results could differ materially from
any future performance suggested in this report as a result of the factors,
including those discussed in "Factors That May Affect Future Operating Results,"
elsewhere in this report and in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000.
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 conducting a multicenter international Phase III
clinical trial of XCYTRIN(R) (motexafin gadolinium) Injection 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 are
conducting a Phase IIb clinical trial for LUTRIN(R) (motexafin lutetium)
Injection as a photosensitizer for use in the photodynamic therapy of patients
with recurrent breast cancers to the chest wall that have failed standard
therapies. Through our Cooperative Research and Development Agreement, the
National Cancer Institute is conducting Phase I trials of XCYTRIN for treatment
of both primary adult and pediatric brain tumors, pancreatic cancer and lung
cancer and of LUTRIN for prostate cancer. The National Cancer Institute also
intends to conduct several additional Phase I clinical trials of XCYTRIN and
LUTRIN, each for a variety of additional cancer indications. We are now
conducting a multicenter randomized Phase II clinical trial with ANTRIN(R)
(motexafin lutetium) Injection photoangioplasty for treatment of patients with
peripheral arterial disease and a Phase I trial for treatment of coronary artery
disease. In addition, Alcon is conducting a Phase II clinical trial with
OPTRIN(TM) (motexafin lutetium) Injection 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 September 30, 2000, had an accumulated deficit of approximately $99.0
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.
RESULTS OF OPERATIONS
Revenues
Revenues were $110,000 for the three months ended September 30, 2000
compared to $135,000 for the three months ended September 30, 1999. Revenue in
both periods consisted of contract revenue associated with one of the company's
corporate collaboration agreements.
9
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Research and Development
Research and development expenses were $10,039,000 for the three months
ended September 30, 2000 compared to $3,509,000 for the three months ended
September 30, 1999. Expenses in the first quarter of fiscal 2000 were reduced by
a credit of $3,540,000 associated with the termination of our manufacturing
development and supply agreement with Celanese, Ltd. Pursuant to the termination
agreement, Celanese assigned to us all rights, title and interest in the
manufacturing technology and intellectual property for our texaphyrin-based
products and agreed to make a cash payment of $750,000 to us. The termination
agreement also relieved us of all obligations to pay Celanese for shared
development costs incurred prior to termination of the Agreement. As of June 30,
1999, we had accrued $2,790,000 associated with such costs.
Excluding the impact of the Celanese termination agreement, research and
development expenses increased $2,990,000 (42%) to $10,039,000 in the three
months ended September 30, 2000 as compared to $7,049,000 in the three months
ended September 30, 1999. This increase was due primarily to increased clinical
trial costs, greater drug purchases and greater personnel costs associated with
supporting the company's clinical trials.
General and Administrative
General and administrative expenses increased $296,000 (32%) to $1,234,000
in the three months ended September 30, 2000 as compared to $938,000 in the
three months ended September 30, 1999. This increase is primarily related to
greater personnel and related expenses associated with hiring new employees to
support the company's increased development activities.
Interest Income, Net
Interest income, net, increased $2,278,000 (340%) to $2,948,000 in the
three months ended September 30, 2000 as compared to $670,000 in the three
months ended September 30, 1999. This increase is primarily attributable to
increased earnings from higher investment balances resulting from the proceeds
of a public equity offering of common stock completed in September and October
1999, and a private placement of stock completed in March 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of working capital have been private and public
equity financings and proceeds from collaborative research and development
agreements, as well as grant and contract revenues and interest income.
As of September 30, 2000, we had approximately $172,828,000 in cash, cash
equivalents and investments. Net cash used in operating activities of $6,200,000
during the three months ended September 30, 2000 resulted primarily from the net
loss for the period and an increase in prepaid expenses and other assets,
partially offset by an increase in accounts payable. Net cash used in operating
activities of $5,235,000 during the three months ended September 30, 1999
resulted primarily from the net loss for the period and a reduction in accounts
payable.
Net cash used in investing activities of $4,908,000 for the three months
ended September 30, 2000 consisted primarily of purchases of investments, net of
maturities of investments. Net cash provided by investing activities of
$4,505,000 for the three months ended September 30, 1999, consisted primarily of
proceeds from maturities of investments, net of purchases of investments.
Net cash provided by financing activities of $594,000 and $84,081,000 for
the three months ended September 30, 2000 and 1999, respectively, primarily
consisted of proceeds from the sale of stock.
10
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Based on the current status of our product development and
commercialization plans, we believe cash, cash equivalents and short- and
long-term 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.
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. There can be no assurance 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation-an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the definition of an employee for the purpose of applying Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," the
criteria for determining whether a plan qualifies as a noncompensatory plan, the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is generally effective
July 1, 2000. The adoption of FIN 44 did not have a material effect on the
company's financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 requires that license and other upfront fees received from
research collaborators be recognized over the term of the agreement unless the
fee is in exchange for products delivered or services performed that represent
the culmination of a separate earning process. SAB 101, as amended, is effective
in the fourth quarter of fiscal 2001. The company does not expect such adoption
to have a material effect on its financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. In
July 1999, the FASB issued Statement of Financial Accounting Standards No. 137
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 deferred the
effective date of SFAS 133 until fiscal years beginning after June 15, 2000. The
adoption of SFAS No. 133 did not have a material effect on the company's
financial statements.
11
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IMPACT OF YEAR 2000
In prior years, we implemented a Year 2000 project to address the issue of
computer software and hardware correctly processing dates through and beyond the
Year 2000. The goal of this project was to ensure that all computer software and
hardware that we use or rely upon is retired, replaced or made Year 2000
compliant before December 31, 1999. To date, we have not experienced any Year
2000-related operational issues and are not aware of any material potential
problems that may arise as a result of Year 2000 issues either from our own
internal systems or from the products and services of third parties upon which
we rely.
We expensed external and internal costs specifically associated with
addressing Year 2000 issues as incurred. The total cost of our Year 2000
compliance efforts was not material to our financial condition or results of
operations. We will continue to monitor our business-critical computer
applications and those of our suppliers and vendors throughout the Year 2000 to
ensure that any latent Year 2000 problems that may arise are promptly addressed.
MARKET RISK
Our cash and cash equivalents, investments and capital lease obligations
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 cancelable 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.
12
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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
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 September 30, 2000, had an accumulated deficit of approximately $99.0
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 to date
are primarily from license and milestone payments and, to a lesser extent,
funding from one government research grant.
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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:
o failure to obtain or maintain requisite governmental approvals;
o failure to obtain approvals of clinically intended uses of our
products under development; or
o 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.
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:
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<PAGE> 15
o the receipt of regulatory approvals for the uses that we are studying;
o 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
o 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 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.
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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. Alcon may terminate their agreement 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 enhancer 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.
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. and
cylindrically diffusing light fibers from CardioFocus, Inc. 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.
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 granted Celanese exclusive worldwide manufacturing
rights and required Celanese to supply all of our texaphyrin-based products for
late-stage clinical and commercial use. As a result of the change in its
business focus, Celanese requested that we pursue alternative supply sources. On
August 27, 1999, we entered into an agreement to terminate the manufacturing and
supply agreement with Celanese. Pursuant to that agreement, Celanese assigned to
us all right, title and interest in and to the manufacturing technology and
intellectual property for our texaphyrin-based products.
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During discussions with Celanese that resulted in termination of the
manufacturing and supply agreement, we entered into agreements with three new
manufacturers to evaluate their ability to supply us with the components of the
texaphyrin-based products. The last of these manufacturers has delivered
commercial quantities of drug substance to us, but we cannot yet be certain that
this manufacturer will be able to continue to deliver commercial quantities of
drug substance on a timely basis. If this manufacturer fails to perform its
obligation 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.
We have entered into an agreement with Cook Pharmaceutical Solutions to
formulate, fill, package and label clinical and commercial quantities of
XCYTRIN. Cook also supplies us with clinical quantities of ANTRIN and LUTRIN.
Any interruption of supply of our products from Cook could have a material
adverse affect on our business, financial condition and results of operations.
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 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 either of our agreements with Alcon or Nycomed 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.
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 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:
o continued progress of our research and development programs;
o our ability to establish additional collaborative arrangements;
17
<PAGE> 18
o changes in our existing collaborative relationships;
o progress with preclinical studies and clinical trials;
o the time and costs involved in obtaining regulatory clearance;
o the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims;
o competing technological and market developments; and
o 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 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.
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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:
o the results of preclinical testing and clinical trials by us or our
competitors;
o technological innovations or new therapeutic products;
o governmental regulation;
o developments in patent or other proprietary rights;
o litigation;
o public concern as to the safety of products developed by us or others;
o comments by securities analysts; and
o 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.
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 from 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.
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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, 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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Employment agreement, dated July 10, 2000, by and between
the Company and Jon R. Wallace
27 Financial Data Schedule
b. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PHARMACYCLICS, INC.
(Registrant)
Dated: November 9, 2000 By: /s/ RICHARD A. MILLER, M.D.
--------------------------------------
Richard A. Miller, M.D.
President and Chief Executive Officer
Dated: November 9, 2000 By: /s/ LEIV LEA
-------------------------------------
Leiv Lea
Vice President, Finance and
Administration and
Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit # Description
--------- -----------
<S> <C>
10.1 Employment agreement, dated July 10, 2000, by and between
the Company and Jon R. Wallace
27.1 Financial Data Schedule
</TABLE>
