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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997,
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 0-19825
SCICLONE PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3116852
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
901 MARINERS ISLAND BOULEVARD,
SAN MATEO, CALIFORNIA 94404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(650) 358-3456
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $72,992,432 as of March 27, 1998, based upon
the closing sale price of the Registrant's Common Stock on The Nasdaq National
Market on such date. Shares of Common Stock held by each executive officer and
director have been excluded from the calculation because such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 27, 1998, there were 17,348,108 shares of the Registrant's
Common Stock outstanding.
Part III incorporates by reference from the definitive proxy statement for
the registrant's 1997 Annual Meeting of Shareholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this Form.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Annual Report on Form 10-K for SciClone Pharmaceuticals, Inc.
("SciClone" or the "Company") contains forward-looking statements concerning,
among other things, the Company's expected future revenues, operations and
expenditures, estimates of the potential markets for the Company's products,
assessments of competitors and potential competitors, projected timetables for
the preclinical and clinical development, regulatory approval and market
introduction of the Company's products and the Company's expectations regarding
future financing and corporate partnering arrangements. These forward-looking
statements represent the expectations of SciClone's management as of the filing
date of this Form 10-K. The Company's actual results could differ materially
from those anticipated by the forward-looking statements due to a number of
factors, including (i) the Company's current reliance on a single product,
ZADAXIN(R) thymosin alpha 1, for its revenues; (ii) the absence of regulatory
approval for ZADAXIN in significant markets; (iii) risks associated with the
manufacture and supply of ZADAXIN; (iv) the Company's ability to complete
successfully preclinical and clinical development and obtain timely regulatory
approval and patent and other proprietary rights protection for its products;
(v) decisions and timing of decisions made by the U.S. Food and Drug
Administration and other agencies regarding the indications for which the
Company's products may be approved; (vi) market acceptance of the Company's
products; (vii) the Company's ability to obtain reimbursement for its products
from third-party payers, where appropriate; (viii) the accuracy of the Company's
information concerning the products and resources of competitors and potential
competitors; and the risks and uncertainties described in Part II under the
captions "Factors That May Affect Future Operating Results" -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
INTRODUCTION
SciClone Pharmaceuticals, Inc. ("SciClone" or the "Company") is an
international biopharmaceutical company that acquires, develops, and
commercializes specialist-oriented proprietary drugs for treating chronic and
life-threatening diseases, including hepatitis B, hepatitis C, cancer, immune
system disorders and cystic fibrosis. SciClone has two drugs in clinical
development, ZADAXIN(R) thymosin alpha 1 and CPX, and other drug candidates in
preclinical development.
ZADAXIN, an immunomodulator (i.e., an immune system regulator), is the
Company's lead drug, targeting hepatitis B, hepatitis C, cancer, vaccine
enhancement and certain immune system disorders such as DiGeorge Anomaly.
ZADAXIN is approved and marketed (over $2.2 million in 1997 sales) in the
People's Republic of China, the Philippines and Singapore for treatment of
hepatitis B, one of the most common chronic infectious diseases in the world. In
February 1998, ZADAXIN was approved in Argentina, a leading market in Latin
America, for use as an influenza vaccine adjuvant and in Peru for treatment of
hepatitis B. In March 1998, ZADAXIN was approved in Kuwait for the treatment of
hepatitis B, the Company's sixth ZADAXIN market approval. ZADAXIN has now been
approved in each of the three primary regions SciClone has targeted for
hepatitis B sales -- Asia, Latin America and the Middle East. Collectively,
these regions represent most of the potential hepatitis B markets worldwide. The
Company has filed for approval to market ZADAXIN in 16 additional countries in
Asia, Latin America and the Middle East. SciClone has worldwide marketing,
development and manufacturing rights to ZADAXIN, except in Japan, Italy, Spain
and Portugal, where the Company's rights have been sublicensed.
In the U.S. and Europe, the Company is developing combination ZADAXIN plus
interferon for the treatment of hepatitis C, a worldwide epidemic affecting over
170 million worldwide including ten million people in the U.S., Europe and
Japan, the world's largest pharmaceutical markets. Clinical data demonstrate
that combination ZADAXIN plus interferon could be a significant therapeutic
advance in the fight against hepatitis C. Interferon, the only approved therapy
to treat hepatitis C, leads to a sustained response in only 5% to 20% of
patients and causes unpleasant side effects. The Company is pursuing a corporate
partnering
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arrangement for the pivotal phase 3 development of combination ZADAXIN plus
interferon for hepatitis C in the U.S. and Europe.
In Japan, the world's leading market for viral hepatitis therapies, the
Company has licensed exclusive development and marketing rights to ZADAXIN to
Schering-Plough K.K. ("SPKK"), the Japanese subsidiary of Schering-Plough
Corporation, a leading marketer of viral hepatitis therapies worldwide. The
Japanese Ministry of Public Health has approved SPKK's application to commence a
Japanese pivotal phase 3 study of ZADAXIN monotherapy for hepatitis B. In Japan,
interferon monotherapy, including SPKK's interferon, is the established
first-line therapy for hepatitis B. In November 1997, SPKK commenced a phase 2
study of ZADAXIN monotherapy for hepatitis C, as required in Japan for approval
of the drug for the treatment of hepatitis C. SPKK is also in the process of
satisfying Japanese requirements to begin a clinical program to study the use of
its interferon plus ZADAXIN as a combination therapy for hepatitis C.
CPX is SciClone's second drug in clinical development. CPX is an orally
administered protein-repair therapy initially developed by the U.S. National
Institutes of Health ("NIH") as a potential treatment for cystic fibrosis
("CF"). SciClone acquired an exclusive license to CPX from the NIH. CF is caused
by mutations in the gene that encodes the cystic fibrosis transmembrane
conductance regulator ("CFTR") protein. More than 70% of the CF patients have
the delta F508 mutation, the most common cause of CF. In October 1997, Harvey
Pollard, M.D., Ph.D, of the Uniformed Services University of the Health Sciences
and formerly of the NIH, presented breakthrough new preclinical data
demonstrating that CPX corrects the two key molecular defects causing CF --
impaired chloride ion transport and abnormal CFTR trafficking. These preclinical
data indicate that CPX is the only drug in clinical development with the
potential to correct the two key molecular defects in CF patients. The Company
obtained orphan drug status for CPX from the United States Food and Drug
Administration ("FDA") in April 1997. In October 1997, the FDA awarded SciClone
a $100,000 Orphan Drug Grant for phase 1 development of CPX as a treatment for
CF. The Company recently completed dosing thirty-six (36) patients in its
multicenter, single ascending oral dose phase 1 clinical study in the U.S.
SciClone plans to start a multicenter, multiple-ascending oral dose phase 2
clinical trial in the U.S. in the third quarter of 1998. The Cystic Fibrosis
Foundation ("CF Foundation") provided substantial financial support for early
NIH research of CPX. The CF Foundation also supported SciClone in its
Investigational New Drug ("IND") filing with the FDA to gain approval to begin
the testing of CPX directly in CF patients rather than the standard process of
testing first in healthy volunteers.
The Company has other drug candidates in early preclinical development. One
of these drug candidates is in preclinical studies at the NIH and U.S. National
Cancer Institute for epilepsy and multiple drug resistance in cancer,
respectively. The Company plans to continue to evaluate activity of its
preclinical drug candidates in 1998.
Internationally, SciClone has entered into ZADAXIN distribution
arrangements covering 31 countries outside the U.S., Europe and Japan. The
Company intends to out-license its products where a collaborative arrangement
will materially enhance the prospects for a drug's commercial success in
licensed markets, such as the Company's license with SPKK for exclusive rights
to develop and market ZADAXIN in Japan and its arrangements with its ZADAXIN
distributors. The Company is currently pursuing a corporate partnering
arrangement in the U.S. and Europe for pivotal phase 3 development of
combination ZADAXIN plus interferon for hepatitis C. The Company intends to
source ZADAXIN, CPX and any future products through contract manufacturing and
supply agreements. The Company has entered into separate supply agreements in
the U.S. and Europe for the supply of bulk and finished product thymosin alpha
1. The Company currently contracts with a major U.S. pharmaceutical company for
the supply of bulk CPX and another U.S. pharmaceutical manufacturer for finished
product CPX.
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STRATEGY
SciClone's corporate objective is to become a leader in the acquisition,
development and commercialization of specialist-oriented drugs for treating
chronic and life threatening diseases, such as hepatitis B, hepatitis C, cancer,
immune system disorders and cystic fibrosis. The Company's strategy to achieve
this objective is to apply its international drug development, regulatory
affairs and sales and marketing expertise as follows:
Increase ZADAXIN Sales. In 1997, SciClone's lead product, ZADAXIN, achieved
over $2.2 million in first full-year commercial sales for hepatitis B. In 1998,
the Company intends to expand its international sales and marketing capabilities
and increase sales of ZADAXIN. Management forecasts solid growth potential for
ZADAXIN in the Company's existing and anticipated markets.
In addition to its global sales and marketing capabilities, SciClone is
equipped to manage clinical development and regulatory submissions worldwide.
The Company plans to continue to expand these capabilities aggressively to
commercialize ZADAXIN and new products in markets around the world. Management
believes that this strategy will enable the Company to penetrate and perform in
markets worldwide in an accelerated and profitable manner.
Expand Product Pipeline. The Company focuses its resources on drug
development and commercialization, not early drug discovery. SciClone evaluates
new compounds for acquisition or in-licensing from various sources, including
government agencies, universities, and pharmaceutical and biotechnology
companies. The Company seeks development stage compounds that are
specialist-oriented, novel, patented or patentable and possess excellent safety
profiles. Management believes that this will enable the Company to lower its
expected time-to-market and development risk profile relative to competitors
engaged in both drug discovery and drug development.
Leverage Key Third-Party Resources. The Company does not own or maintain
any manufacturing facilities for finished products or raw materials. Instead,
SciClone's manufacturing and quality assurance teams out-source these functions
to third parties that supply bulk product and finished goods according to
current Good Manufacturing Practices ("cGMP"). Management believes that this
strategy will lower the Company's capital requirements and enable the Company to
concentrate its resources on drug development and commercialization activities.
Enhance Product Portfolio Patent Protection. SciClone pursues a policy of
obtaining patent protection both in the U.S. and in selected foreign countries
for subject matter considered patentable and important to its business. SciClone
regularly reviews and seeks to broaden the protection of its intellectual
property and trade secrets by actively developing and expanding its patent
filings for composition of matter, method of use and process patents. Management
believes this strategy will enable the Company to further protect the increased
use of its product portfolio.
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PRODUCT DEVELOPMENT ACTIVITIES
The following table summarizes the Company's current significant product
development activities:
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INDICATION/
PRODUCT LOCATION APPLICATION STATUS
------------------ ------------------ ----------------- -----------------
ZADAXIN People's Republic Hepatitis B and Marketed
thymosin alpha 1 of China viral vaccine
adjuvant
Philippines, Hepatitis B Marketed
Singapore
Kuwait, Hepatitis B Approved Q1 1998
Peru
Argentina Influenza vaccine Approved Q1 1998
adjuvant
Brazil, Brunei, Hepatitis B Market
Chile, Cyprus Applications
Egypt, Hong Kong, Filed
India, Indonesia,
Lebanon, Malaysia,
Mexico, Myanmar,
Nepal, Pakistan,
Turkey, Venezuela
Taiwan Hepatitis B Completed phase 3
Japan(3) Hepatitis B Completed phase 2
U.S./Europe Hepatitis C Phase 3(1)
Japan(2) Hepatitis C Phase 2
CPX U.S. Cystic Fibrosis Phase 1(3)
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(1) A successful, non-pivotal U.S. phase 3 study has been completed. Subsequent
meetings have been held with the FDA, the United Kingdom Medicines Control
Agency, the Netherlands Medicines Evaluation Board and the Denmark Medicines
Agency. From these meetings, a protocol for pivotal phase 3 trials has been
proposed and refined in a workshop with leading international hepatologists.
(2) Clinical trial conducted by SPKK.
(3) The Company recently completed dosing thirty-six (36) patients in its
multi-center, multiple ascending oral dose phase 1 clinical study in the
U.S. and is preparing to start its phase 2a study in early Q3.
ZADAXIN THYMOSIN ALPHA 1 (THYMALFASIN) FOR HEPATITIS B AND HEPATITIS C
ZADAXIN thymosin alpha 1 for injection is a naturally occurring 28 amino
acid peptide that is produced by chemical synthesis for therapeutic use.
ZADAXIN's common chemical name is thymosin alpha 1. Thymosin alpha 1's generic
name in the U.S. is thymalfasin. The Company believes that ZADAXIN has
significant immunomodulatory properties. Data demonstrate that ZADAXIN enhances
multiple immune response parameters in a substantial number of patients. The
drug appears to act on cells of the immune system that have been suppressed by
infection or other causes. Additionally, ZADAXIN does not produce the side
effects, particularly fever, chills, fatigue, nausea and depression, associated
with other immunomodulatory agents, such as interferon. No significant ZADAXIN
related side effects have been reported. Based on more than 70 clinical trials
conducted to date, the Company believes that ZADAXIN, either alone or in
combination with other therapies, especially interferon, may have application
across a broad spectrum of diseases, including hepatitis B, hepatitis C, cancer
and immune system diseases such as DiGeorge Anomaly.
Pursuant to its 1994 license agreement with Alpha 1 Biomedicals ("A1B"),
the Company obtained worldwide marketing, development and manufacturing rights
to thymosin alpha 1, with the exception of Italy, Spain and Portugal. In April
1997, SciClone entered into an agreement with A1B to administer the sublicense
activities of A1B's licensee for Italy, Spain and Portugal. Under this 1997
agreement, the Company also
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acquired control of A1B's patent portfolio for thymosin alpha 1. In December
1997, SciClone and A1B entered into an Asset Purchase Agreement (the
"Agreement") pursuant to which the Company will acquire A1B's worldwide rights
to thymosin alpha 1, including rights A1B licensed from Hoffmann-LaRoche, Inc.
and F. Hoffmann-LaRoche AG. (collectively, "Roche"), and eliminated the
Company's and the Company's current and future sublicensee's royalty obligations
to A1B with respect to future sales of thymosin alpha 1. Pursuant to the
Agreement, the Company agreed to issue up to 600,000 shares of common stock and
loan A1B up to an aggregate amount of $280,000 for the assets described above.
The Agreement is subject to approval by A1B's stockholders at A1B's 1998 Annual
Meeting of Stockholders and the Company's receipt of certain consents from
Roche..
HEPATITIS B
Hepatitis B is one of the most common infectious diseases in the world. It
is transmitted through blood transfusions, contaminated needles, sexual contact
and from mother-to-child. In addition, a large number of people are infected by
unknown means. The World Health Organization estimates that approximately 350
million individuals worldwide or 5% of the world's population are carriers of
the virus. Among carriers of the hepatitis B virus, unfortunately most are
unaware that they are infected or have minimal disease with no clinically
evident symptoms. However, carriers of the hepatitis B virus have a 200-fold
increased chance of developing primary liver cancer, the most common cancer in
the world, and a significant number develop cirrhosis of the liver.
ZADAXIN has been approved in five countries as a safe and effective
treatment for hepatitis B. When used alone or in combination with other
immunodulatory agents such as interferon ZADAXIN has not caused any significant
drug related side effects.
META ANALYSIS AND RANDOMIZED AND CONTROLLED ZADAXIN HEPATITIS B TRIALS
Meta analysis is the statistical pooling of data derived from two or more
clinical trials. By using data from two or more studies, random effects are
reduced and precision of estimates will increase as sample size increases. A
valuable use of meta analysis is to assess the efficacy of a drug in the
treatment of a particular disease across many studies. The Company commissioned
a meta analysis of hepatitis B randomized and controlled trials of ZADAXIN. The
meta analysis was performed by MetaWorks, Inc. of Boston, Massachusetts, and
included AlB's two U.S. hepatitis B trials and the Company's Taiwan hepatitis B
trial. A statistically significant benefit (p=0.04) was demonstrated in the meta
analysis with a ZADAXIN overall response rate of 36% compared to 19% for the
control group. The results also showed no indications of drug toxicity and no
significant drug related side effects in any of the trials.
Interferon is an immunomodulatory protein that is produced commercially
using recombinant DNA technology and other techniques. Interferon is approved
for treatment of hepatitis B in the United States, Europe, Japan as well as in
numerous countries in Asia, Latin America and the Middle East. Other agents
under development, but not yet approved anywhere for the treatment of hepatitis
B, include nucleoside analogs such as lamivudine and famciclovir. Unlike
ZADAXIN, data reported in the October 1997 supplement to Hepatology show that
lamivudine may be associated with fatal rebound viral hepatitis. Nucleoside
analogs may suppress viral replication but seldom eradicate the virus. Viral
replication resumes when nucleoside analogs are discontinued.
Set forth below is more detailed information regarding the commercial and
clinical development status of ZADAXIN as a therapy for hepatitis B in certain
key markets.
THE PEOPLE'S REPUBLIC OF CHINA. In January 1997, the Company launched
ZADAXIN for the treatment of hepatitis B in The People's Republic of China. This
product launch marked the first introduction of ZADAXIN by the Company anywhere
in the world and the first introduction of an imported finished pharmaceutical
for treatment of hepatitis B in this market since the interferons. The Chinese
Ministry of Public Health (MOPH) approval was based on a regulatory package
assembled from U.S. and European data in addition to a locally required
controlled clinical trial to evaluate the efficacy of ZADAXIN for patients
suffering from hepatitis B. Sales and distribution of ZADAXIN in The People's
Republic of China are
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managed by SciClone Pharmaceuticals International, Ltd. (SPIL) based in Hong
Kong. SPIL focused its 1997 sales efforts on the following three population
centers: the southern province of Guangdong, the capital city of Beijing, and
Shanghai. In these three areas four local distribution teams are used to sell
and place ZADAXIN on hospital formularies of Chinese city and provincial
hospitals. The Company expects to expand into additional major population
centers in the Chinese market in 1998.
JAPAN. In Japan, the world's largest market for viral hepatitis therapies,
the Company has licensed exclusive ZADAXIN development and marketing rights to
SPKK. SPKK has completed a phase 1 single and multiple dose safety and
pharmacokinetics trial. SPKK has successfully completed a dose ranging phase 2
safety and efficacy trial involving approximately 60 patients. SPKK recently
received government approval to commence a 300-patient pivotal phase 3 study in
hepatitis B.
TAIWAN. The Company has submitted the Plant Master File required by
Taiwanese law to allow the Company to file for registration in Taiwan. The
Company expects to file for registration in Taiwan in the second quarter of
1998. The Company sponsored a multicenter, randomized and controlled ZADAXIN
phase 3 hepatitis B trial in Taiwan. The audited results of this trial showed
37% of patients responded to ZADAXIN monotherapy, compared to 25% for the
control patients. The Company believes this trial produced the best results of
any randomized and controlled hepatitis B trial for any therapy in Taiwan. The
results also showed no significant ZADAXIN related side effects, consistent with
all prior ZADAXIN studies.
ASIA, LATIN AMERICA AND THE MIDDLE EAST. ZADAXIN has been approved in each
of the three primary regions SciClone has targeted for hepatitis B
sales -- Asia, Latin America and the Middle East. Collectively, these regions
represent most of the potential hepatitis B markets worldwide. In February 1998,
ZADAXIN was approved in Argentina, a leading market in Latin America, for use as
a viral vaccine adjuvant and in Peru for treatment of hepatitis B. In March
1998, ZADAXIN was approved in Kuwait, the Company's first market in the Middle
East, for the treatment of hepatitis B. SciClone has 16 ZADAXIN NDAs pending in
Asia, Latin America and the Middle East and expects to file additional NDAs in
these territories in 1998.
HEPATITIS C
Hepatitis C is a worldwide epidemic, infecting over 170 million people
worldwide, including approximately 10 million in the U.S., Europe and Japan, the
world's leading pharmaceutical markets. According to the Centers for Disease
Control and Prevention, approximately 4 million Americans are infected with the
hepatitis C virus. The American Liver Foundation (ALF) estimates that 170,000
new hepatitis C cases are reported each year in the U.S. and that up to 10,000
people in the U.S. die as a result of complications of hepatitis C each year.
Without improved prevention and treatment, the ALF estimates that the death rate
associated with hepatitis C will triple in the next 20 years. The prevalence of
hepatitis C in Europe is similar to that in the U.S., approximately 4 million.
An article in the Annals of Internal Medicine indicates that in Japan there are
more than l million cases of hepatitis C. Hepatitis C can be transmitted
wherever blood to blood contact occurs, especially by blood transfusions and
contaminated needles. The mode of transmission in many cases is unknown.
Approximately 10% to 20% of hepatitis C carriers may develop cirrhosis, and up
to 40% of these individuals may develop liver cancer. Hepatitis C, accompanied
by cirrhosis and liver failure, is the leading cause of liver transplantation in
the U.S. Currently, interferon is the only therapy approved in major markets for
hepatitis C. There is no approved vaccine to prevent hepatitis C.
POOLED AND META ANALYSES OF HEPATITIS C TRIALS
Although interferon has been shown to be safe and effective in the
treatment of hepatitis C, dissatisfaction with the low sustained response rate
(5% to 20%) to interferon monotherapy has led to the study of interferon
combination therapies. Clinical data demonstrate that combination ZADAXIN plus
interferon could be a significant therapeutic advance in the fight against
hepatitis C. Three studies, published as full articles or abstracts, describe
the response in patients with hepatitis C to combination ZADAXIN plus
interferon. The strength of pooled analysis and meta analysis techniques was
applied to the three studies. Patients were treated for 6 to 12 months with
combination ZADAXIN plus interferon and followed for 6 months after treatment.
Interferon-treated patients from the randomized controlled trials and historical
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controls from an open label trial were used as controls. A total of 121 patients
(67 ZADAXIN plus interferon combination therapy and 54 interferon monotherapy)
were studied.
END OF TREATMENT BIOCHEMICAL AND VIROLOGICAL RESPONSE
Pooled intent-to-treat analysis revealed an end of treatment biochemical
(ALT, a liver enzyme) response of 44.7% in the combination ZADAXIN plus
interferon group compared to 22.2% in the interferon monotherapy group
(p = 0.0096). Meta analysis demonstrated an end of treatment biochemical
response odds ratio and 95% confidence interval of greater than 1 indicating
that combination ZADAXIN plus interferon was significantly superior to
interferon monotherapy. Meta analysis also showed an end of treatment
virological response odds ratio and 95% confidence interval of indicating that
combination ZADAXIN plus interferon was significantly superior to interferon
monotherapy.
SUSTAINED BIOCHEMICAL AND VIROLIGICAL RESPONSE
Pooled intent-to-treat analysis revealed sustained biochemical (ALT)
response of 22.3% in the combination ZADAXIN plus interferon group compared to
9.26% in the interferon monotherapy group (p = 0.1). Meta analysis demonstrated
a sustained response odds ratio of greater than 1 and a 95% confidence interval
slightly overlaping 1 indicating that combination ZADAXIN plus interferon was
numerically superior to interferon monotherapy. These two sustained biochemical
response analyses demonstrate a statistical trend in favor of the combination
ZADAXIN plus interferon group and suggest that there is only a small chance that
this difference occurred by chance alone. Meta analysis also showed sustained
virological response odds ratio and 95% confidence interval of greater than 1
indicating that combination ZADAXIN plus interferon was significantly superior
to interferon monotherapy.
There were no increased or new side effects in the combination ZADAXIN plus
interferon group compared to patients treated with interferon monotherapy.
Set forth below is more detailed information regarding the development
status of combination ZADAXIN plus interferon for treatment of hepatitis C, an
emerging epidemic worldwide.
U.S. AND EUROPE. In the U.S. and Europe, the Company is developing
combination ZADAXIN plus interferon for hepatitis C. After meeting with the FDA
and regulatory authorities in the United Kingdom, the Netherlands and Denmark in
the first half of 1997, the Company prepared a protocol outline for its pivotal
phase 3 hepatitis C program. In late 1997, this protocol outline was refined by
over 15 leading hepatologists. The Company is currently pursuing a corporate
partnering arrangement for pivotal phase 3 development of combination ZADAXIN
plus interferon for hepatitis C in the U.S. and Europe. Adrian Di Bisceglie,
M.D., Associate Chairman of Medicine, Professor of Internal Medicine at Saint
Louis University and Medical Director of the American Liver Foundation, has
agreed to be the principal investigator for the Company's planned pivotal phase
3 hepatitis C program.
JAPAN. In Japan, SciClone has licensed exclusive development and marketing
rights to ZADAXIN to SPKK. In November 1997, SPKK commenced a phase 2 study of
ZADAXIN as a monotherapy for hepatitis C, as required for Japanese approval of
ZADAXIN for the treatment of hepatitis C. SPKK also is working to satisfy
requirements to begin a clinical program to study the use of its interferon plus
ZADAXIN as a combination therapy for hepatitis C.
ASIA, LATIN AMERICA, MIDDLE EAST. The Company is working to expand its
current approvals and pending NDAs to include use of combination ZADAXIN plus
interferon to treat hepatitis C.
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CPX FOR CYSTIC FIBROSIS
CYSTIC FIBROSIS.
Cystic fibrosis (CF) is the most common fatal genetic disorder in the U.S.
today. Currently, there is no cure for the disease. CF affects approximately
70,000 children and young adults worldwide, including approximately 30,000 in
the U.S. and approximately 30,000 in Europe. In the U.S., CF occurs in
approximately one of every 3,300 live births and approximately 1,000 new cases
are diagnosed each year, usually by the age of three. The median age of survival
for a person with CF is 31 years. CF is caused by a mutated gene that produces
an abnormal CFTR protein. This basic genetic defect in CF cells results in the
faulty transport of chloride and sodium within epithelial cells (which line
organs such as the lungs and pancreas) to the cells' outer surfaces. This faulty
transport causes the body to produce abnormally thick, sticky mucus which clogs
the lungs and leads to fatal infections. This mucus also obstructs the pancreas,
preventing enzymes from reaching the intestines to digest food. Most CF patients
die from lung disease. One in 29 Americans, more than 10 million people, is an
unknowing, symptomless carrier of the defective gene. A child must inherit two
defective copies of the CF gene, one from each parent, to have CF. Each time two
carriers conceive a child, there is a 25% chance that the child will have CF, a
50% chance that the child will be a carrier, and a 25% chance that the child
will be a non-carrier.
Currently, approved CF treatments only address the symptoms of the disease
and not the two underlying molecular defects causing CF in most patients --
impaired chloride ion transport and abnormal CFTR trafficking. The treatment of
CF depends upon the stage of the disease and which organs are involved. One
means of treatment, postural drainage (also called chest physical therapy),
requires vigorous percussion (by using cupped hands) on the back and chest to
dislodge the thick, sticky mucus from the lungs. Antibiotics are also used to
treat lung infections and are administered intravenously, orally and/or in
medicated vapors which are inhaled to open up clogged airways. In addition,
mucolytic (mucus-thinning) drugs are used to thin the viscosity of the mucus.
When CF affects the digestive system, the body does not absorb enough nutrients.
Therefore, people with CF may need to eat an enriched diet and take both
replacement vitamins and enzymes. The annual average cost of care of a CF
patient has been estimated by the CF Foundation to be approximately $50,000 per
patient.
CPX
CPX is an orally available xanthine derivative that is produced for
therapeutic use through chemical synthesis. CPX targets the underlying
biochemical abnormality at the root cause of CF, the malfunctioning CFTR protein
that results in the buildup of thick, sticky mucus. CPX use in CF was discovered
by Harvey Pollard, M.D., Ph.D., and Kenneth Jacobson, Ph.D., while at the
National Institute of Diabetes and Digestive and Kidney Disorders (NIDDK) of the
NIH. In October 1997, Dr. Pollard presented new breakthrough preclinical data
demonstrating that CPX corrects the two key molecular defects causing CF --
impaired chloride ion transport and abnormal CFTR trafficking. Trafficking
refers to the ability of the CFTR protein to traverse the cell cytoplasm and
reach the proper location on the cell membrane. These preclinical data indicate
that CPX is the only drug in clinical development with the potential to correct
the two molecular defects in CF patients.
Consistent with the Company's strategy to expand its product portfolio,
SciClone licensed CPX from the NIH in April 1996. In January 1997, the Company's
IND was approved by the FDA to begin clinical studies of CPX in the U.S.
directly in CF patients rather than healthy volunteers. The CF Foundation
provided substantial financial support in the NIH's early CPX research and has
supported SciClone in its IND filing with the FDA to gain approval to begin
testing of CPX directly in patients. In April 1997, the Company obtained orphan
drug status for CPX from the FDA. In May 1997, the Company initiated a
multicenter phase 1 trial of CPX directly in CF patients. In October 1997, the
FDA awarded SciClone a $100,000 Orphan Drug Grant for phase 1 development of CPX
as a treatment for CF.
U.S. MULTICENTER PHASE 1 CPX TRIAL IN CF PATIENTS
The Company recently completed dosing thirty-six (36) patients in its
multicenter phase 1 clinical study of CPX. The five participating CF centers
were: University of Washington and Children's Hospital CF Center in Seattle,
Washington; University of Iowa Hospitals and Clinics CF Center in Iowa City,
Iowa; The LeRoy
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Matthews CF Center, Rainbow Babies and Children's Hospital in Cleveland, Ohio;
The Emory University CF Center, Egleston Children's Hospital in Atlanta,
Georgia; and Stanford CF Center, and Lucille Packard Children's Hospital in Palo
Alto, California. The primary objectives of the study were to evaluate the
safety and pharmacokinetic profile of CPX. SciClone plans to start a
multicenter, multiple-ascending oral dose phase 2 clinical trial in the U.S. in
the third quarter of 1998.
MARKETING AND SALES
In general, the Company plans to market and sell its products in the U.S.
by establishing its own marketing and sales organization. Outside the U.S., the
Company markets and sells its products through collaborative or distribution
arrangements.
In the U.S. and Europe, ZADAXIN is in late-stage clinical development. In
the U.S. and Europe, SciClone is currently pursuing a corporate partnering
arrangement with a major pharmaceutical company for the pivotal phase 3
development and commercialization of combination ZADAXIN plus interferon for the
treatment of hepatitis C. In Japan, SciClone has licensed exclusive ZADAXIN
development and marketing rights to SPKK.
SciClone's marketing and sales strategy for ZADAXIN in Asia (excluding
Japan), Latin America and the Middle East, is to establish and expand its own
proprietary regional sales and marketing capabilities to commercialize ZADAXIN.
Consistent with this strategy, SciClone conducts medical education and clinical
trial programs targeting the leading specialists (e.g. hepatologists) and
teaching hospitals in each of its approved markets and markets in which the
Company anticipates ZADAXIN approval on a near term or medium term basis.
Distributors assist SciClone with local regulatory submissions to the ministries
of health and are responsible for the importation, inventory, physical
distribution and invoicing of ZADAXIN. SPIL is based in Hong Kong and has
international offices in Japan, Philippines, Singapore and Taiwan. SPIL also
manages a distribution center in Hong Kong which is the source for all ZADAXIN
exported to the Company's non-U.S. markets, except Japan. SciClone has
established distribution arrangements with local pharmaceutical distribution
companies covering 31 countries outside of the U.S., Europe and Japan. In its
three approved ZADAXIN markets in Asia (China, the Philippines and Singapore)
and its three recently approved markets in Latin America (Argentina and Peru)
and the Middle East (Kuwait), SciClone has established ZADAXIN marketing
programs including the positioning and pricing of the drug. Local ZADAXIN sales
in the Company's approved markets are or will be managed by SciClone employees
utilizing dedicated distributor employees nominated and supported by SciClone.
In the U.S., CPX is in clinical development. Currently, the Company plans
to market and sell CPX in the U.S. through the establishment of its own
marketing and sales organization. In other markets, the Company is evaluating
alternative plans for marketing and selling CPX.
MANUFACTURING
The Company has entered into contract manufacturing and supply agreements
to source ZADAXIN and CPX.
To supply markets in Asia (except Japan), Europe, Latin America and the
Middle East, SciClone has a European cGMP third-party source for bulk thymosin
alpha 1. This bulk supply is turned into finished sterile injectable product by
a separate European cGMP manufacturer. This finished product is shipped to Hong
Kong for labeling and redistribution. To supply the U.S. and Japanese markets,
the Company has contracted with a cGMP bulk manufacturer and a separate cGMP
finishing plant, both in the U.S. SciClone has established an inventory of
ZADAXIN sufficient to fulfill its expected commercial requirements in the near
term.
CPX is manufactured for SciClone in the U.S. by a major U.S. pharmaceutical
company and turned into finished form by a separate U.S. pharmaceutical
manufacturer.
The Company directly monitors production runs of its products and maintains
its own quality assurance audit program.
PATENTS AND PROPRIETARY RIGHTS
The Company is the exclusive licensee of composition of matter, process and
use patents and pending applications related to thymosin alpha 1, in the U.S.
and abroad.
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The Company is the exclusive licensee (with limited exceptions) of foreign
patents directed to the thymosin alpha 1 composition of matter which are owned
by F. Hoffmann-La Roche AG and the Board of Regents of the University of Texas
System. Many of these foreign composition of matter patents expired in 1997.
However, the Company is the exclusive licensee of a number of composition of
matter patents and applications directed to analogs and derivatives of thymosin
alpha 1 and has and is seeking numerous other proprietary rights for thymosin
alpha 1. The Company is the exclusive licensee and is directing prosecution of
use and process patents related to the method of making and therapeutic uses of
thymosin alpha 1. Consistent with its strategy, the Company also has filed and
is the owner of use patents for thymosin alpha 1.
Process patents owned by A1B and exclusively licensed to SciClone are
directed to methods of making thymosin alpha 1 and have issued in the U.S., a
majority of European countries, Hong Kong and Taiwan.
SciClone also has exclusively licensed patents and pending applications
covering numerous uses of thymosin alpha 1, including treatment of hepatitis C
which has issued in a majority of European countries, Taiwan, Australia and
South Africa. Patents under which SciClone is exclusively licensed have
additionally issued in the U.S. and Australia covering the use of thymosin alpha
1 to treat small cell and non-small cell lung cancer; in the U.S., South Africa
and Taiwan covering the use of thymosin alpha 1 to treat autoimmune hepatitis;
in Japan covering the treatment of hepatitis B using thymosin alpha 1; in South
Africa for the use of thymosin alpha 1 in treating hepatitis C in non-responders
to interferon treatment; in the U.S., Taiwan and South Africa covering the use
of thymosin alpha 1 to treat septic shock; in the U.S., Australia, Taiwan and
South Africa covering the treatment of infertility in mammalian males using
thymosin alpha 1; and in New Zealand covering the use of thymosin alpha 1 to
treat decompensated liver disease. Patents which SciClone owns have issued in
the U.S., Taiwan, Malaysia and South Africa covering the use of thymosin alpha 1
to treat hepatitis B carriers with minimal disease. Numerous corresponding
additional patent applications in other countries are pending for each of the
above named indications.
The Company is the exclusive licensee of an issued U.S. patent covering the
use of CPX to treat CF, as well as other pending domestic and foreign patent
applications covering CPX analogs and their use in treating CF.
In addition to patent protection, the Company intends to use other means to
protect its proprietary rights. Certain marketing exclusivity periods may be
available under regulatory provisions in certain countries including the U.S.,
European Union countries, Japan and Taiwan, which benefits the holder of the
first marketing approval for new chemical entities or their equivalents for a
given indication and the Company is pursuing such rights. Orphan drug protection
has been or will be sought where available granting additional market
exclusivity and the Company is pursuing such rights. The Company is the holder
of an orphan drug product designation for thymosin alpha 1 for hepatitis B and
DiGeorge Anomaly in the U.S. Recognition and protection of trademarks for
thymosin alpha 1 is being accomplished through a worldwide filing of trademark
applications for ZADAXIN and other trademarks which appear on the commercial
packaging of the product and are used in promotional literature. Copyrights for
the commercial packaging may provide SciClone with means to take advantage of
procedures available in certain countries to exclude counterfeit products or
genuine but unauthorized products from entering a particular country by parallel
importation. The Company has also implemented anti-counterfeiting measures on
commercial packaging and plans to register the packaging with customs
departments in countries where such procedures exist.
The Company is pursuing similar types of protection for CPX, where
applicable. The Company is the holder of an orphan drug product designation for
CPX to treat CF in the U.S.
The Company also relies upon trade secrets, which it seeks to protect, in
part, by confidentiality agreements with employees, consultants, suppliers and
licenses. There can be no assurance that these agreements will not be breached,
that SciClone would have adequate remedies for any breach or that SciClone's
trade secrets will not otherwise become known or independently developed by
competitors.
Upon the closing of the Asset Purchase Agreement with A1B, the Company will
acquire A1B's worldwide patent rights to thymosin alpha 1 and will eliminate
future royalties otherwise payable by it or its sublicensees to A1B. The Company
will become the worldwide exclusive licensee of F. Hoffmann-LaRoche
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AG and the Board of Regents of the University of Texas System and of the foreign
patents directed to the thymosin alpha 1 composition of matter. The Company also
will become the patentee (or owner) of all patents and applications worldwide
currently solely owned by A1B upon closing of the Asset Purchase Agreement.
These patents and applications are directed to processes of making the compound
and analogs and derivatives of the thymosin alpha 1 composition of matter.
Finally, on the closing, the Company will become a joint owner of all A1B's
patents and applications directed to therapeutic uses of thymosin alpha 1,
worldwide, where the Company is now the exclusive licensee of such patents and
applications. The Company has agreed in its Asset Purchase Agreement to issue up
to 600,000 shares of common stock and loan up to an aggregate amount of $280,000
to A1B in exchange for the assets described above.
SPONSORED RESEARCH AND DEVELOPMENT
For the years ended December 31, 1997, 1996 and 1995, the Company expended
$8,642,000, $9,904,000 and $10,386,000, respectively, in Company sponsored
research and development activities.
COMPETITION
Competition in the pharmaceutical field is intense and the Company expects
that competition will increase. The Company's competitors include major
pharmaceutical companies, biotechnology firms and universities and other
research institutions, both in the U.S. and abroad, that are actively engaged in
research and development of products in the therapeutic areas being pursued by
the Company. Many of these companies and institutions have substantially greater
financial, technical, manufacturing, marketing and human resource capabilities
than the Company and extensive experience in undertaking clinical testing and
obtaining regulatory approvals necessary to market drugs. Principal competitive
factors in the pharmaceutical field include efficacy, safety, and therapeutic
regimen. Where comparable products are marketed by other companies price is also
a competitive factor. The Company intends to use alpha interferon as a reference
drug in establishing pricing for ZADAXIN, although this may change over time.
GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. and foreign countries is
a significant factor in the manufacturing of products for the Company and the
marketing of products by the Company, in ongoing research and development
activities and in preclinical and clinical trials and testing related to the
Company's products. If the Company's products are manufactured, tested or sold
in the U.S., they will be regulated in accordance with the Federal Food, Drug
and Cosmetic Act ("FFD&C Act"). The standard process required by the FDA before
a pharmaceutical agent may be marketed in the U.S. includes (i) preclinical
laboratory and animal tests, (ii) submission to the FDA of an application for an
investigational new drug exemption ("IND"), which must become effective before
human clinical trials may commence, (iii) adequate well-controlled human
clinical trials to establish the safety and efficacy of the product for its
intended indication, (iv) submission to the FDA of a New Drug Application
("NDA") with respect to drugs, and (v) FDA approval of the NDA prior to any
commercial marketing, sale or shipment of the drug. In addition to obtaining FDA
approval for each product, each domestic manufacturing establishment must be
registered with the FDA. Domestic manufacturing establishments are subject to
inspections by the FDA and by other federal, state and local agencies and must
comply with current United States Good Manufacturing Practices ("cGMP").
In the U.S., clinical trial programs generally involve a three-phase
process. Typically, phase 1 pharmacology trials are conducted in a small number
of healthy volunteers to determine the toxicity, pharmacological effects,
metabolism and dose range requirements for the drug. Phase 2 trials are
conducted with groups of patients afflicted with the target disease to make a
preliminary determination of efficacy and optimal dosages and to provide
additional evidence of safety. In phase 3, large-scale, multi-center comparative
trials are conducted in patients afflicted with the target disease to provide
sufficient data for the statistical proof of efficacy and safety required by the
FDA and other regulatory agencies. The results of the preclinical and clinical
testing are submitted to the FDA in the form of an NDA or PLA for approval to
commence commercial sales. In responding to an NDA, the FDA may grant marketing
approval or deny the application if
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the FDA determines that the application does not satisfy its regulatory approval
criteria. In approving an NDA, the FDA may require further post-marketing
studies, referred to as phase 4 studies. When used in this Report in connection
with trials and filings in other countries, terms such as "phase 1," "phase 2,"
"phase 3," "phase 4" and "new drug application" refer to what the Company
believes are comparable trials and filings in such other countries.
Congress recently amended the FFD&C Act to facilitate and expedite the
development and review of drugs intended for treatment of serious or
life-threatening conditions that demonstrate the potential to address unmet
medical needs for such conditions. These provisions, which combine existing FDA
expedited approval and accelerated approval procedures, set forth a new
procedure for designation of a drug as a "fast track product." Concurrent with
or after an IND is filed, the sponsor may request designation as a fast track
product, which must be responded to by the FDA within 60 calendar days.
If designated fast track, the FDA must take such actions as are appropriate
to expedite the development and review of applications for these products.
Another advantage of fast track designation is that sponsors may submit, and the
FDA may commence review of, portions of an application before the complete
application is submitted, provided that a schedule for submission of the
completed application is provided. Sponsors of fast track products also may seek
and obtain FDA approval based upon a determination that the product has an
effect on a clinical endpoint or on a surrogate endpoint that is reasonably
likely to predict clinical benefit. Products approved on such basis are subject
to rigorous postmarket compliance requirements. For example, the sponsor may be
required to conduct post-approval studies to validate or confirm the endpoint
and/or may be required to submit copies of all promotional materials 30 days
prior to their dissemination. The FDA may withdraw approval of fast track
products if, for example, the sponsor fails to conduct required post-approval
studies or disseminates false or misleading promotional materials.
Even after initial FDA approval has been obtained, further studies,
including post-marketing studies, may be required to provide additional data on
safety and will be required to gain approval for the use of a product as a
treatment for clinical indications other than those for which the product was
initially tested. Also, the FDA will require post-marketing reporting to monitor
the side effects of the drug. Results of post-marketing programs may limit or
expand the further marketing of the products. Further, if there are any
modifications to the drug, including changes in indication, labeling, or a
change in manufacturing facility, an NDA supplement may be required to be
submitted to the FDA. Pursuant to recent amendments to the FFD&C Act, once
regulations are implemented, certain manufacturing changes will not require
submission of a supplement.
The orphan drug provisions of the FFD&C Act provide incentives to drug
manufacturers to develop and manufacture drugs for the treatment of rare
diseases, currently defined as diseases that affect fewer than 200,000
individuals in the U.S. or, for a disease that affects more than 200,000
individuals in the U.S., where the sponsor does not realistically anticipate its
product becoming profitable. Under these provisions, a manufacturer of a
designated orphan product can seek tax benefits, and the holder of the first FDA
approval of a designated orphan product will be granted a seven year period of
marketing exclusivity for that product for the orphan indication. While the
marketing exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same compound for the same indication, it would not
prevent other types of drugs from being approved for the same use. SciClone has
been granted orphan designation by the FDA for CPX for cystic fibrosis and for
thymosin alpha 1 for hepatitis B and DiGeorge Anomaly. In prior years,
legislation was introduced in the U.S. Congress that would restrict the duration
of the market exclusivity of an orphan drug. There can be no assurances that
this type of legislation will not be reintroduced and passed into law, or that
the benefits of the existing statute will remain in effect.
Under the Drug Price Competition and Patent Term Restoration Act of 1984
("DPCPTRA"), a sponsor may be granted marketing exclusivity for a period of time
following FDA approval of certain drug applications, regardless of patent
status, if the drug is a new chemical entity or new clinical studies were used
to support the marketing application. This marketing exclusivity would prevent a
third party from obtaining FDA approval for a similar or identical drug through
an Abbreviated New Drug Application ("ANDA"), which is the application form
typically used by manufacturers seeking approval of a generic drug. The statute
also allows a patent owner to extend the term of the patent for a period equal
to one-half the period of time elapsed between
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the filing of an IND and the filing of the corresponding NDA plus the period of
time between the filing of the NDA and FDA approval with the maximum patent
extension term being five years. Once a drug is granted some form of marketing
exclusivity, the recently enacted FDA Modernization Act provides an additional
six months of marketing exclusivity for certain pediatric research conducted at
the written request of FDA.
The Company may seek the benefits of orphan, DPCPTRA, or fast track
provisions, but there can be no assurance that the Company will be able to
obtain any such benefits.
The Company is subject to foreign regulations governing human clinical
trials and pharmaceutical sales. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country. Whether or not FDA approval has been obtained, approval of a
product by the comparable regulatory authorities of foreign countries is
required prior to the commencement of marketing of the Company's products in
those countries. The approval process varies from country to country and the
time required for approval may be longer or shorter than that required for FDA
approval. In general, foreign countries use one of three forms of regulatory
approval process. In one form, local clinical trials must be undertaken and the
data must be compiled and submitted for review and approval. In Japan, for
example, the process is time-consuming and costly because all clinical trials
and most preclinical studies must be conducted in Japan. A second form of
approval process requires clinical trial submissions, but permits use of foreign
clinical trials and typically also requires some form of local trial as well. A
third form of approval process does not require local clinical trials, but
rather contemplates submission of an application including proof of approval by
countries that have clinical trial review procedures. Thus, a prior approval in
one or more of the U.S., Japan, most European countries or Australia, among
others, is often sufficient for approval in countries using this third form of
approval process.
In addition to required foreign approvals, the FDA regulates the export of
drugs or bulk pharmaceuticals from the U.S. In general, a drug that has been
approved for commercial sale in the U.S. may be exported for commercial sale. In
1996, export reform legislation was passed in the U.S. that provides that an
unapproved drug may be exported to a "listed country" for investigational
purposes without FDA authorization. The listed countries are Australia, Canada,
Israel, Japan, New Zealand, Switzerland, South Africa, and countries in the
European Union and the European Economic Area. Export of drugs to an unlisted
country for clinical trial purposes continues to require FDA approval. The
Company has obtained, where necessary, FDA approval for all exports of ZADAXIN
from the U.S. to date for clinical trial purposes, and will seek to obtain FDA
approval, where necessary, for any future shipments from the U.S. to any
unlisted country. The export reform legislation further provides that an
unapproved drug can be exported to any country for commercial purposes without
prior FDA approval, provided that the drug: (i) complies with the laws of that
country; and (ii) has valid marketing authorization or the equivalent from the
appropriate authority in a "listed country." Export of drugs not approved in the
U.S. that do not have marketing authorization in a listed country continue to
require FDA export approval.
Pursuant to the Prescription Drug User Fee Act of 1992, drug manufacturers
generally are required to pay three types of user fees: (1) a one-time
application fee for approval of an NDA; (2) an annual product fee imposed on
prescription drugs after FDA approval; and (3) an annual establishment fee
imposed on facilities used to manufacture prescription drugs. The fee rates for
1998 are: (1) $256,846 one-time fee for an application requiring clinical data,
or $128,423 fee for an application not requiring clinical data; (2) $141,966
annual establishment fee; and (3) $18,591 annual product fee. These fee amounts
are likely to increase in the future. Fee waivers or reductions are available in
certain instances, including a waiver of the application fee for the first
application filed by a small business. Additionally, no user fees are assessed
on NDAs for products designated as orphan drugs, unless such drug also includes
a non-orphan indication.
Among the conditions for NDA approval in the U.S. is the requirement that
the prospective manufacturer's quality control and manufacturing procedures
conform to cGMP. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of
production and quality control to ensure full technical compliance.
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices, the experimental use of animals
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and the use and disposal of hazardous or potentially hazardous substances,
including radioactive compounds and infectious disease agents, used in
connection with research work and preclinical and clinical trials and testing.
The extent of government regulation which might result from future legislation
or administrative action in these areas cannot be accurately predicted.
As the preceding discussion indicates, the research, preclinical
development, clinical development, manufacturing, marketing and sales of
pharmaceuticals, including ZADAXIN and CPX, are subject to extensive regulation
by governmental authorities. Products developed by the Company cannot be
marketed commercially in any jurisdiction in which they have not been approved.
The process of obtaining regulatory approvals is lengthy, uncertain and requires
the expenditure of substantial resources. For example, in some countries where
the Company contemplates marketing ZADAXIN, the regulatory approval process for
drugs not previously approved in countries that have established clinical trial
review procedures is uncertain and this uncertainty may result in delays in
granting regulatory approvals. In addition, in certain countries such as Japan,
the process for obtaining regulatory approval is time consuming and costly
because all clinical trials and most preclinical studies must be conducted in
that country. The Company is currently pursuing regulatory approvals of ZADAXIN
in a number of countries, and of CPX in the U.S., but there can be no assurance
that the Company will ultimately obtain approvals in such countries in a timely
and cost-effective manner or at all. The marketing approval for ZADAXIN in
Singapore requires a post marketing surveillance program to continue study of
the drug's safety and efficacy. Failure to comply with applicable U.S. or
foreign regulatory requirements can, among other things, result in Warning
Letters, fines, suspensions of regulatory approvals, product recalls or
seizures, operating restrictions, injunctions and criminal prosecutions.
Further, additional government regulation may be established or imposed by
legislation or otherwise which could prevent or delay regulatory approval of
ZADAXIN, CPX or any future products of the Company. Adverse events related to
the Company's products in any of the Company's existing or future markets could
cause regulatory authorities to withdraw market approval for such products, if
any, or prevent the Company from receiving market approval in the future.
THIRD PARTY REIMBURSEMENT
The Company's ability to successfully commercialize its products may depend
in part on the extent to which coverage and reimbursement for such products will
be available from government health care programs, private health insurers and
other third party payors or organizations. Significant uncertainty exists as to
the reimbursement status of new therapeutic products and there can be no
assurance that third party insurance coverage and reimbursement will be
available for therapeutic products the Company might develop. In many of the
foreign countries in which the Company intends to market ZADAXIN, reimbursement
of ZADAXIN under government or private health insurance programs will not be
available. In the U.S., health care reform is an area of increasing national
attention and a priority of many governmental officials. Recent legislation, for
example, imposes limitations on the amount of reimbursement available for
specific drug products under some governmental health care programs. There can
be no assurance that future additional limitations will not be imposed in the
future on drug coverage and reimbursement.
EMPLOYEES
As of December 31, 1997, the Company had 35 employees, 24 in the U.S. and
11 abroad. The Company considers its relations with its employees to be
satisfactory.
RECENT DEVELOPMENTS
On April 1, 1998, the Company issued 661,157 shares of convertible
preferred stock (the "Series C Preferred Stock") to three institutional
investors (each an "Investor" and collectively, the "Investors") at a purchase
price (the "Purchase Price") of $6.05 per share (the "Sale"). The Company has
agreed to use its best efforts to cause a registration statement to become
effective with respect to the resale of the common stock issuable upon
conversion of the Series C Preferred Stock within 90 days of the closing date of
the Sale (the "Closing Date"). The Purchase Price was equal to 160% of the
average closing bid price for the common stock of the Company (the "Common
Stock") for the five trading days prior to the Closing Date.
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Generally, the Series C Preferred Stock is not convertible until 90 days
from the closing and is then subject to limitations summarized below. The
conversion price for the Series C Preferred Stock is the lesser of (a) $6.05, or
(b) the average closing bid price of the Common Stock on any three (3)
consecutive trading days selected by an Investor out of the twenty-two (22)
trading days immediately prior to the date the Investor delivers a notice of
conversion (the "Market Conversion Price"). However, the Market Conversion Price
can never be less than $3.78 except as described below. The Investors may
convert fifty percent (50%) of their Series C Preferred Stock into Common Stock
at the Market Conversion Price between the 91st and 180th day following the
Closing Date, and the Investors may convert one hundred percent (100%) of their
Series C Preferred Stock at the Market Conversion Price from and after the 181st
day following the Closing Date. Whenever the Market Conversion Price of the
Series C Preferred Stock is more than $6.05, the Investors may convert all of
their then outstanding Series C Preferred Stock at the Market Conversion Price.
If between ninety (90) and three hundred sixty-five (365) days after the
Closing Date, the closing bid price of the Common Stock is less than $3.78 on
any three (3) consecutive trading days, the Company has the option to (a) allow
any of the shares of Series C Preferred Stock which are then convertible to be
converted at the Market Conversion Price or (b) redeem the shares of Series C
Preferred Stock then eligible for conversion, if any. The Investors are not
obligated to accept either option. However, these provisions will terminate
immediately and automatically after the closing bid price of the Common Stock
has exceeded $6.00 for forty (40) consecutive trading days. At the end of such
forty (40) day period or three hundred sixty-five (365) days after the Closing
Date, whichever occurs first, the conversion price for the Series C Preferred
Stock may never be less than $3.78. Further, if at any time after the Closing
Date the closing bid price of the Common Stock is less than $1.50 for ten (10)
consecutive trading days, the Company has the option to either (a) permit the
Investors to convert any then remaining Series C Preferred Stock at the Market
Conversion Price and without lock-up restrictions, or (b) redeem the then
remaining Series C Preferred Stock, if any. The redemption price for any of the
foregoing redemptions would be 110% of the original purchase price of the
remaining shares of Series C Preferred Stock subject to redemption, if any.
Each Investor also received an option to purchase additional shares in the
Sale. If the Market Conversion Price prior to the date Investor delivers notice
of conversion is more than $6.00 per share, the Investor has the right to
purchase one additional share of the Common Stock for every share of the Common
Stock received upon conversion of the Series C Preferred Stock. Such additional
shares of the Common Stock purchased by an Investor will be priced at the Market
Conversion Price, which price will never be less than $6.00 per share.
The Investors also received warrants to purchase an aggregate of 100,000
shares of Common Stock at a price equal to $5.67 per share. The warrants have a
five (5) year term.
The Company also granted the Investors certain rights of first refusal and
protective provisions in the event the Company sells shares at a lower price
prior to conversion of the Series C Preferred Stock. Further, in order to ensure
the Investors of the free tradability of their shares upon conversion, the
Company is subject to penalties in certain events, including the failure of the
Company to fulfill its obligation to file and keep effective a registration
statement for the resale of the Common Stock by the Investors, or if trading of
the Common Stock is suspended for a prolonged period.
ITEM 2. PROPERTIES
The Company has leased approximately 14,000 square feet of office space at
its headquarters in San Mateo, California and limited office space for marketing
purposes in Singapore, Hong Kong, Taiwan and Japan. The Company believes that
its existing facilities are adequate for its current needs and that additional
space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
As of the filing date of this Form 10-K, there are no material pending
legal proceedings to which SciClone or any of its subsidiaries is a party or to
which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock trades on The Nasdaq National Market under the
symbol "SCLN."
The following table sets forth the high and low sale prices per share for
the periods indicated, as reported by The Nasdaq National Market. The quotations
shown represent inter-dealer prices without adjustment for retail markups,
markdowns, or commissions, and may not necessarily reflect actual transactions.
PRICE RANGE
COMMON STOCK
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HIGH LOW
1997 ----------- -----------
4th quarter................................. $ 7 11/32 $ 2 15/16
3rd quarter................................. 6 1/2 3 7/16
2nd quarter................................. 7 15/32 4 3/8
1st quarter................................. 16 1/8 4 3/4
HIGH LOW
1996 ----------- -----------
4th quarter................................. $13 $ 7 3/4
3rd quarter................................. 14 3/4 6 7/8
2nd quarter................................. 15 1/8 11 1/4
1st quarter................................. 16 1/8 4 3/4
As of March 15, 1998, there were approximately 250 holders of record and
more than 5,000 beneficial holders of the Company's Common Stock.
The Company has not paid any dividends on its Common Stock and currently
intends to retain any future earnings for use in its business.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K.
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
STATEMENTS OF OPERATIONS DATA:
Product sales................... $ 2,223,052 $ 703,082 $ 273,353 $ -- $ --
Cost of product sales........... 989,792 740,494 737,460 -- --
------------ ------------ ------------ ------------ ------------
Gross margin.................... 1,233,260 (37,412) (464,107) -- --
Operating expenses:
Research and development...... 8,642,137 9,903,536 10,386,312 9,282,051 8,122,716
Special research and
development charges......... -- -- -- 3,470,000 --
Marketing..................... 4,144,499 4,240,208 4,323,327 4,375,447 1,771,985
General and administrative.... 3,662,441 3,182,972 2,903,991 3,810,696 2,895,513
------------ ------------ ------------ ------------ ------------
Total operating expenses........ 16,449,077 17,326,716 17,613,630 20,938,194 12,790,214
------------ ------------ ------------ ------------ ------------
Loss from operations............ (15,215,817) (17,364,128) (18,077,737) (20,938,194) (12,790,214)
Interest and investment income,
net........................... 1,218,812 2,618,381 3,302,307 3,056,869 1,111,183
------------ ------------ ------------ ------------ ------------
Net loss........................ $(13,997,005) $(14,745,747) $(14,775,430) $(17,881,325) $(11,679,131)
============ ============ ============ ============ ============
Basic net loss per share........ $ (0.85) $ (0.85) $ (0.88) $ (1.02) $ (0.89)
============ ============ ============ ============ ============
Weighted average shares used in
computing basic net loss per
share amounts................. 16,472,765 17,421,312 16,881,652 17,507,564 13,098,462
BALANCE SHEET DATA:
Cash, cash equivalents and
investments................... $ 12,900,465 $ 35,105,708 $ 47,389,827 $ 63,670,287 $ 284,254
Working capital................. 7,416,472 9,223,793 19,283,278 44,796,629 4,995,598
Total assets.................... 19,195,505 42,727,687 54,150,795 67,012,993 48,095,931
Total shareholders' equity...... 15,723,657 37,465,628 49,555,262 62,754,031 45,520,246
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is an international biopharmaceutical company that acquires,
develops and commercializes specialist-oriented proprietary drugs for treating
chronic and life-threatening diseases, including hepatitis B, hepatitis C,
cancer, immune system disorders and cystic fibrosis. Currently, the Company has
two drugs in clinical development, ZADAXIN for hepatitis B, hepatitis C, cancer
and immune system disorders, and CPX for cystic fibrosis. The Company also has
other drug candidates in preclinical development. To date, the Company's
principal focus has been the development and commercialization of ZADAXIN and
the development of CPX.
From commencement of operations through December 31, 1997, the Company
incurred a cumulative net loss of approximately $85.3 million. The Company
expects its operating expenses to increase over the next several years as it
expands its research and development, clinical testing and marketing
capabilities. The Company's ability to achieve profitable operations is
primarily dependent on increasing ZADAXIN sales in approved markets, securing
regulatory approvals for ZADAXIN in additional countries and successfully
launching ZADAXIN, if approved, in such countries. In addition, other factors
may also impact the Company's ability to achieve a profitable level of
operations such as spending associated with successful development of CPX,
acquiring rights to additional drugs, and entering into and extending agreements
for product development and commercialization, where appropriate. There can be
no assurance that the Company will be able to attain these objectives or that
the Company will ever achieve a profitable level of operations.
The Company's operating results may fluctuate from period to period as a
result of, among other things, market acceptance of ZADAXIN, the timing and
costs associated with preclinical and clinical development of the Company's
products, the regulatory approval process, and the acquisition of additional
product rights. The Company participates in a highly dynamic industry, which
often results in significant volatility of the Company's common stock price.
Setbacks in the launch, sale or distribution of ZADAXIN, preclinical and
clinical development of the Company's products, the regulatory approval process
or relationships with collaborative partners, and any shortfalls in revenue or
earnings from levels expected by securities analysts, among other developments,
have in the past had and could in the future have an immediate and significant
adverse effect on the trading price of the Company's common stock in any given
period.
RESULTS OF OPERATIONS
Product sales were approximately $2,223,000, $703,000 and $273,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. Currently, the
Company has received approval to market ZADAXIN in Argentina, Kuwait, the
People's Republic of China, Peru, the Philippines and Singapore. For the year
ended December 31, 1997, the first full-year of ZADAXIN sales, one customer in
China accounted for 66% of the Company's product sales. The Company's accounts
receivable collections in China are typically 180 days or longer. Such customer
represents 86% of the accounts receivable balance at December 31, 1997. Such
collections to date have been slower than anticipated and the Company is
currently monitoring the situation. At the end of 1997, the Company has
allowances for bad debts of $250,000. If collection of outstanding accounts
receivable does not improve, it may become necessary to further increase related
allowances for bad debts. In addition, the Company has filed for approval to
market ZADAXIN in several countries and anticipates additional filings in other
countries. As a result, the Company expects product sales to increase in its
existing approved markets in 1998 and beyond, upon the commencement of the
commercial launch of ZADAXIN in additional markets once regulatory approvals are
secured. The level of such product sales increase is dependent upon increased
ZADAXIN market penetration in the Company's existing approved markets,
additional ZADAXIN marketing approvals and the successful launch of ZADAXIN in
new markets. Although the Company remains optimistic regarding the prospects of
ZADAXIN, there can be no assurance that the Company will ever achieve
significant levels of product sales or that the Company will receive additional
ZADAXIN market approvals.
Cost of product sales was approximately $990,000, $740,000 and $737,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. The increase is
attributable to increased product sales. The Company expects cost of product
sales to vary from quarter to quarter, dependent upon the level of product
sales, the absorption of fixed product-related costs, and any charges associated
with excess or expiring finished product.
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Research and development expenses were approximately $8,642,000,
$9,904,000, and $10,386,000 for the years ended December 31, 1997, 1996, and
1995, respectively. For the year ended December 31, 1997, the decrease in
research and development expenses as compared to 1996 was due to decreased
professional fees partially offset by increased clinical trial expenses.
Clinical trial expenses in 1997 were impacted by additional clinical trial
expenses for the clinical development of CPX, a synthetic compound licensed in
April 1996 from the NIH as a potential treatment for cystic fibrosis. In April
1997, the Company commenced its CPX clinical trial program in the U.S. In
addition, the Company is pursuing a corporate partnering arrangement with a
major pharmaceutical company for a pivotal phase 3 development of combination
ZADAXIN plus interferon for hepatitis C in the U.S. and Europe. The initiation
and continuation of these programs by the Company had and will continue to have
a significant effect on the Company's research and development expenses in the
future and will require the Company to seek additional capital resources. For
the year ended December 31, 1996, the decrease in research and development
expenses as compared to 1995 was primarily attributable to decreases in
regulatory expenses and in costs associated with decreased ZADAXIN clinical
trials, essentially due to the completion of the ZADAXIN Taiwan phase 3
Hepatitis B trial during the first half of 1996, offset by increased preclinical
development expenses associated with CPX. In general, the Company expects
product research and development expenses to increase over the next several
years and to vary quarter to quarter as the Company pursues its strategy of
initiating additional clinical trials and testing, entering into one or more
corporate partnering arrangements, acquiring product rights, and expanding
regulatory activities.
Marketing expenses were approximately $4,144,000, $4,240,000, and
$4,323,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
The decrease in 1997 as compared to 1996 is due to decreased professional
services and travel expenses partially offset by increased publications and
promotional material expenses associated with the launch of ZADAXIN in its
approved markets. The decrease in 1996 as compared to 1995 is primarily
attributable to decreased payroll costs related to an executive officer who left
the Company in 1995, offset by increased professional services, primarily
consulting services expenses, regarding preparations for the launch of ZADAXIN
in its approved markets in early 1997. The Company expects marketing expenses to
increase significantly in the next several quarters and years as it anticipates
expanding its commercialization and marketing efforts and pursuing other
strategic relationships.
General and administrative expenses were approximately $3,662,000,
$3,183,000, and $2,904,000 for the years ended December 31, 1997, 1996, and
1995, respectively. The increase in 1997 as compared to 1996 is due to increased
general office expenses associated with increased rent and office relocation
expenses and investment banking fees and fees for professional services,
primarily legal and accounting fees, associated with the Company's adoption of a
shareholder rights plan and proposed public offering. The increase in 1996 as
compared to 1995 is primarily attributable to increased payroll costs offset by
decreased expenses for professional services, primarily legal services and
consulting fees. In the near term, the Company expects general and
administrative expenses to vary quarter to quarter as the Company augments its
general and administrative activities and resources to support increased
expenditures on clinical trials and testing, and regulatory,
pre-commercialization and marketing activities.
Net interest and investment income was approximately $1,218,000,
$2,618,000, and $3,302,000 for the years ended December 31, 1997, 1996, and
1995, respectively. The decrease in 1997 as compared to 1996 and in 1996 as
compared to 1995 resulted from decreased interest and investment income due to
lower average invested cash balances.
LIQUIDITY AND CAPITAL RESOURCES
In April 1998, the Company received $4,000,000 (before deducting expenses)
from the sale of 661,157 shares of Series C convertible preferred stock from a
private placement. In March 1998, the Company also received approximately
$754,000 from one of its executive officers as a partial payment of an
outstanding loan. (See "Note 1" -- "Notes Receivable from Officers").
In July 1997, the Company loaned Thomas E. Moore, former Chairman and one
of the founders of the Company, $5.944 million secured by approximately 1.9
million shares of SciClone common stock owned by Mr. Moore. The loan carries
interest at 7%. During the period Mr. Moore's loan is outstanding and
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immediately prior to the closing of any offering of the Company's common stock,
the Company may convert the loan, in a non-cash exchange into Mr. Moore's
SciClone common stock by retiring shares of his SciClone common stock at a fixed
discount rate from the offering price. To date, the Company has not retired any
of Mr. Moore's SciClone common stock. In connection with this transaction, Mr.
Moore resigned from the Company. On December 31, 1997, the principal balance of
the loan was $5.944 million and was classified as an offset to shareholders'
equity.
At December 31, 1997, and 1996, the Company had approximately $12,900,000,
and $35,106,000, respectively, in cash, cash equivalents and marketable
securities. The marketable securities consist primarily of highly liquid
short-term and long-term investments.
Net cash used by the Company in operating activities amounted to
approximately $14,056,000, $14,641,000, and $17,098,000, for the years ended
December 31, 1997, 1996, and 1995, respectively. Net cash used in operating
activities for the year ended December 31, 1997 is greater than the Company's
net loss for such period primarily due to increases in accounts receivable
associated with sales from the Company's launch of ZADAXIN in its approved
markets and increases in payments to third parties for goods and services and to
employees for compensation and benefits. These amounts were partially offset by
non-cash charges associated with depreciation and amortization, decreases in
prepayments of certain future expenses, and increases in amounts owed to third
parties for clinical trials. Net cash used in operating activities for the year
ended December 31, 1996 is less than the Company's net loss for such period
primarily due to non-cash charges associated with depreciation of furniture and
equipment and amortization of deferred compensation in addition to increases in
amounts owed to third parties for goods and services. These amounts were
partially offset by cash used for inventory purchases, increases in and
prepayments of certain future period expenses and payments of amounts owed to
third parties related to clinical trial expenses and compensation and benefits.
Net cash used in operating activities for the year ended December 31, 1995 was
greater than the Company's net loss for such period primarily due to cash used
for inventory purchases, the prepayment of certain future period expenses and
increases in accounts receivable. These cash uses were partially offset by
increases in amounts owed to third parties for goods and services related to
clinical trial expenses in addition to noncash charges associated with
depreciation and amortization.
Net cash provided by investing activities for the year ended December 31,
1997 primarily related to the net sale of approximately $21,335,000 in
marketable securities offset by the purchase of approximately $404,000 in
equipment and furniture. Net cash provided by investing activities for the year
ended December 31, 1996 primarily related to the net sale of approximately
$12,319,000 in marketable securities offset by the purchase of approximately
$94,000 in equipment and furniture. Net cash provided by investing activities
for the year ended December 31, 1995 primarily related to the net sale of
approximately $14,729,000 in marketable securities offset by the purchase of
approximately $204,000 in equipment and furniture.
Net cash used in financing activities for the year ended December 31, 1997
consisted of approximately $4,267,000 related to Company's repurchase of its
common stock under the Company's approved stock repurchase plan, the amounts
loaned to Mr. Thomas E. Moore referred to above of $5,944,000 offset by
approximately $2,313,000 in proceeds received from the issuance of common stock
by the exercise of outstanding warrants and from the issuance of common stock
under the Company's stock option plan and employee stock purchase plan. Net cash
provided by financing activities for the year ended December 31, 1996 related to
approximately $3,731,000 in proceeds received from the issuance of common stock
under the Company's stock option plan offset by approximately $659,000 related
to Company's repurchase of its common stock. Net cash used in financing
activities for the year ended December 31, 1995 related to the Company's
repurchase of approximately $1,925,000 of its common stock offset by
approximately $192,000 in proceeds received from the issuance of common stock
under the Company's stock option plan.
Management believes its existing capital resources and interest on funds
available are adequate to maintain its current and planned operations through
1998. In December 1997, the Company filed a registration statement with the
Securities and Exchange Commission with respect to a proposed registered direct
placement of its Common Stock but decided not to proceed with such offering due
to market conditions and other factors. The Company subsequently concluded an
offering of convertible preferred stock with
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proceeds of $4,000,000 (before deducting expenses) and is actively pursuing
additional financings including a private placement of common stock and an
equity line. The Company believes it will conclude one or more of such
additional financings in the next three to six months although no assurance can
be given that such financing will occur in the time frame expected by the
Company, on terms favorable to the Company, or at all. The Company is
considering corporate partnering and other opportunities to increase its capital
resources and if one or more of such other opportunities occurred, the Company
would consider accelerating drug development activities, including clinical
trials. The Company's capital requirements may change depending upon numerous
factors, including the level of ZADAXIN product sales, the availability of
complementary products, technologies and businesses, the initiation of
preclinical and clinical trials and testing, the timing of regulatory approvals,
developments in relationships with existing or future collaborative partners and
the status of competitive products. The Company continues to pursue corporate
partnering and public and private financing alternatives. If the Company cannot
eventually generate sufficient funds from operations, it will need to raise
additional financing in the near future. There can be no assurance that such
financing will be available on acceptable terms and on a timely basis, if at
all.
IMPACT OF THE YEAR 2000
As the year 2000 approaches, an issue impacting all companies has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to accommodate only a two digit date
position which represents the year (e.g., "95" is stored on the system and
represents the year 1995). As a result, the year 1999 (i.e., "99") could be the
maximum date value systems will be able to accurately process. Management is in
the process of working with its software vendors to assure that the Company is
prepared for the year 2000. Management does not anticipate that the Company will
incur significant operating expenses or be required to invest heavily in
computer system improvements to be year 2000 compliant.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Dependence on ZADAXIN and CPX. The Company's principal drug development
efforts are currently focused primarily on ZADAXIN and CPX. Clinical trials of
ZADAXIN sponsored by the Company and/or other parties are currently in progress
or planned and favorable results from such trials will be necessary to gain
regulatory approval in significant markets. Sales of ZADAXIN commenced in 1997
but are not material at this time. While ZADAXIN has been approved for
commercial sale for treatment of hepatitis B in the People's Republic of China,
Kuwait, Peru, the Philippines and Singapore, no assurance can be given that
ZADAXIN approvals will be obtained in additional countries or for the treatment
of additional indications, such as hepatitis C or cancer, in a timely fashion or
at all. The Company's launch of ZADAXIN in the People's Republic of China, the
Philippines and Singapore is the first commercial introduction of ZADAXIN by the
Company, and no assurance can be given that commercialization of ZADAXIN will
prove successful. The Company has not yet launched ZADAXIN in Argentina, Kuwait
or Peru and no assurance can be given that future launch of ZADAXIN will prove
successful. Future sales of ZADAXIN will depend on market acceptance and
successful distribution. In particular, although the People's Republic of China
has the highest hepatitis B prevalence rate in the world, the low average income
and poorly developed distribution infrastructure present ongoing challenges to
successful commercialization of ZADAXIN in that market. Because the Company
currently relies on ZADAXIN as its sole source of revenue, the failure to
demonstrate the drug's efficacy in future clinical trials, obtain additional
marketing approvals or commercialize the drug successfully would have a material
adverse effect on the Company.
The Company may experience delays and encounter difficulties in clinical
trials of CPX. In addition, there can be no assurance that any clinical trial
will provide statistically significant evidence of the efficacy of CPX in
treating CF. A failure to demonstrate the efficacy of CPX in a CF clinical
trial, obtain regulatory approval of CPX for CF or successfully commercialize
CPX would have a material adverse effect on the Company.
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No History of Significant Revenues; Continuing Operating Losses. The
Company has only recently generated revenues from the commercialization of its
products, and there is substantial uncertainty regarding the timing and amount
of any future revenues and whether such future revenues will be material. The
Company cannot predict when or if marketing approvals for CPX will be obtained
or additional marketing approvals for ZADAXIN will be obtained. Even if such
approvals are obtained, there can be no assurance that ZADAXIN and CPX will be
commercialized successfully. The Company has experienced significant operating
losses since its inception and, as of December 31, 1997, had an accumulated
deficit of approximately $85.3 million. The Company expects its operating
expenses to increase over the next several years as it expands its development,
clinical testing and marketing capabilities. The Company's ability to achieve a
profitable level of operations is dependent in large part on successful
expansion of the market for ZADAXIN in Asia, Latin America and the Middle East,
obtaining additional regulatory approvals for ZADAXIN and/or future products,
entering into a corporate partnering arrangement for pivotal phase 3 development
of combination ZADAXIN plus interferon for hepatitis C in the U.S. and Europe,
entering into other agreements for product development and commercialization,
where appropriate, and continuing to expand from development into successful
marketing. There can be no assurance that the Company will ever achieve a
profitable level of operations.
Future Capital Needs; Uncertainty of Additional Financing. The Company
will need additional financing to support its long-term product development and
commercialization programs. The Company's future capital requirements will
depend on many factors, including progress with preclinical testing and clinical
trials, the time and cost involved in obtaining regulatory approvals, patent
costs, competing technological and market developments, the nature of existing
and future collaborative relationships, and the Company's ability to establish
development, sales, manufacturing and marketing arrangements. No assurance can
be given that adequate financing will be available to the Company on acceptable
terms and on a timely basis, if at all.
Dependence on Third Parties. The Company's strategy contemplates that it
will enter into various arrangements with other entities. To date, the Company
has acquired rights to ZADAXIN, CPX and certain other drugs but is only actively
pursuing clinical development of ZADAXIN and CPX. Failure to license or
otherwise acquire rights to additional drugs would result in a shortage of
products for development. In addition, the Company has licensed exclusive rights
to develop and market ZADAXIN in Japan to SPKK. SPKK has a substantial
commitment to alpha interferon, which is an approved therapy for hepatitis B and
hepatitis C in Japan. There can be no assurance that the relationship will prove
successful or that the Company will be able to negotiate additional arrangements
in the future. The amount and timing of resources that collaborators devote to
their activities with the Company will not be within the control of the Company
and may be affected by financial difficulties or other factors affecting these
third parties. There can be no assurance that such parties will perform their
obligations as expected. Moreover, the Company's ability to obtain regulatory
approval in one country may be delayed or adversely affected by the timing of
regulatory activities and approvals in one or more other countries, particularly
if the Company does not participate in the regulatory approval process in such
other countries. See "Business -- Manufacturing" and "-- Marketing and Sales."
Foreign Sales and Operations. The Company's financial condition in the
near term will be highly dependent on ZADAXIN sales in foreign jurisdictions,
where sales and operations are subject to inherent risks, including difficulties
and delays in obtaining pricing approvals and reimbursement, unexpected changes
in regulatory requirements, tariffs and other barriers, political instability,
difficulties in staffing and managing foreign operations, longer payment cycles,
greater difficulty in accounts receivable collection, currency fluctuations and
potential adverse tax consequences. Certain foreign countries regulate pricing
of pharmaceuticals and such regulation may result in prices significantly below
those that would prevail in a free market. The majority of the Company's current
sales are to customers in the People's Republic of China where the Company's
accounts receivable collections are typically 180 days or greater. Such
collections to date have been slower than anticipated and the Company is
currently monitoring the situation. If collection of outstanding accounts
receivable does not continue to improve, it may become necessary to further
increase the related allowances for bad debts or slow the rate of sales to this
market.
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Patents and Proprietary Rights. Most European composition of matter
patents for thymosin alpha 1 expired in October 1997. The Company will in the
future have only limited composition of matter patents for thymosin alpha 1 or
other products and this could adversely affect the Company's proprietary rights.
However, the Company owns or has exclusive licenses for use and process patents
or patent applications in the U.S. and other jurisdictions for thymosin alpha 1
and CPX and will seek to protect such products from competition through such
patent protection and through other means. See "Business -- Patents and
Proprietary Rights." The Company's success is significantly dependent on its
ability to obtain patent protection for its products and technologies and to
preserve its trade secrets and operate without infringing on the proprietary
rights of third parties. No assurance can be given that the Company's pending
patent applications will result in the issuance of patents or that any patents
will provide competitive advantages or will not be invalidated or circumvented
by its competitors. Moreover, no assurance can be given that patents are not
issued to, or patent applications have not been filed by, other companies which
would have an adverse effect on the Company's ability to use, manufacture or
market its products or maintain its competitive position with respect to its
products. Numerous patents and patent applications relating to thymosin alpha 1
are held under exclusive license and the breach by the Company of the terms of
such license could result in the loss of the Company's rights to such patents
and patent applications. Other companies obtaining patents claiming products or
processes useful to the Company may bring infringement actions against the
Company and such litigation is typically costly and time-consuming. As a result,
the Company may be required to obtain licenses from others or not be able to
use, manufacture or market its products. Such licenses may not be available on
commercially reasonable terms, if at all.
The patent positions of biotechnology firms generally are highly uncertain
and involve complex legal and factual questions. No consistent policy has
emerged regarding the validity and scope of claims in biotechnology patents, and
courts have issued varying interpretations in the recent past, and legal
standards concerning validity, scope and interpretations of claims in
biotechnology patents may continue to evolve. Even issued patents may later be
modified or revoked by the U.S. Patent and Trademark Office, the European Patent
Office or the courts in proceedings instituted by third parties. Moreover, the
issuance of a patent in one country does not assure the issuance of a patent
with similar claims in another country and claim interpretation and infringement
laws vary among countries, so the extent of any patent protection is uncertain
and may vary in different countries.
Pharmaceuticals are not patentable in certain countries in SciClone's
ZADAXIN territory, or have only recently become patentable, and enforcement of
intellectual property rights in many countries in such territory has been
limited or non-existent. Future enforcement of patents and proprietary rights in
many countries in SciClone's ZADAXIN territory can be expected to be problematic
or unpredictable. There can be no assurance that any patents issued or licensed
to the Company will provide it with competitive advantages or will not be
challenged by others. No assurance can be given that holders of patents licensed
to the Company will file, prosecute, extend or maintain their patents in
countries where the Company has rights. Furthermore, there can be no assurance
that others will not independently develop similar products or will not design
around patents issued or licensed to the Company.
Government Regulation and Product Approvals. The research, preclinical and
clinical development, manufacturing, marketing and sales of pharmaceuticals,
including ZADAXIN, CPX and the Company's other drug candidates, are subject to
extensive regulation by governmental authorities. Products developed by the
Company cannot be marketed commercially in any jurisdiction in which they have
not been approved. The process of obtaining regulatory approvals is lengthy and
requires the expenditure of substantial resources. In some countries where the
Company contemplates marketing ZADAXIN, the regulatory approval process for
drugs not previously approved in countries that have established clinical trial
review procedures is uncertain and this uncertainty may result in delays in
granting regulatory approvals. In addition, in certain countries such as Japan,
the process for obtaining regulatory approval is time consuming and costly
because all clinical trials and most preclinical studies must be conducted
there. The Company is currently sponsoring clinical trials and pursuing
regulatory approvals of ZADAXIN in a number of countries and of CPX in the U.S.,
but there can be no assurance that the Company will be able to complete such
trials, that such trials, if completed, will fulfill regulatory approval
criteria or that the Company will ultimately obtain approvals in such countries.
Adverse
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results in the Company's development programs also could result in the placement
of restrictions on the use of ZADAXIN and CPX or revocation of the approval. The
marketing approval for ZADAXIN in Singapore requires a patient surveillance
program to continue study of the drug's safety and efficacy. Adverse results in
such program could result in the placement of restrictions on the use of ZADAXIN
or revocation of the approval in Singapore. Failure to comply with the
applicable U.S. or foreign regulatory requirements can, among other things,
result in Warning Letters, fines, suspensions of regulatory approvals, product
recalls or seizures, operating restrictions, injunctions and criminal
prosecutions. Further, additional government regulation may be established or
imposed which could prevent or delay regulatory approval of ZADAXIN, CPX or any
future products of the Company.
Manufacturing. The Company has entered into contract manufacturing and
supply agreements to source ZADAXIN and CPX. The Company has experienced delays
of supply of thymosin alpha 1 bulk drug in the past and could do so again in the
future. To be successful, the Company's products must be manufactured in
commercial quantities in compliance with regulatory requirements and at an
acceptable cost. While the Company believes it has and will be able in the
future to establish manufacturing relationships with experienced suppliers
capable of meeting the Company's needs, there can be no assurance that the
Company will establish long term manufacturing relationships with suppliers or
that these suppliers will prove satisfactory. The Company currently has vialing
and packaging supply agreements in effect and has a sufficient supply of
finished thymosin alpha 1 for the near term and is currently negotiating a new
vialing and packaging supply agreement. No assurances can be given that such new
agreement will be reached. Production interruptions, if they occur, could
significantly delay clinical development of potential products, reduce third
party or clinical researcher interest and support of proposed clinical trials.
Such interruptions could also delay commercialization of the Company's products
and impair their competitive position, which would have a material adverse
effect on the business and financial condition of the Company. See "Business --
Manufacturing."
Marketing and Sales. The Company has established distribution arrangements
with local pharmaceutical distribution companies covering 31 countries, in Asia,
Latin America and the Middle East. However, no assurance can be given that any
such distribution arrangements will remain in place or prove successful. See
"Business -- Marketing and Sales."
Technological Change and Competition. Rapid technological development may
result in the Company's products becoming obsolete before they are marketed or
before the Company recovers a significant portion of the related development and
commercialization expenses. Competition in the pharmaceutical field is intense
and the Company expects that competition will increase. The Company's
competitors include major pharmaceutical companies, biotechnology firms and
universities and other research institutions, both in the U.S. and abroad, that
are actively engaged in research and development of products in the therapeutic
areas being pursued by the Company. Many of these companies and institutions
have substantially greater financial, technical, manufacturing, marketing and
human resource capabilities than the Company and extensive experience in
undertaking clinical testing and obtaining regulatory approvals necessary to
market drugs. Principal competitive factors in the pharmaceutical field include
efficacy, safety, and therapeutic regimen. Where comparable products are
marketed by other companies price is also a competitive factor.
Uncertainty of Third Party Reimbursement; Resources of Patient
Populations. The Company's ability to successfully commercialize its products
may depend in part on the extent to which reimbursement for the cost of such
products will be available from government health administration authorities,
private health insurers and other organizations. Significant uncertainty exists
as to the reimbursement status of new therapeutic products and there can be no
assurance that third party reimbursement will be available for therapeutic
products the Company might develop. In many of the foreign countries in which
the Company intends to operate, reimbursement of ZADAXIN under government or
private health insurance programs will not be available. In the U.S., health
care reform is an area of increasing national attention and a priority of many
governmental officials. Certain reform proposals, if adopted, could impose
limitations on the prices the Company will be able to charge in the U.S. for its
products or the amount of reimbursement for the Company's products from
governmental agencies or third party payors. In many countries where the Company
has marketing rights for ZADAXIN, government resources and per capita income
levels may be so low that
24
26
the Company's products will be prohibitively expensive for a large percentage of
the population. In such countries, there can be no assurance that the Company
will be successful in marketing its products on economically favorable terms, if
at all.
Dependence on Qualified Personnel and Key Individuals. Because of the
specialized scientific nature of the Company's business, the Company is highly
dependent upon its ability to continue to attract and retain qualified
management, scientific and technical personnel. There is intense competition for
qualified personnel in the areas of the Company's activities, and there can be
no assurance that the Company will be able to continue to attract and retain the
qualified personnel necessary for the development of its business. In addition,
many key responsibilities within the Company have been assigned to a relatively
small number of individuals. Loss of the services of any of these individuals
unless they were promptly replaced could be significantly detrimental to the
Company's development. The Company does not maintain key person life insurance
on the lives of any of its key personnel.
Product Liability; Absence of Insurance. The Company's business will expose
it to potential product liability risks which are inherent in the testing,
manufacturing, marketing and sale of pharmaceutical products, and there can be
no assurance that product liability claims will not be asserted against the
Company. Product liability insurance for the pharmaceutical industry generally
is expensive to the extent that it is available at all. The Company has product
liability insurance coverage for clinical trials and commercial sales. However,
there can be no assurance that a product liability claim would not adversely
affect the business or financial condition of the Company.
Blank Check Preferred Stock. The Company recently issued shares of Series C
Preferred Stock in a $4,000,000 financing. (See "Business -- Recent
Developments"). The Company's Board of Directors has the authority to issue
additional series of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, without any
further vote or action by the Company's shareholders. The rights of the holders
of the Common Stock will be subject to, and may be adversely affected by, the
rights of the holders of any Preferred Stock that may be issued in the future.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company.
Series C Preferred Stock. Under certain conditions, each share of the
Company's outstanding Series C Preferred Stock may convert into more than one
share of Common Stock. If such events were to occur, the conversion of the
Preferred Stock could have a dilutive effect on the common shareholders. (See
"Business -- Recent Developments.")
25
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SCICLONE PHARMACEUTICALS, INC.
FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND 1996 AND FOR
EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995.
26
28
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,619,100 $ 4,642,590
Short-term investments.................................... 3,866,007 5,205,529
Accounts receivable, net of allowances of $250,000 in 1997
and $7,000 in 1996..................................... 1,024,802 245,078
Inventory................................................. 2,046,218 2,608,877
Prepaid expenses and other current assets................. 332,193 1,783,778
------------ ------------
Total current assets........................................ 10,888,320 14,485,852
Property and equipment, net................................. 525,077 299,405
Long-term investments....................................... 5,415,358 25,257,589
Notes receivable from officers.............................. 2,326,851 2,648,292
Other assets................................................ 39,899 36,549
------------ ------------
Total assets................................................ $ 19,195,505 $ 42,727,687
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 562,730 $ 639,392
Accrued compensation and employee benefits................ 758,955 817,774
Accrued clinical trials expense........................... 1,210,164 964,331
Accrued professional fees................................. 413,000 1,989,000
Other accrued expenses.................................... 526,999 851,562
------------ ------------
Total current liabilities................................... 3,471,848 5,262,059
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common stock, no par value; 75,000,000 shares authorized;
17,343,358 and 17,532,195 shares issued and
outstanding............................................ 107,033,516 108,988,019
Note receivable from former officer....................... (5,944,000) --
Net unrealized loss on available-for-sale securities...... (17,588) (171,125)
Accumulated deficit....................................... (85,348,271) (71,351,266)
------------ ------------
Total shareholders' equity.................................. 15,723,657 37,465,628
------------ ------------
Total liabilities and shareholders' equity.................. $ 19,195,505 $ 42,727,687
============ ============
See notes to consolidated financial statements
27
29
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Product sales.................................. $ 2,223,052 $ 703,082 $ 273,353
Cost of product sales.......................... 989,792 740,494 737,460
------------ ------------ ------------
Gross margin................................... 1,233,260 (37,412) (464,107)
Operating expenses:
Research and development..................... 8,642,137 9,903,536 10,386,312
Marketing.................................... 4,144,499 4,240,208 4,323,327
General and administrative................... 3,662,441 3,182,972 2,903,991
------------ ------------ ------------
Total operating expenses....................... 16,449,077 17,326,716 17,613,630
------------ ------------ ------------
Loss from operations........................... (15,215,817) (17,364,128) (18,077,737)
Interest and investment income, net............ 1,218,812 2,618,381 3,302,307
------------ ------------ ------------
Net loss....................................... $(13,997,005) $(14,745,747) $(14,775,430)
============ ============ ============
Basic net loss per share....................... $ (0.85) $ (0.85) $ (0.88)
============ ============ ============
Weighted average shares used in computing basic
net loss per share amounts................... 16,472,765 17,421,312 16,881,652
See notes to consolidated financial statements
28
30
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NET UNREALIZED
NOTE GAIN (LOSS) ON
COMMON STOCK RECEIVABLE AVAILABLE-FOR-
------------------------- FROM FORMER SALE ACCUMULATED DEFERRED
SHARES AMOUNT OFFICER SECURITIES DEFICIT COMPENSATION
---------- ------------ ----------- --------------- ------------ ------------
Balance at December 31,
1994...................... 17,086,780 $107,648,758 $ -- $(2,304,989) $(41,830,089) $ (759,649)
Issuance of common stock
from exercise of stock
options................. 66,477 191,686 -- -- -- --
Repurchase of common
stock................... (346,000) (1,924,896) -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- 554,796
Net unrealized gain on
available-for-sale
securities.............. -- -- -- 2,755,075 -- --
Net loss.................. -- -- -- -- (14,775,430) --
---------- ------------ ----------- ----------- ------------ -----------
Balance at December 31,
1995...................... 16,807,257 105,915,548 -- 450,086 (56,605,519) (204,853)
Issuance of common stock
from exercise of stock
options and warrants and
employee stock purchase
plan.................... 802,938 3,731,284 -- -- -- --
Repurchase of common
stock................... (78,000) (658,813) -- -- -- --
Amortization of deferred
compensation............ -- -- -- -- -- 204,853
Net unrealized loss on
available-for-sale
securities................ -- -- -- (621,211) -- --
Net loss.................. -- -- -- -- (14,745,747) --
---------- ------------ ----------- ----------- ------------ -----------
Balance at December 31,
1996...................... 17,532,195 108,988,019 -- (171,125) (71,351,266) --
Issuance of common stock
from exercise of stock
options and warrants and
employee stock purchase
plan.................... 495,663 2,312,746 -- -- -- --
Repurchase of common
stock................... (684,500) (4,267,249) -- -- -- --
Note receivable from
former officer.......... (5,944,000) -- -- --
Net unrealized gain on
available-for-sale
securities.............. -- -- -- 153,537 -- --
Net loss.................. -- -- -- -- (13,997,005) --
---------- ------------ ----------- ----------- ------------ -----------
Balance at December 31,
1997...................... 17,343,358 $107,033,516 $(5,944,000) $ (17,588) $(85,348,271) $ --
========== ============ =========== =========== ============ ===========
TOTAL
SHAREHOLDERS'
EQUITY
-------------
Balance at December 31,
1994...................... $ 62,754,031
Issuance of common stock
from exercise of stock
options................. 191,686
Repurchase of common
stock................... (1,924,896)
Amortization of deferred
compensation 554,796
Net unrealized gain on
available-for-sale
securities.............. 2,755,075
Net loss.................. (14,775,430)
------------
Balance at December 31,
1995...................... 49,555,262
Issuance of common stock
from exercise of stock
options and warrants and
employee stock purchase
plan.................... 3,731,284
Repurchase of common
stock................... (658,813)
Amortization of deferred
compensation............ 204,853
Net unrealized loss on
available-for-sale
securities................ (621,211)
Net loss.................. (14,745,747)
------------
Balance at December 31,
1996...................... 37,465,628
Issuance of common stock
from exercise of stock
options and warrants and
employee stock purchase
plan.................... 2,312,746
Repurchase of common
stock................... (4,267,249)
Note receivable from
former officer.......... (5,944,000)
Net unrealized gain on
available-for-sale
securities.............. 153,537
Net loss.................. (13,997,005)
------------
Balance at December 31,
1997...................... $ 15,723,657
============
See notes to consolidated financial statements
29
31
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss....................................... $(13,997,005) $(14,745,747) $(14,775,430)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 178,484 313,560 713,343
Changes in operating assets and liabilities:
Prepaid expenses and other assets......... 1,769,676 (490,243) (1,924,132)
Accounts receivable....................... (779,724) (136,668) (108,410)
Inventory................................. 562,659 (248,398) (1,340,190)
Accounts payable and other accrued
expenses................................ (401,225) 802,066 64,276
Accrued clinical trials expense........... 245,833 (1,090,410) 238,437
Accrued professional fees................. (1,576,000) 1,224,000 (10,000)
Accrued compensation and benefits......... (58,819) (269,130) 43,858
------------ ------------ ------------
Net cash used in operating activities (14,056,121) (14,640,970) (17,098,248)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment........... (404,156) (94,409) (204,077)
Sale of marketable securities, net........... 21,335,290 12,319,191 14,728,955
------------ ------------ ------------
Net cash provided by investing activities...... 20,931,134 12,224,782 14,524,878
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock,
net....................................... 2,312,746 3,731,284 191,686
Notes receivable from former officer......... (5,944,000) -- --
Repurchase of common stock................... (4,267,249) (658,813) (1,924,897)
------------ ------------ ------------
Net cash (used in) provided by financing
activities................................... (7,898,503) 3,072,471 (1,733,211)
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents.................................. (1,023,490) 656,283 (4,306,581)
Cash and cash equivalents, beginning of
period....................................... 4,642,590 3,986,307 8,292,888
------------ ------------ ------------
Cash and cash equivalents, end of period....... $ 3,619,100 $ 4,642,590 $ 3,986,307
============ ============ ============
See notes to consolidated financial statements.
30
32
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
SciClone Pharmaceuticals, Inc. ("SciClone" or the "Company") is an
international biopharmaceutical company that acquires, develops and
commercializes specialist-oriented proprietary drugs for treating chronic and
life-threatening diseases, including hepatitis B, hepatitis C, cancer, immune
system disorders and cystic fibrosis. Currently, the Company has two products in
clinical development, ZADAXIN for hepatitis B, hepatitis C, cancer and immune
system disorders, and CPX for cystic fibrosis. The Company has other drug
candidates in preclinical development. To date, the Company's principal focus
has been the development and commercialization of ZADAXIN and the development of
CPX.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. The principal office of the Company's
subsidiary is located in Hong Kong. All significant intercompany accounts and
transactions have been eliminated
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents and Investments
Cash equivalents consist of highly liquid investments with remaining
maturities of three months or less. All cash equivalents are carried at cost
plus accrued interest, which approximates market.
The Company has classified its entire investments portfolio as
available-for-sale and records these investments at fair value, as determined by
available market information, on the balance sheet. The portfolio primarily
consists of U.S. Government securities and short-term and long-term debt
instruments. Unrealized holding gains or losses are carried as a separate
component of shareholders' equity. The amortized cost of debt securities
classified as available-for-sale is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in investment
income along with interest earned. Realized gains or losses, and declines in
value judged to be other than temporary are also included in investment income.
Management believes the credit risk associated with these investments is limited
due to the nature of investments.
For the year ended December 31, 1997, net unrealized gains of approximately
$154,000 were charged to shareholders' equity, leaving a balance at December 31,
1997 of approximately $18,000 of net unrealized losses. For the year ended
December 31, 1996, net unrealized losses of approximately $621,000 were charged
to shareholders' equity, leaving a balance at December 31, 1996 of approximately
$171,000 of net unrealized losses.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the respective
assets (three to five years) on the straight-line basis.
31
33
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Notes Receivable from Officers
In August 1996, the Company extended a loan to one of its executive
officers with an aggregate principal amount of $1,000,000 to be used to finance
the purchase of his primary residence. The loan is secured by a first deed of
trust on the property, bears interest at 8% per annum and is payable in July
2000.
In June 1995, the Company extended a loan to one of its executive officers
with an aggregate principal amount of $1,365,000 to be used to finance the
purchase and renovation of his primary residence. The loan is secured by a first
deed of trust on the property and 20,000 shares of SciClone Common Stock owned
by the executive officer, bears interest at 7.5% per annum and is payable in
July 2000.
In July 1995, the Company extended a loan to one of its former board
members and former executive officers in the principal amount of $95,000 which
carries an interest rate of 7.375%. In December 1995, the Company extended an
additional loan to this individual in the principal amount of $600,000, which
carries an interest rate of 7.50%. The loans were due and payable in December
1997 after which they became subject to an additional 3.5% accelerated interest.
The loans are secured by a second deed of trust on residential property owned by
this individual. At December 31, 1997, these loans have not been repaid. The
Company expects the loans to be repaid, both principal and accrued interest, in
1998.
At December 31, 1997 and 1996, the fair value of the notes receivable from
officers was $2,320,000 and $2,710,000 respectively. The fair value was
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms of borrowers of similar credit
quality.
Foreign Currency Translation
The Company has determined the U.S. dollar to be the functional currency
for its wholly owned subsidiaries. Adjustments resulting from translation are
included in results of operations and have not been significant.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment.
Research and Development
Research and development expenditures are charged to operations as
incurred.
Income Taxes
Income tax expense is based on reported results of operations before
extraordinary items and income taxes. Deferred income taxes reflect the impact
of temporary differences between the amount of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes.
These deferred taxes are measured by applying current tax laws. Based on the
Company's lack of earnings history, deferred tax assets have been fully offset
by a valuation allowance.
Retirement Benefits
The Company has a pre-tax savings plan covering substantially all U.S.
employees, which qualifies under Section 401(k) of the Internal Revenue Code.
Under the plan, eligible employees may contribute a portion of their pre-tax
salary, subject to certain limitations. The Company contributes and matches 20%
of the employee contributions, up to 6% of the employee's salary. Company
contributions, which can be terminated at the Company's discretion, were
$26,000, $25,000, and $24,000 for the years ended December 31, 1997, 1996, and
1995, respectively. The plan commenced on January 1, 1991.
32
34
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Net Loss Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented. In
accordance with SFAS 128, basic net loss per share has been computed using the
weighted average number of shares of common stock outstanding during the period.
The weighted average number of shares are different than what was disclosed in a
prior press release due to the exclusion of shares held as collateral against a
former officer's loan (see Note 8). Diluted net loss per share has not been
presented as the result would be antidilutive given the Company's history of net
losses.
Had the Company been in a net income position, diluted earnings per share
would have included the shares used in the computation of basic net loss per
share as well as an additional 3,058,734, 2,991,260, 3,026,392 shares in 1997,
1996 and 1995, respectively, related to outstanding options and warrants not
included in the calculation of basic net loss per share.
Accounting for Employee Stock-Based Compensation
As permitted by SFAS 123, the Company accounts for its stock option and
employee stock purchase plans under the provisions of Accounting Principles
Board Opinion 25 ("APB 25") and related Interpretations. Accordingly, the
Company does not recognize compensation expense in accounting for its stock
option and employee stock purchase plans for awards which have an exercise price
equal to the fair value of the Company's common stock on the date of the grant.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," and Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," which
require additional disclosures to be adopted beginning in the first quarter of
1998 and on December 31, 1998, respectively. Under SFAS 130, the Company is
required to display comprehensive income and its components as part of the
Company's full set of financial statements. SFAS 131 requires that the Company
report financial and descriptive information about its reportable operating
segments. The Company is evaluating the impact if any, of SFAS 130 and SFAS 131
on its future financial statement disclosures, but does not believe the
additional disclosure will be material to the financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Impact of the Year 2000
As the year 2000 approaches, an issue impacting all companies has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to accommodate only a two digit date
position which represents the year (e.g., "95" is stored on the system and
represents the year 1995). As a result, the year 1999 (i.e., "99") could be the
maximum date value systems will be able to accurately process. Management is in
the process of working with its software vendors to assure that the Company is
prepared for the year 2000. Management does not anticipate that the Company will
incur significant operating expenses or be required to invest heavily in
computer system improvements to be year 2000 compliant.
33
35
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
NOTE 2 -- INVESTMENTS
The following is a summary of available-for-sale securities:
AVAILABLE-FOR-SALE SECURITIES
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
DECEMBER 31, 1997:
U.S. government & agency obligations...... $ 3,873,492 $17,045 $ (3,509) $ 3,887,028
Corporate obligations..................... 5,356,643 6,612 (39,751) 5,323,504
Corporate equity securities............... 100,000 8,333 (37,500) 70,833
----------- ------- ---------- -----------
$ 9,330,135 $31,990 $ (80,760) $ 9,281,365
=========== ======= ========== ===========
DECEMBER 31, 1996:
U.S. government & agency obligations...... $21,974,342 $37,048 $ (158,340) $21,853,050
Corporate obligations..................... 8,459,901 10,882 (23,535) 8,447,248
Corporate equity securities............... 200,000 12,820 (50,000) 162,820
----------- ------- ---------- -----------
$30,634,243 $60,750 $ (231,875) $30,463,118
=========== ======= ========== ===========
The amortized cost and estimated fair value of debt and investments at
December 31, 1997 by contractual maturity are shown below.
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ----------
Due in one year or less........................... $3,813,655 $3,795,174
Due after one year through three years............ 5,416,480 5,415,358
---------- ----------
9,230,135 9,210,532
Corporate equity securities....................... 100,000 70,833
---------- ----------
$9,330,135 $9,281,365
========== ==========
NOTE 3 -- INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Inventories consisted of the following:
DECEMBER 31,
------------------------
1997 1996
---------- ----------
Raw materials..................................... $1,568,071 $1,545,923
Finished goods.................................... 478,147 1,062,954
---------- ----------
$2,046,218 $2,608,877
========== ==========
34
36
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
--------------------
1997 1996
-------- --------
Office furniture and fixtures........................ $300,469 $279,369
Office equipment..................................... 798,629 619,709
Leasehold improvements............................... 204,136 --
-------- --------
1,303,234 899,078
Less accumulated depreciation........................ 778,157 599,673
-------- --------
Net property and equipment........................... $525,077 $299,405
======== ========
NOTE 5 -- LICENSE AGREEMENTS
Pursuant to its 1994 license agreement with Alpha 1 Biomedicals, Inc.
("A1B"), the Company obtained worldwide marketing, development and manufacturing
rights to thymosin alpha 1, with the exception of Italy, Spain and Portugal. In
April 1997, SciClone entered into an arrangement with A1B to administer the
sublicense activities of the A1B licensee for Italy, Spain and Portugal. Under
this 1997 agreement, the Company also acquired control of A1B's patent portfolio
for thymosin alpha 1. In December 1997, SciClone and A1B entered into an Asset
Purchase Agreement pursuant to which the Company will acquire A1B's worldwide
rights to thymosin alpha 1, which rights A1B licensed from Hoffmann-LaRoche,
Inc. and F. Hoffmann-LaRoche AG (collectively, "Roche"), and eliminated the
Company's and its current and future sublicensee's royalty obligations to A1B
with respect to future sales of thymosin alpha 1. The Company has agreed in its
Asset Purchase Agreement to issue up to 600,000 shares of common stock and make
loans up to an aggregate amount of $280,000 to A1B in exchange for the assets
described above. The Agreement is subject to approval by A1B's stockholders at
A1B's 1998 Annual Meeting of Stockholders and receipt of consents from Roche.
In October 1996, the Company entered into an expanded and amended license
and supply agreement with Schering-Plough K.K. ("SPKK"), giving SPKK exclusive
development and marketing rights to ZADAXIN in Japan. Under the amended
agreement, the Company expects SPKK to continue development of ZADAXIN
monotherapy for the treatment of hepatitis B and hepatitis C and to initiate
investigation of the combination ZADAXIN plus SPKK's INTRON(R) A (interferon
alfa-2b) for the treatment of hepatitis C, with the parties sharing certain
development expenses. SPKK will undertake the development, registration and
marketing of ZADAXIN in Japan. Contingent upon product approval, SciClone will
receive milestone payments. To date, there has been no license fee revenue
recognized by the Company.
In April 1996, the Company acquired an exclusive license to CPX, a
synthetic compound, from the National Institutes of Health ("NIH"). The NIH
developed CPX as a potential treatment for cystic fibrosis. Under this license
agreement, the Company is obligated to pay the NIH a minimum annual royalty
payment and, upon product approval, will receive a milestone payment in addition
to royalties based on a percentage of CPX net sales revenue.
In December 1994, the Company acquired the rights to develop, manufacture,
and commercialize thymosin alpha 1 in South Korea from a pharmaceutical company.
35
37
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
NOTE 6 -- INCOME TAXES
The domestic and foreign components of loss before income tax are as
follows:
1997 1996 1995
------------ ------------ ------------
Domestic....................... $ (8,515,547) $ (6,125,896) $ (5,675,924)
Foreign........................ (5,481,458) (8,610,042) (9,099,506)
------------ ------------ ------------
Loss before income tax......... $(13,997,005) $(14,735,938) $(14,775,430)
============ ============ ============
The significant components of the Company's deferred tax assets and
liabilities at December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995
------------ ------------ -----------
ASSETS
Net operating loss carryforwards........ $ 12,640,000 $ 9,854,000 $ 6,231,000
Other, net.............................. 2,500,000 1,795,000 277,000
------------ ------------ -----------
Gross deferred tax assets............... 15,140,000 11,649,000 6,508,000
Valuation allowance..................... (15,070,000) (11,426,000) (6,308,000)
------------ ------------ -----------
Total deferred tax asset................ $ 70,000 $ 223,000 $ 200,000
------------ ------------ -----------
LIABILITIES
Net unrealized gains on
available-for-sale securities......... $ -- $ -- $ 200,000
Other................................... 70,000 223,000 --
------------ ------------ -----------
Total deferred tax liability............ 70,000 223,000 200,000
------------ ------------ -----------
Net deferred tax assets................. $ -- $ -- $ --
============ ============ ===========
Deferred tax assets relating to net operating loss carryforwards as of
December 31, 1997 and 1996 include $3,400,000 and $3,300,000, respectively,
associated with stock option activity for which any subsequently recognized tax
benefits will be credited directly to shareholders' equity.
At December 31, 1997, the Company had net operating loss carryforwards for
U.S. tax purposes totaling approximately $34,000,000, expiring in 2006-2012, and
approximately $10,000,000 in state net operating losses expiring in 1998-2002.
The difference between the current year's loss for financial reporting purposes
and federal income tax purposes is primarily attributable to losses incurred by
the Company's foreign subsidiaries.
Due to the change in ownership provisions of the Tax Reform Act of 1986,
utilization of net operating loss carryforwards may be limited against taxable
income in future periods.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its main office facility under a non-cancelable lease
agreement which expires in April 2000. The lease is for a period of five years
and requires the Company to pay insurance and taxes and its pro-rata share of
operating expenses. The Company also leases various office facilities abroad
under non-cancelable lease agreements, expiring in 2002. Rental expense in 1997,
1996, and 1995 was $462,000, $397,000, and $391,000 respectively. Minimum future
rental commitments amount to $494,000 in 1998, $509,000 in 1999, $147,000 in
2000, $139,000 in 2001 and $145,000 in 2002.
36
38
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Royalties
Under the April 1996 CPX license agreement with the NIH, the Company is
obligated to pay the NIH a minimum annual royalty and, upon commercialization of
CPX, will be obligated to pay a royalty based on a percentage of CPX net sales
revenue. During 1997, the Company paid $10,000 related to the minimum annual
royalty. No royalties were paid in 1996.
In October 1992, the Company amended its services agreement with a Japanese
trading company. Upon receipt by SciClone of any revenues in Japan for ZADAXIN,
the Japanese trading company will receive a royalty as a percentage of such
revenues for a specified period of time. To date, no royalty amounts have been
paid or are due the Japanese trading company with respect to this agreement.
NOTE 8 -- SHAREHOLDERS' EQUITY
Common Stock and Warrants
In January 1994, the Company sold 2,000,000 shares of common stock in an
underwritten public offering at $23.25 per share. The Company received
approximately $43,600,000 in net proceeds from the offering.
In conjunction with its initial public offering ("IPO"), the Company
granted its IPO investment banker warrants to purchase 300,000 shares of common
stock and 300,000 non-redeemable warrants. The warrants were exerciseable during
the four-year period ending March 16, 1997. The exercise price of the 300,000
shares of common stock was $6.00 per share and the non-redeemable warrants was
at $0.33 per warrant. The non-redeemable warrants were further exerciseable into
one common share at $15.55 per share. In March 1997, 164,995 warrants
exerciseable at $6.00 per share remained outstanding and were exercised by the
Company's IPO investment banker resulting in proceeds of approximately $990,000.
In exchange for exercising the outstanding warrants at $6.00 per share, the
Company lowered the exercise price of the non-redeemable warrants from $15.55
per share to $4.00 per share. In October 1997, 300,000 warrants were exercised
at $4.00 per share by the Company's IPO investment banker resulting in proceeds
of approximately $1,200,000.
In July 1997, the Company loaned to one of its former board members and
former executive officers $5.944 million secured by approximately 1.9 million
shares of the Company's common stock owned by this individual. The loan carries
interest at 7%. During the period this loan is outstanding and immediately prior
to the closing of any offering of the Company's common stock, the Company may
convert the loan in a non-cash exchange into this individual's SciClone common
stock by retiring his SciClone common stock at a fixed discount rate from the
offering price. To date, the Company has not retired any of this individual's
SciClone common stock. On December 31, 1997, the balance of the loan was $5.944
million and was classified as an offset to shareholders' equity.
Repurchase of Common Stock
In 1995 and 1994, the Company's Board of Directors authorized the
repurchase of up to 1.0 million and 1.5 million shares of the Company's common
stock, respectively. In the year ended December 31, 1997, 1996, and 1995, the
Company repurchased 684,500, 78,000, and 346,000 shares of its common stock for
an aggregate cost of $4,267,000, $659,000, and $1,925,000, respectively.
Stock Award Plans
In August 1991, the Board of Directors and shareholders of the Company
approved the 1991 Stock Plan (the "1991 Plan") and reserved 1,300,000 shares for
issuance thereunder. In May 1993, the Board of Directors and shareholders of the
Company approved a 2,150,000 share increase in the shares reserved under the
1991 Plan. The 1991 Plan permits the award of incentive or nonqualified stock
options and shares of common stock under restricted stock purchase agreements.
In January 1992, the Board of Directors and
37
39
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
shareholders of the Company approved the 1992 Stock Plan (the "1992 Plan") and
reserved 240,000 shares for issuance thereunder. The 1992 Plan permits the award
of incentive or nonqualified stock options which must be exercised in cash. In
June 1995, the Board of Directors and the shareholders of the Company approved
the 1995 Equity Incentive Plan (the "1995 Plan") and reserved 1,250,000 shares
for issuance thereunder. The 1995 Plan permits the award of incentive or
nonqualified stock options and shares of common stock under restricted stock
awards.
Under the 1991, 1992 and 1995 Plans, options are exercisable upon
conditions determined by the Board of Directors and expire ten years from the
date of grant. Options are generally granted at fair market value on the date of
grant and vest over time, generally four years.
In June 1995, the Board of Directors and the shareholders of the Company
approved the Nonemployee Director Stock Option Plan (the "Nonemployee Director
Plan") and reserved 250,000 shares for issuance thereunder. The Nonemployee
Director Plan automatically grants nonqualified stock options to nonemployee
directors upon their appointment or first election to the Company's Board of
Directors ("Initial Grant") and annually upon their reelection to the Board of
Directors at the Company's Annual Meeting of Shareholders ("Annual Grant"). The
options are granted at fair market value on the date of grant. Initial Grants
vest annually over a period of three years. Annual Grants vest monthly over a
period of one year.
In July 1996, the Board of Directors and shareholders of the Company
approved the 1996 Employee Stock Purchase Plan (the "ESPP") and reserved 500,000
shares for issuance thereunder. All full-time employees are eligible to
participate in the ESPP. Under the terms of the ESPP, employees can choose to
have up to 15% of their salary withheld to purchase the Company's common stock.
The purchase price of the stock is the lower of 85% of the fair market value as
of the first trading day of each quarterly participation period, or as of the
last trading day of each quarterly participation period. Under the ESPP, the
Company sold 20,432 and 5,675 shares to employees in 1997 and 1996,
respectively.
The following table summarizes the stock option activity under the 1991,
1992 and 1995 plans and the Nonemployee Director Plan:
WEIGHTED AVERAGE
SHARES AVAILABLE SHARES UNDER EXERCISE PRICE OF
FOR GRANT OPTION SHARES UNDER PLAN
---------------- ------------ -----------------
BALANCE AT DECEMBER 31, 1994.................. 801,212 2,225,337 $5.81
1995 Plan shares reserved................... 1,250,000 -- --
Nonemployee Director Plan shares reserved... 250,000 -- --
Options canceled............................ 63,963 (63,963) 5.93
Options granted............................. (436,500) 436,500 5.68
Options exercised........................... (66,477) 2.88
--------- ---------
BALANCE AT DECEMBER 31, 1995.................. 1,928,675 2,531,397 5.86
Options canceled............................ 107,357 (107,357) 7.97
Options granted............................. (901,850) 901,850 5.73
Options exercised........................... (799,625) 4.66
--------- ---------
BALANCE AT DECEMBER 31, 1996.................. 1,134,182 2,526,265 6.11
Options canceled............................ 232,595 (232,595) 7.03
Options granted............................. (775,300) 775,300 5.12
Options exercised........................... -- (10,236) 3.14
--------- ---------
BALANCE AT DECEMBER 31, 1997.................. 591,477 3,058,734 $5.80
========= =========
38
40
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ----------- -------------- ----------- --------------
0.30 - $ 0.30.................... 14,000 3.75 $ 0.30 14,000 $ 0.30
3.00 - $ 4.38.................... 381,578 5.12 3.50 355,161 3.46
4.80 - $ 7.25.................... 2,314,531 8.08 5.49 1,145,190 5.72
7.59 - $12.50.................... 348,625 6.42 10.57 297,975 10.82
--------- ---------
3,058,734 7.50 $ 5.80 1,812,326 $ 6.07
========= =========
As permitted by SFAS 123, the Company applies APB 25 and related
Interpretations in accounting for its stock award plans and accordingly, does
not recognize compensation expense for awards which have an exercise price equal
to the fair value of the Company's common stock on the date of the grant.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
stock awards under the fair value method of that Statement. The fair value for
the options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1997, 1996 and
1995: risk-free interest rates of 6.16%, 5.14% and 6.81%, respectively; dividend
yields of 0%; volatility factors of the expected market price of the Company's
stock of .83 for 1997 and .84 for 1996 and 1995; and a weighted average expected
life of the option of 4.31 years for 1997 and 4.37 years for 1996 and 1995. The
fair value for the employee stock purchases was also estimated using the
Black-Scholes model with the following assumptions for 1997 and 1996: risk-free
interest rate of 5.23% and 5.3% respectively; dividend yield of 0%; expected
volatility of .74 and .84 respectively, and expected life of .25 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock awards have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
the Company's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and stock
purchases.
The Company recorded deferred compensation of approximately $2.4 million
related to 1992 stock option grants. The deferred compensation is amortized over
the vesting period, which ranged from two to five years. For the years ended
December 31, 1996, and 1995, approximately $205,000 and $555,000, of deferred
compensation related to stock option grants was charged to compensation expense,
respectively. There was no deferred compensation charged to compensation expense
for the year ended December 31, 1997.
39
41
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Had compensation expense for the Company's option and employee purchase
plans been determined based on the fair value at the grant date for awards in
1997, 1996 and 1995 consistent with the provisions of SFAS 123, the Company's
net loss and net loss per share would have been adjusted to the pro forma
amounts indicated below:
1997 1996 1995
------------ ------------ ------------
Net loss -- as reported........ $(13,997,000) $(14,746,000) $(14,775,000)
============ ============ ============
Net loss -- pro forma.......... $(15,726,000) $(15,821,000) $(14,643,000)
============ ============ ============
Net loss per share -- as
reported..................... $ (0.85) $ (0.85) $ (0.88)
============ ============ ============
Net loss per share -- pro
forma........................ $ (0.95) $ (0.91) $ (0.87)
============ ============ ============
The effects of applying SFAS 123 for pro forma disclosures are not likely
to be representative of the effects on reported net loss for future years. Pro
forma net loss for the year ended December 31, 1997 reflects compensation
expense for three years' vesting while the year ended December 31, 1998 will
reflect compensation expense for four years' vesting of outstanding stock
awards.
NOTE 9 -- SIGNIFICANT GEOGRAPHIC INFORMATION
Approximate foreign sources of revenues were as follows:
1997 1996 1994
---------- -------- --------
Asia....................................... $2,131,000 $636,000 $239,000
Other...................................... 92,000 67,000 34,000
For the year ended December 31, 1997, one customer in China accounted for
66% of the Company's product sales. Such customer represents 86% of the accounts
receivable balance at December 31, 1997.
NOTE 10 -- SUBSEQUENT EVENTS
In March 1998, the Company received $754,000 from one of its executive
officers as a partial payment of a $1,000,000 loan. This payment reduced the
loan to $236,500 including accrued interest. (See "Note 1 -- Notes Receivable
from Officers.")
In April 1998, the Company sold 661,157 shares of Series C convertible
preferred stock at $6.05 per share and received approximately $4,000,000 from
the offering (before deducting expenses). The preferred stock is convertible
into common stock on a scheduled basis over the next five years at prices based
on the market price of the common stock during a pricing period preceding
conversion. In conjunction with the offering, the Company granted to the
investor warrants to purchase 100,000 shares of common stock. These warrants are
exercisable during the five year period ending March 2003 at an exercise price
of $5.67 per share. (See "Business -- Recent Developments.")
40
42
SCICLONE PHARMACEUTICALS, INC.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
SciClone Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of SciClone
Pharmaceuticals, Inc. as of December 31, 1997 and 1996 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SciClone
Pharmaceuticals, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Palo Alto, California
January 16, 1998, except Note 10 as to
which date is April 2, 1998
41
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
42
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company, their ages as of
February 28, 1997, and certain other information about them are set forth below:
NAME AGE POSITION
---- --- --------
Donald R. Sellers................... 53 President, Chief Executive Officer
and Director
Alfred R. Rudolph, M.D.............. 50 Chief Operating Officer
Shawn K. Singh, J.D................. 34 Senior Vice President and Assistant
Secretary
David A. Karlin, M.D................ 54 Vice President and Medical Director
Mark A. Culhane..................... 38 Vice President, Finance and
Administration, Chief Financial
Officer and Secretary
Jere E. Goyan, Ph.D................. 67 Chairman of the Board of Directors
John D. Baxter, M.D................. 57 Director
Edwin C. Cadman, M.D................ 52 Director
Rolf H. Henel....................... 60... Director
Donald R. Sellers has served as the Company's Chief Executive Officer
since April 1996 and as President and Director since January 1996. From May 1993
to present, he has also served as Managing Director, SciClone Pharmaceuticals
International Ltd., the international arm of the Company. From 1990 to 1993, Mr.
Sellers was Corporate Vice President of Getz Bros., a U.S.-based international
trading company, as well as President of one of their Japanese operations. From
1983 to 1990, Mr. Sellers was employed by Sterling Drug International, initially
as Vice President of Marketing and Operations in Asia and later as President of
their Latin American Andina Group. Mr. Sellers began his pharmaceutical career
in 1973 with Pfizer as Country Manager, Vietnam and Hong Kong, and he later
worked with the Revlon Healthcare Group as Director of Worldwide Exports and
Pacific Area Director.
Alfred R. Rudolph, M.D. joined the Company in April 1997 as Chief
Technical Officer and was promoted to Chief Operating Officer in August 1997.
From January 1995 to September 1995, Dr. Rudolph was President and Chief
Operating Officer of Neptune Pharmaceuticals, Inc., a marine-based natural
product screening company. Dr. Rudolph was Senior Vice President of T Cell
Sciences, Inc., a biotechnology company, from December 1991 to September 1994
and was Vice President, Medical Affairs from March 1990 to December 1991.
Shawn K. Singh, J.D. has served as the Company's Senior Vice President and
Assistant Secretary since January 1998. From October 1997 to January 1998, Mr.
Singh was SciClone's Vice President of Corporate Development and Communications.
From August 1995 to October 1997, Mr. Singh served as the Company's Vice
President of Business Development. He joined SciClone in November 1993 as
Director of Business Development. Prior to SciClone, Mr. Singh specialized in
corporate finance, licensing and acquisitions in the Silicon Valley office of
Morrison & Foerster, an international law firm. Mr. Singh is a member of the
California State Bar.
David A. Karlin, M.D. has served as a Company Vice President since July
1996 and as a Medical Director since June 1995. Dr. Karlin joined SciClone with
oncology, gastroenterology, antiemetic and analgesic drug development
experience. Prior to SciClone, Dr. Karlin spent nine years in various roles at
Syntex Corporation ("Syntex"). These included the positions of Director of
Medical Research and Clinical Program Team Leader for Syntex Development
Research, Senior Clinical Research Physician for Syntex Medical Research Europe,
Associate Medical Director and Head, Gastroenterology and Anti-Ulcer Therapy
Department for Institute of Clinical Medicine, Syntex. Before Syntex, Dr. Karlin
spent ten years in academia as Associate Professor, Department of
Medicine/Section of Gastroenterology at the Temple University
43
45
School of Medicine in Philadelphia, Assistant Professor, Department of
Medicine/Gastroenterology Section at the University of Texas M.D. Anderson
Hospital and Tumor Institute and Instructor, Department of
Medicine/Gastroenterology Section the University of Chicago. Dr. Karlin held the
position of Major USA MC for Department of Medicine Staff Gastroenterology
Service and Staff Hematology Oncology Service at the University of Chicago,
residency training in Internal Medicine at the University of Michigan and
fellowship training in Gastroenterology/GI Oncology at the University of
Chicago.
Mark A. Culhane, currently on an unpaid leave of absence, has been the
Company's Vice President, Finance and Administration and Chief Financial Officer
since May 1994 and its Secretary since November 1993. From June 1992 to May
1994, Mr. Culhane served in other financial positions with the Company. From
July 1982 to June 1992, Mr. Culhane was employed by Price Waterhouse, an
international public accounting firm, where his last position was Senior
Manager.
Jere E. Goyan, Ph.D. has been a director of the Company since January 1992
and has been Chairman of the Board of Directors of the Company since July 1997.
Since July 1993, Dr. Goyan has been President and Chief Operating Officer and a
director of Alteon, Inc., a biotechnology company, where he served as Senior
Vice President for Research and Development from January 1993 through July 1993
and as Acting Chief Executive Officer from July 1993 through May 1994. Dr. Goyan
was Dean of the School of Pharmacy and Professor of Pharmacy and Pharmaceutical
Chemistry at the University of California, San Francisco from 1967 through 1992,
and was a Professor there from 1965 through 1992. From 1979 to 1981, Dr. Goyan
was the Commissioner of the United States Food and Drug Administration. Dr.
Goyan also currently serves as a director of Emisphere Technologies, Inc. and
Atrix Laboratories, both biotechnology companies, and Boehringer Ingelheim
Pharmaceuticals Corporation and Penwest Pharmaceuticals, a pharmaceutical
company which is a 100% owned subsidiary of Penford Corporation.
John D. Baxter, M.D. has been a director of the Company and the Chairman
of its Scientific Advisory Board since June 1991. Dr. Baxter has been associated
with the University of California, San Francisco ("UCSF") since 1970. He has
been Professor of Medicine since 1979, Chief of the Endocrinology Section,
Parnassus Campus since 1980 and Director of UCSF's Metabolic Research Unit since
1981. Dr. Baxter was a founder and served as a director of California
Biotechnology, Inc. (now Scios Nova, Inc.), a biotechnology company, from its
inception in 1982 to 1991.
Edwin C. Cadman, M.D. has been a director of the Company and a member of
its Scientific Advisory Board since November 1991. Since January 1994, Dr.
Cadman has been Senior Vice President of Medical Affairs and Chief of Staff at
Yale New Haven Hospital, where he was Chief of the Medical Service from 1987
through December 1993. Since 1987, Dr. Cadman has also been Professor of
Medicine at Yale University, where he was Chairman of the Department of Medicine
from 1987 through December 1993. Prior to these positions, he was Director of
the Cancer Research Institute at UCSF. Dr. Cadman also currently serves as a
director of CytoTherapeutics, Inc., a biotechnology company.
Rolf H. Henel joined the Company as a director in July 1997. Mr. Henel has
been a partner at Naimark & Associates, Inc., a healthcare consulting firm,
since September 1993. Mr. Henel has been Executive Director of Performance
Effectiveness Corporation, Inc., a pharmaceutical consulting and education
company, since April 1993. From 1978 to 1993, Mr. Henel was with Cyanamid, a
chemical company, most recently as President of Cyanamid International Lederele
Division. Mr. Henel is also a director of Penwest Pharmaceuticals, a
pharmaceutical company which is a 100% owned subsidiary of Penford Corporation.
Directors serve one year terms or until their successors are elected and
qualified. Executive officers serve at the discretion of the Board of Directors.
There are no family relationships among any of the directors or executive
officers of the Company.
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46
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
definitive proxy statement for the Company's 1998 Annual Meeting of Shareholders
to be filed with the Commission pursuant to Regulation 14A not later than 120
days after the end of the fiscal year covered by this Form (the "Proxy
Statement") under the caption "EXECUTIVE COMPENSATION."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
Proxy Statement under the caption "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
Proxy Statement under the captions "TRANSACTIONS WITH MANAGEMENT" and "EXECUTIVE
COMPENSATION -- Compensation Committee Interlocks and Insider Participation."
45
47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements. The following financial statements of the Company
are contained on pages 26-41 of this Report on Form 10-K:
Consolidated Balance Sheets at December 31, 1997 and 1996.
Consolidated Statements of Operations for each of the three years ended
December 31, 1997, 1996 and 1995.
Consolidated Statement of Shareholders' Equity for each of the three
years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
(2) Financial Statement Schedules
The following schedule is filed as part of this Report:
Schedule II -- Valuation and Qualifying Accounts for each of the three
years ended December 31, 1997, 1996 and 1995.
All other schedules have been omitted because they are either
inapplicable or the required information has been given in the
consolidated financial statements or the notes hereto.
(3) Exhibits.
Refer to Item 14(c) below.
(b) Reports on Form 8-K.
Form 8-K filed on January 26, 1998 announcing the execution of the Alpha
Rights Acquisition Agreement
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48
(c) EXHIBITS.
Exhibits (numbered in accordance with Item 601 of Regulation S-K):
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------
3(i).1(1) Restated Articles of Incorporation
3(i).2(2) Certificate of Amendment of Restated Articles of
Incorporation
3(i).3(14) Certificate of Determination
3(i).4 Certificate of Determination Regarding the terms of the
Series C Preferred Stock
3(ii).1(1) Bylaws
3(ii).2(2) Certificate of Amendment of Bylaws
4.1(1) Representative's Warrant Agreement, dated as of March 24,
1992, between the Registrant and Josephthal Lyon & Ross
Incorporated
4.2(14) Rights Agreement dated as of July 25, 1997 between the
Registrant and Chase Mellon Shareholder Services, L.L.C.
4.3 Preferred Stock Investment Agreement dated March 27, 1998 by
and among Registrant, Halifax Fund, L.P., Themis Partners
L.P. and Heracles Fund
4.4 Registration Rights Agreement dated April 1, 1998 by and
among Registrant, Halifax Fund, L.P., Themis Partners L.P.
and Heracles Fund
10.1(5) Thymosin License Agreement dated August 19, 1994 between
Registrant and Alpha 1 Biomedicals, Inc.
10.2(3) License, Development and Supply Agreement, dated January 12,
1993, between the Registrant and Schering-Plough K.K.
10.3(6) Supply Agreement dated October 19, 1994 between Registrant
and UCB Bioproducts S.A.
10.4(4)** Manufacturing Services Agreement dated as of July 27, 1993
by and between SciClone Pharmaceuticals International
Limited and Sclavo S.p.A.
10.5(1) Services Agreement, dated August 28, 1991, between the
Registrant and Nichimen Corporation (the "Nichimen Services
Agreement")
10.6(3) Restated Nichimen Services Agreement, dated October 5, 1992
10.7(2)** Registrant's 1991 Stock Plan, together with forms of
agreements thereunder
10.8(1)** Registrant's 1992 Stock Plan, together with forms of
agreements thereunder
10.9(9)** Employment Agreement, dated January 3, 1995, between the
Registrant and Mark A. Culhane
10.10(1) Lease, dated September 10, 1991, between the Registrant and
Spieker-Singleton68 concerning property, located at 901
Mariners Island Boulevard, San Mateo, California, as amended
(the "Spieker Lease")
10.11(7) Amendment No. 4 to Spieker Lease, dated October 4, 1994
10.12(9) Amendment No. 7 to Spieker Lease, dated November 14, 1995
10.13(8)** Registrant's 1995 Equity Incentive Plan, together with forms
of agreement thereunder
10.14(8)** Registrant's 1995 Nonemployee Director Stock Option Plan,
together with forms of agreement thereunder
10.15(9)** Form of Promissory Note and Deed of Trust With Assignment of
Rents between the Registrant and David L. Horwitz, M.D.,
Ph.D.
10.16(9) Employment Agreement dated February 1, 1996 between the
Registrant and Donald R. Sellers
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49
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------
10.17(10) License Agreement effective April 19, 1996 between the
Registrant and the National Institute of Health Office of
Technology Transfer
10.18(11) Form of Promissory Note secured by Deed of Trust between
Registrant and Donald R. Sellers
10.19(11) Amendment No. 8 to Spieker Lease, dated August 26, 1996
10.20(13)* Expanded and Amended License, Development and Supply
Agreement dated October 28, 1996 by and between the
Registrant and Schering-Plough K.K., a Japanese corporation
10.21(15) Alpha Rights Acquisition Agreement by and between the
Registrant and Alpha 1 Biomedicals, Inc., dated December 17,
1997
10.22(16) Purchase and Sale, Pledge and Security Agreement; Release
dated as of July 23, 1997 by Thomas Moore, in favor of
SciClone Pharmaceuticals, Inc.
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Powers of Attorney. See page 49.
27 Financial Data Schedule
- ---------------
* Confidential treatment requested.
** Management compensatory plan or arrangement.
(1) Incorporated by reference from the Company's Registration Statement on Form
S-l (No. 33-45446), declared effective by the Commission on March 17, 1992.
(2) Incorporated by reference from the Company's Registration Statement on Form
S-8 (No. 33-66832) filed with the Commission on August 3, 1993.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30. 1993.
(5) Incorporated by reference from the Company's Report on Form 8-K dated
August 19, 1994.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994.
(7) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(8) Incorporated by reference from the Company's Registration Statement on Form
S-8 (No. 33-80911) filed with the Commission on December 28, 1995.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.
(12) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(13) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(14) Incorporated by reference from the Company's Current Report on Form 8-K
filed on October 14, 1997
(15) Incorporated by reference from the Company's Current Report on Form 8-K
filed on January 26, 1998
(16) Incorporated by reference from the Company's Amendment No. 3 to its
Registration Statement on Form S-3 (No. 333-38773) filed with the
Commission December 2, 1997.
48
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SCICLONE PHARMACEUTICALS, INC.
/s/ DONALD R. SELLERS
By:
--------------------------------------
Donald R. Sellers,
Date: April 2, 1998 Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Donald R. Sellers and Shawn K. Singh, and
each of them, his attorneys-in-fact and agents, each with the power of
substitution and resubstitution, for him in any and all capacities, to sign any
and all amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary, to be done in connection therewith,
as fully as to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
either of them, or their or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DONALD R. SELLERS Chief Executive Officer, Director April 2, 1998
- --------------------------------------------- (Principal Executive Officer)
Donald R. Sellers
/s/ DIANE LEE Director, Corporate Finance and April 2, 1998
- --------------------------------------------- Administration
Diane Lee (Principal Financial and
Accounting Officer)
/s/ JOHN D. BAXTER, M.D. Director April 2, 1998
- ---------------------------------------------
(John D. Baxter, M.D.)
/s/ EDWIN C. CADMAN, M.D. Director April 2, 1998
- ---------------------------------------------
(Edwin C. Cadman, M.D.)
/s/ JERE E. GOYAN, PH.D. Director April 2, 1998
- ---------------------------------------------
(Jere E. Goyan, Ph.D.)
49
51
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
SCICLONE PHARMACEUTICALS INC.
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
----------- ------------ ---------- ---------------- ---------- -------------
YEAR ENDED DECEMBER 31, 1997
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectable
accounts............................ $ 7,000 $43,000 $200,000(1) $250,000
Inventory Reserve..................... 174,888 225,000(1) 74,888(2) 325,000
YEAR ENDED DECEMBER 31, 1996
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectable
accounts............................ -- 7,000 7,000
Inventory Reserve..................... 114,753 60,135 174,888
YEAR ENDED DECEMBER 31, 1995
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectable
accounts............................ -- 14,753 100,000 114,753
Inventory Reserve..................... --
- ---------------
(1) Transfer from General Reserve
(2) Adjustment to Reserve
50
52
INDEX TO EXHIBITS
SEQUENTIALLY
NUMBERED
EXHIBIT NO. EXHIBIT PAGE NUMBER
----------- ------- ------------
3(i).1(1) Restated Articles of Incorporation..........................
3(i).2(2) Certificate of Amendment of Restated Articles of
Incorporation...............................................
3(i).3(14) Certificate of Determination................................
3(i).4 Certificate of Determination Regarding the terms of the
Series C Preferred Stock....................................
3(ii).1(1) Bylaws......................................................
3(ii).2(2) Certificate of Amendment of Bylaws..........................
4.1(1) Representative's Warrant Agreement, dated as of March 24,
1992, between the Registrant and Josephthal Lyon & Ross
Incorporated................................................
4.2(14) Rights Agreement dated as of July 25, 1997 between the
Registrant and Chase Mellon Shareholder Services, L.L.C. ...
4.3 Preferred Stock Investment Agreement dated March 27, 1998 by
and among Registrant, Halifax Fund, L.P., Themis Partners
L.P. and Heracles Fund......................................
4.4 Registration Rights Agreement dated April 1, 1998 by and
among Registrant, Halifax Fund, L.P., Themis Partners L.P.
and Heracles Fund...........................................
10.1(5) Thymosin License Agreement dated August 19, 1994 between
Registrant and Alpha 1 Biomedicals, Inc. ...................
10.2(3) License, Development and Supply Agreement, dated January 12,
1993, between the Registrant and Schering-Plough K.K. ......
10.3(6) Supply Agreement dated October 19, 1994 between Registrant
and UCB Bioproducts S.A. ...................................
10.4(4)** Manufacturing Services Agreement dated as of July 27, 1993
by and between SciClone Pharmaceuticals International
Limited and Sclavo S.p.A. ..................................
10.5(1) Services Agreement, dated August 28, 1991, between the
Registrant and Nichimen Corporation (the "Nichimen Services
Agreement").................................................
10.6(3) Restated Nichimen Services Agreement, dated October 5,
1992........................................................
10.7(2)** Registrant's 1991 Stock Plan, together with forms of
agreements thereunder.......................................
10.8(1)** Registrant's 1992 Stock Plan, together with forms of
agreements thereunder.......................................
10.9(9)** Employment Agreement, dated January 3, 1995, between the
Registrant and Mark A. Culhane..............................
10.10(1) Lease, dated September 10, 1991, between the Registrant and
Spieker-Singleton68 concerning property, located at 901
Mariners Island Boulevard, San Mateo, California, as amended
(the "Spieker Lease").......................................
10.11(7) Amendment No. 4 to Spieker Lease, dated October 4, 1994.....
10.12(9) Amendment No. 7 to Spieker Lease, dated November 14, 1995...
10.13(8)** Registrant's 1995 Equity Incentive Plan, together with forms
of agreement thereunder.....................................
10.14(8)** Registrant's 1995 Nonemployee Director Stock Option Plan,
together with forms of agreement thereunder.................
10.15(9)** Form of Promissory Note and Deed of Trust With Assignment of
Rents between the Registrant and David L. Horwitz, M.D.,
Ph.D........................................................
10.16(9) Employment Agreement dated February 1, 1996 between the
Registrant and Donald R. Sellers............................
10.17(10) License Agreement effective April 19, 1996 between the
Registrant and the National Institute of Health Office of
Technology Transfer.........................................
53
SEQUENTIALLY
NUMBERED
EXHIBIT NO. EXHIBIT PAGE NUMBER
----------- ------- ------------
10.18(11) Form of Promissory Note secured by Deed of Trust between
Registrant and Donald R. Sellers............................
10.19(11) Amendment No. 8 to Spieker Lease, dated August 26, 1996.....
10.20(13)* Expanded and Amended License, Development and Supply
Agreement dated October 28, 1996 by and between the
Registrant and Schering-Plough K.K., a Japanese
corporation.................................................
10.21(15) Alpha Rights Acquisition Agreement by and between the
Registrant and Alpha 1 Biomedicals, Inc., dated December 17,
1997........................................................
10.22(16) Purchase and Sale, Pledge and Security Agreement; Release
dated as of July 23, 1997 by Thomas Moore, in favor of
SciClone Pharmaceuticals, Inc. .............................
21.1 Subsidiaries of Registrant..................................
23.1 Consent of Ernst & Young LLP, Independent Auditors..........
24.1 Powers of Attorney. See page 49. ...........................
27 Financial Data Schedule.....................................
- ---------------
* Confidential treatment requested.
** Management compensatory plan or arrangement.
(1) Incorporated by reference from the Company's Registration Statement on Form
S-l (No. 33-45446), declared effective by the Commission on March 17, 1992.
(2) Incorporated by reference from the Company's Registration Statement on Form
S-8 (No. 33-66832) filed with the Commission on August 3, 1993.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30. 1993.
(5) Incorporated by reference from the Company's Report on Form 8-K dated
August 19, 1994.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994.
(7) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(8) Incorporated by reference from the Company's Registration Statement on Form
S-8 (No. 33-80911) filed with the Commission on December 28, 1995.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.
(12) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(13) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(14) Incorporated by reference from the Company's Current Report on Form 8-K
filed on October 14, 1997
(15) Incorporated by reference from the Company's Current Report on Form 8-K
filed on January 26, 1998
(16) Incorporated by reference from the Company's Amendment No. 3 to its
Registration Statement on Form S-3 (No. 333-38773) filed with the
Commission December 2, 1997.