UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-26658
PHARMACYCLICS, INC.
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Sunnyvale, California 94085-4521 (408) 774-0330 |
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and Registrant's telephone number, including area code) |
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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
As of January 31, 2004, there were 16,362,811 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 Exhibits Index page immediately follows page 22.
PHARMACYCLICS, INC.
Form 10-Q
Table of Contents
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PART I. Financial Information |
Page No. |
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Item 1. Financial Statements (unaudited): |
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Condensed Balance Sheets |
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Condensed Statements of Operations |
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Condensed Statements of Cash Flows |
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Notes to Condensed Financial Statements |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Factors that May Affect Future Operating Results |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. Controls and Procedures |
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PART II. Other Information |
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Item 1. Legal Proceedings |
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Item 2. Changes in Securities and Use of Proceeds |
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Item 3. Defaults Upon Senior Securities |
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Item 4. Submission of Matters to a Vote of Security Holders |
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Item 5. Other Information |
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Item 6. Exhibits and Reports on Form 8-K |
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Signatures |
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Exhibits Index |
Pharmacyclics®,
(the pentadentate logo), Xcytrin® and
Antrin®, are registered U.S. trademarks of Pharmacyclics, Inc.
Other trademarks, trade names or service marks used herein are the property of their
respective owners.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PHARMACYCLICS, INC.
(a development stage enterprise)
CONDENSED BALANCE SHEETS
(unaudited; in thousands)
December 31, June 30,
2003 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 37,835 $ 50,371
Marketable securities ............................... 36,549 37,364
Prepaid expenses and other current assets ........... 1,553 1,339
----------- -----------
Total current assets ........................... 75,937 89,074
Property and equipment, net ........................... 1,533 2,206
Other assets .......................................... 550 573
----------- -----------
$ 78,020 $ 91,853
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 1,945 $ 1,445
Accrued liabilities ................................. 931 963
----------- -----------
Total current liabilities ...................... 2,876 2,408
Deferred rent ......................................... 70 35
----------- -----------
Total liabilities .............................. 2,946 2,443
----------- -----------
Stockholders' equity:
Common stock ........................................ 2 2
Additional paid-in capital .......................... 276,144 275,829
Accumulated other comprehensive income .............. 105 144
Deficit accumulated during development stage ........ (201,177) (186,565)
----------- -----------
Total stockholders' equity ...................... 75,074 89,410
----------- -----------
$ 78,020 $ 91,853
=========== ===========
The accompanying notes are an integral part of these condensed financial statements.
PHARMACYCLICS, INC.
(a development stage enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited; in thousands, except per share data)
Period From
Inception
Three Months Ended Six Months Ended (April 1991)
December 31, December 31, through
------------------ ------------------ December 31,
2003 2002 2003 2002 2003
-------- -------- -------- -------- -------------
Revenues:
License and milestone revenues .........$ -- $ -- $ -- $ -- $ 7,855
Contract revenues ....................... -- -- -- -- 5,847
-------- -------- -------- -------- ------------
Total Revenues ................. -- -- -- -- 13,702
Operating expenses:
Research and development .............. 6,182 5,847 12,117 11,703 209,596
General and administrative ............ 1,480 1,469 3,024 2,984 38,763
-------- -------- -------- -------- ------------
Total operating expenses ....... 7,662 7,316 15,141 14,687 248,359
-------- -------- -------- -------- ------------
Loss from operations ....................... (7,662) (7,316) (15,141) (14,687) (234,657)
Interest and other income, net ............. 251 470 529 1,112 33,480
-------- -------- -------- -------- ------------
Net loss ................................... $ (7,411) $ (6,846) $(14,612) $(13,575) $ (201,177)
======== ======== ======== ======== ============
Basic and diluted net loss per share ....... $ (0.46) $ (0.42) $ (0.90) $ (0.84)
======== ======== ======== ========
Shares used to compute basic and
diluted net loss per share .............. 16,267 16,202 16,252 16,196
======== ======== ======== ========
The accompanying notes are an integral part of these condensed financial statements.
PHARMACYCLICS, INC.
(a development stage enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited; in thousands)
Period From
Inception
Six Months Ended (April 1991)
December 31, through
-------------------- December 31,
2003 2002 2003
--------- --------- ---------
Cash flows from operating activities:
Net loss ..................................................... $ (14,612) $ (13,575) (201,177)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................................ 869 1,083 12,416
Stock compensation expense ................................... 7 5 857
Gain on sale of marketable securities ........................ -- -- 58
Write-down of fixed assets ................................... -- 21 381
Changes in assets and liabilities:
Prepaid expenses and other assets ......................... (191) (340) (2,103)
Accounts payable .......................................... 500 (387) 1,945
Accrued liabilities ....................................... (32) (242) 931
Deferred rent ............................................. 35 (46) 70
--------- --------- ---------
Net cash used in operating activities .................. (13,424) (13,481) (186,622)
--------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment ........................... (196) (95) (10,561)
Proceeds from sale of property and equipment ................. -- -- 112
Purchases of marketable securities ........................... (21,840) (16,295) (410,291)
Proceeds from maturities and sales of marketable securities .. 22,616 16,893 373,789
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Net cash provided by (used in) investing activities ..... 580 503 (46,951)
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Cash flows from financing activities:
Issuance of common stock, net of issuance costs .............. 308 39 251,775
Proceeds from notes payable .................................. -- -- 3,000
Issuance of convertible preferred stock, net of issuance costs -- -- 20,514
Payments under capital lease obligations ..................... -- -- (3,881)
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Net cash provided by financing activities ............... 308 39 271,408
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Increase (decrease) in cash and cash equivalents ................ (12,536) (12,939) 37,835
Cash and cash equivalents at beginning of period ................ 50,371 89,324 --
--------- --------- ---------
Cash and cash equivalents at end of period ...................... $ 37,835 $ 76,385 37,835
========= ========= =========
The accompanying notes are an integral part of these condensed financial statements.
PHARMACYCLICS, INC.
(a development stage enterprise)
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 accounting principles generally accepted in the United States of America 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 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, 2003 filed with the Securities and Exchange Commission on September 25, 2003.
The results of operations for the three and six months ended December 31, 2003 are not necessarily indicative of the operating results that may be reported for the fiscal year ending June 30, 2004 or for any other future period.
Employee Stock-Based Compensation
The company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB No. 25 ("FIN 44") and complies with the disclosure provisions of Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123") as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation Disclosure ("SFAS No. 148").
Under APB 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the company's stock and the exercise price. SFAS No. 123 defines a "fair value" based method of accounting for an employee stock option or similar equity instruments.
The following table illustrates the effect on net loss per common share if the company had applied the fair-value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share amounts):
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
2003 2002 2003 2002
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Net loss, as reported .............. $ (7,411) $ (6,846) $ (14,612) $ (13,575)
Employee stock-based
compensation using the
fair value based methtod ......... $ (1,849) $ (2,573) $ (3,802) $ (5,561)
--------- --------- --------- ---------
Proforma net loss .................. $ (9,260) $ (9,419) $ (18,414) $ (19,136)
========= ========= ========= =========
Basic and diluted net loss
per share, as reported ........... $ (0.46) $ (0.42) $ (0.90) $ (0.84)
========= ========= ========= =========
Proforma basic and
diluted net loss per share ....... $ (0.57) $ (0.58) $ (1.13) $ (1.18)
========= ========= ========= =========
Note 2 - Basic and Diluted Net Loss Per Share
Basic and diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share excludes potential common stock if their effect is antidilutive. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method). Options to purchase 4,012,090 and 3,928,505 shares of common stock were outstanding at December 31, 2003 and 2002, respectively, and were excluded from the calculation of loss per share as they were antidilutive.
Note 3 - Comprehensive Loss
Comprehensive loss includes unrealized gains (losses) on marketable securities which are excluded from the results of operations.
The company's comprehensive losses were as follows (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net loss ................................. $ (7,411) $ (6,846) $ (14,612) $ (13,575)
Change in net unrealized gains and losses
on available-for-sale securities ....... (2) 15 (39) 33
--------- --------- --------- ---------
Comprehensive loss ....................... $ (7,413) $ (6,831) $ (14,651) $ (13,542)
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from any future performance suggested in this report as a result of factors, including those discussed in "Factors That May Affect Future Operating Results" and elsewhere in this report and in the company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003. All forward-looking statements are based on information currently available to Pharmacyclics; and we assume no obligation to update such forward-looking statements.
Overview
Pharmacyclics is a pharmaceutical company focused on the development of products that improve existing therapeutic approaches to cancer and atherosclerosis. To date we have devoted substantially all of our resources to the research and development of our products and have not derived any commercial revenues from the sale of our products. We have two primary investigational drug products, or research and development programs, for which we are currently focusing our efforts: Xcytrin® and Antrin®.
We are enrolling patients in a pivotal Phase 3 trial of Xcytrin for the potential treatment of lung cancer patients with brain metastases. This randomized controlled study, known as the SMART (Study of Neurologic Progression with Motexafin Gadolinium And Radiation Therapy) trial, will enroll about 550 patients; and we plan to complete enrollment in this trial in the fourth quarter of calendar 2004. The trial will compare the effects of whole brain radiation therapy (WBRT) alone to WBRT plus Xcytrin in lung cancer patients with brain metastases. The primary efficacy endpoint will be time to neurologic progression as determined by a blinded events-review committee. Survival and neurocognitive function will also be assessed as secondary endpoints of the trial. We requested and received a Special Protocol Assessment from the FDA for the SMART trial. Special Protocol Assessment provides for sponsors of clinical trials to receive official FDA evaluation, guidance and agreement on pivotal trials. The FDA has also granted us fast track designation for the SMART trial. This designation will not impact the results of our trial, but will facilitate and expedite the development and review of the application for the approval of the drug.
The SMART trial is based on the results of our completed large randomized trial in patients with brain metastases from solid tumors. That trial enrolled 401 patients and compared WBRT alone to WBRT plus Xcytrin. The primary end points were survival and time to neurologic progression. The overall trial did not meet its end points, but a benefit was seen in lung cancer, the largest sub-group of patients (N=251). There was an improvement in time to neurologic progression as assessed by investigators and by a blinded events review committee for lung cancer patients receiving Xcytrin. Lung cancer patients treated with Xcytrin were also found to have a reduction in death due to brain tumor progression as assessed by investigators. The results of this study have been published in July 2003 in the Journal of Clinical Oncology. Patients receiving Xcytrin were also found to have improved time to neurocognitive progression. Neurogognitive progression is a quantitative and blinded assessment of cognitive functions such as memory, verbal-fluency, decision making ability and fine motor control. These results were published in January 2004 in the Journal of Clinical Oncology.
We have several Phase 1 and Phase 2 clinical trials now open evaluating Xcytrin as a single agent, in combination with radiation, and in combination with chemotherapy for various cancers. We have begun Phase 2 clinical trials with Xcytrin used alone in hematologic cancers such as chronic lymphocytic leukemia and in combination with monoclonal antibodies Rituxan® and Zevalin® for recurrent lymphoma. Phase 1 trials are underway evaluating Xcytrin given in combination with doxorubicin and with docetaxel (Taxotere®) for lung, prostate, ovarian and breast cancer and combined with radiation and chemotherapy for the treatment of newly diagnosed, advanced head and neck cancer patients. Through our Cooperative Research and Development Agreement, the National Cancer Institute is conducting Phase 1 trials of Xcytrin for treatment of both primary adult and pediatric brain tumors, pancreatic cancer and lung cancer.
We have also completed a Phase 1 clinical trial with Antrin phototherapy for the treatment of coronary artery disease in patients receiving balloon angioplasty and stents. This study was primarily designed to evaluate the safety of various doses of drug and light. Results of this trial were published in the September 2003 issue of the journal Circulation. 79 patients were treated on this protocol, which demonstrated the safety and feasibility of Antrin phototherapy and determined optimum doses of drug and light for future trials. No major treatment-related angiographic or biochemical adverse effects or abnormalities were observed and no dose-limiting toxicities were noted. No instances of emergency coronary artery bypass, death, stroke or myocardial infarction occurred in patients who received both Antrin infusion and endovascular illumination and activation of the drug. The most frequently reported side effects were mild, transient rash and reversible mild tingling in the hands and feet, some of which lasted days to weeks, but did not require clinical intervention.
We have incurred significant operating losses since our inception in 1991, and as of December 31, 2003, had an accumulated deficit of approximately $201.2 million. We expect to continue to incur significant operating losses until the commercialization of our products generates sufficient revenues to cover our expenses. 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
Research and Development
Research and development expenses increased $335,000 (6%) to $6,182,000 for the three months ended December 31, 2003 compared to $5,847,000 for the three months ended December 31, 2002. This increase was primarily due to higher third party clinical trial costs ($918,000) as the company's continued to enroll patients in its SMART Phase 3 trial. This increase was partially offset by decreases in payroll and related expenses ($432,000) as the company decreased average headcount in fiscal 2004. For the six months ended December 31, 2003, research and development expenses increased $414,000 (4%) to $12,117,000 compared to $11,703,000 for the six months ended December 31, 2002. The increase was due primarily to higher third party clinical trial expenses ($1,706,000) partially offset by lower payroll and related expenses ($1,097,000). The company expects research and development expenses to increase slightly throughout fiscal 2004 as the company continues enrollment in its ongoing clinical trials.
General and Administrative
General and administrative expenses remained relatively consistent, increasing approximately 1% to $1,480,000 for the three months ended December 31, 2003, compared to $1,469,000 for the three months ended December 31, 2002. For the six months ended December 31, 2003, general and administrative expenses remained relatively consistent increasing approximately 1% to $3,024,000 compared to $2,984,000 for the six months ended December 31, 2002. The company expects general and administrative expenses to remain relatively consistent for the remainder of fiscal 2004.
Interest and Other Income, Net
Interest and other income, net was $251,000 and $470,000 for the three months ended December 31, 2003 and 2002, respectively, a decrease of 47%. For the six months ended December 31, 2003 and 2002, interest and other income, net was $529,000 and $1,112,000, respectively, a decrease of 52%. The decreases were primarily due to lower cash, cash equivalents and marketable securities balances combined with lower interest rates being earned by these balances.
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 December 31, 2003, we had approximately $74,384,000 in cash, cash equivalents and marketable securities. Net cash used in operating activities of $13,424,000 during the six months ended December 31, 2003 resulted primarily from the company's net loss for the period, net of depreciation and amortization. Net cash used in operating activities of $13,481,000 during the six months ended December 31, 2002 resulted primarily from the company's net loss for the period, net of depreciation and amortization.
Net cash provided by investing activities of $580,000 and $503,000 for the six months ended December 31, 2003 and 2002, respectively, consisted primarily of proceeds from maturities and sales of marketable securities, net of purchases.
Net cash provided by financing activities of $308,000 and $39,000 for the six months ended December 31, 2003 and 2002, respectively, primarily consisted of proceeds from the sale of common stock upon the exercise of stock options and from purchases under the company's Employee Stock Purchase Plan.
We lease our facilities under non-cancelable operating leases that expire in fiscal 2008. Future minimum lease payments under non-cancelable operating leases as of December 31, 2003 are as follows:
Operating
Lease
Commitments
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Remaining 6 months of fiscal 2004 .. $ 571,000
Fiscal 2005 ........................ 1,162,000
Fiscal 2006 ........................ 1,201,000
Fiscal 2007 ........................ 1,220,000
Fiscal 2008 ........................ 610,000
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Total minimum lease payments .. $4,764,000
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Based upon the current status of our product development and commercialization plans, we believe that our existing cash, cash equivalents and marketable securities, will be adequate to satisfy our capital needs through at least fiscal year 2005. We expect to complete enrollment of our Phase 3 clinical trial of our first investigational drug Xcytrin in patients with brain metastases from non-small cell lung cancer in the fourth calendar quarter of 2004 (the second fiscal quarter of our fiscal 2005). There can be no assurance that our current capital resources will be sufficient to satisfy our capital needs through full enrollment of the Xcytrin trial or, if Xcytrin is ultimately approved for sale, through its production, marketing and commercialization. If our existing capital resources are insufficient to satisfy our capital requirements through testing, regulatory clearance and commercialization of Xcytrin, we would be required to raise additional funds through public or private financings, collaborative relationships (partnerships with other drug manufacturers) or other arrangements to complete commercialization. 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. 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 restrictions on our business. 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.
Critical Accounting Policies
Reference is made to "Critical Accounting Policies and Estimates" included on page 27 of our Annual Report on Form 10-K for the year ended June 30, 2003. As of the date of the filing of this Quarterly Report, we have not identified any critical accounting policies other than those discussed in our Annual Report for the year ended June 30, 2003 and have not otherwise concluded that any of these policies have become out of date or otherwise misleading.
Factors That May Affect Future Operating Results
Risks Related to Pharmacyclics
We operate in an environment that involves a number of risks and uncertainties. The risks and uncertainties described below are the material risks and uncertainties of which we are currently aware. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition would suffer. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward- looking statements. All forward-looking statements are based on information currently available to Pharmacyclics and we assume no obligation to update any such forward-looking statements.
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 to conduct 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 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 due to 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 for many reasons, including, as is the case with our first Phase 3 trial of Xcytrin, failure to meet our primary endpoints. Even if we are able to submit a new drug application, the U.S. Food and Drug Administration (FDA) may refuse to file our application or may not approve our application in a timely manner or at all.
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 from clinical trials we are conducting is susceptible to varying interpretations which could delay, limit or prevent regulatory approval. A number of companies in the pharmaceutical industry 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. In this regard, our initial Phase 3 trial of Xcytrin failed to meet its co-primary endpoints even though our Phase 1b/2 trial showed a benefit for treated patients. The outcome of the current Phase 3 trial may delay or prevent the regulatory clearance of Xcytrin as a treatment for brain metastases in patients with lung cancer and may result in material harm to our business. The outcomes of our other ongoing Phase 1 and Phase 2 trials with Xcytrin for additional cancer indications may not provide sufficient data supporting advancement of the development of Xcytrin for these additional cancer indications and also may result in material harm to our business.
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 December 31, 2003, had an accumulated deficit of approximately $201.2 million. We expect to continue to incur substantial additional operating losses until the commercialization of our products generates sufficient revenues to cover our expenses. 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 proposed products. Our lead product, Xcytrin, may receive regulatory clearance on a delayed basis or may not receive such clearance at all, which would have a material impact on our ability to become profitable. To date, we have not generated revenue from the commercial sale of our products.
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, and the 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. Data from our completed initial Phase 3 clinical trial of Xcytrin was not sufficient to obtain regulatory clearance. Any approval of Xcytrin will require at least one additional clinical trial, including the Phase 3 trial we are currently conducting. Conducting additional trials will cause significant delays in approval and consume additional resources and may not be sufficient to obtain regulatory clearance.
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. The Fast Track designation that we have received for our Phase 3 trial of Xcytrin may not actually lead to a faster development, regulatory review, or approval process. 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.
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:
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. Failure of our suppliers to follow current Good Manufacturing Practices or other regulatory requirements may lead to significant delays in the availability of products for commercial or clinical use and could subject us to fines, injunctions and civil penalties. We also may be subject to delays in commercializing our products for Antrin phototherapy due to delays in approvals of the third-party light sources required for this product.
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:
Physicians, patients, payors or the medical community in general may be unwilling to accept, purchase, 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 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 by our products, 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 by Schering AG that relate to pharmaceutical formulations and methods for enhancing magnetic resonance imaging. Even though we have obtained the opinion of outside patent counsel that our magnetic resonance imaging detectable compounds do not infringe the claims of such patents, 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 of Schering AG's 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. 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 the like 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.
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, clinical development, manufacturing, marketing and distribution of our products. We rely on contract clinical research organizations (CROs) for various aspects of our clinical development activities including clinical trial monitoring, data collection and data management. Any failure of such CROs to successfully accomplish these activities, in a timely manner, could have a material adverse effect on our ability to complete clinical development of our products.
We have no expertise in the development of light sources and associated light delivery devices required for our Antrin phototherapy product under development. Successful development, manufacturing, approval and distribution of this product will require third party participation for the required light sources, associated light delivery devices and other equipment. Failure to develop 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 Antrin product 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.
We have limited manufacturing experience and thus rely heavily upon contract manufacturers
We have no manufacturing facilities and we currently rely on third parties for manufacturing and storage activities related to all of our products in development. Our manufacturing strategy presents the following risks:
Any of these factors could delay clinical trials or commercialization of our products under development and entail higher costs.
We lack marketing and sales experience
We currently have limited marketing, sales and distribution experience. 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 those of such other companies.
We may need additional financing 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 expend 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. In this regard, we may require additional funds to complete our current Phase 3 trial with Xcytrin for the potential treatment of brain metastases in lung cancer patients.
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 fiscal year 2005. Our actual capital requirements will depend on many factors, including:
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 or subject us to restrictive covenants. 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, sales, 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 effects than our products. 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. Our competitors may price their products below ours, may receive better reimbursement or may have products that are more cost effective than ours.
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, biologics 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.
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:
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, the impact of the Medicare Prescription Drug Improvement and Modernization Act of 2003 on the use and reimbursement of pharmaceuticals may result in a decrease in the reimbursement levels for oncology drugs. Given this and other 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.
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 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to interest rate risk relates primarily to our investment portfolio. Fixed rate securities may have their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have declined in market value due to changes in interest rates. The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in debt instruments of the U.S. Government and its agencies and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we maintain investments at an average maturity of generally less than two years. Assuming a hypothetical increase in interest rates of one percentage point, the fair value of our total investment portfolio as of December 31, 2003 would have declined by $371,000.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures: As required by rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the second fiscal quarter of 2004, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal controls over financial reporting: There have been no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred during the second fiscal quarter of 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Not Applicable.
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On December 11, 2003, at the Company's 2003 Annual Meeting of Stockholders, the following matters were submitted to and voted on by stockholders and were adopted:
The results of the vote are as follows:
|
Total Vote for Each Director |
Total Vote Withheld from Each Director |
|||
|
Miles R. Gilburne |
13,507,285 |
1,239,384 |
||
|
Loretta M. Itri, M.D. |
13,504,635 |
1,242,034 |
||
|
Richard M. Levy, Ph.D. |
12,978,598 |
1,768,071 |
||
|
Richard A. Miller, M.D. |
13,771,460 |
975,209 |
||
|
William R. Rohn |
12,981,998 |
1,764,671 |
||
|
Craig C. Taylor |
13,507,285 |
1,239,384 |
The results of the vote are as follows:
|
For |
Against |
Abstain |
|
7,654,096 |
1,414,544 |
436,595 |
The results of the vote are as follows:
|
For |
Against |
Abstain |
|
14,451,921 |
286,193 |
8,555 |
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
|
31.1 |
Rule 13a-14(a) / 15d-14(a) Certification of CEO |
|
31.2 |
Rule 13a-14(a) / 15d-14(a) Certification of CFO |
|
32.1 |
Section 1350 Certifications of CEO and CFO |
On October 30, 2003, we filed a Current Report on Form 8-K, under Item 12, announcing our financial results for the fiscal quarter ended September 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PHARMACYCLICS, INC. |
| (Registrant) |
Dated: February 4, 2004
| By: | /s/ RICHARD A. MILLER, M.D. |
|
| |
| Richard A. Miller, M.D. | |
| President and Chief Executive Officer |
Dated: February 4, 2004
| By: | /s/ LEIV LEA |
|
| |
| Leiv Lea | |
|
Vice President, Finance and
Administration and Chief Financial Officer and Secretary |
|
Exhibit No. |
Exhibit Description |
|
31.1 |
Rule 13a-14(a) / 15d-14(a) Certification of CEO |
|
31.2 |
Rule 13a-14(a) / 15d-14(a) Certification of CFO |
|
32.1 |
Section 1350 Certifications of CEO and CFO |