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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-19825
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 MARINER'S 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 $39,287,889 as of March 12, 1999, 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 12, 1999, there were 20,067,028 shares of the Registrant's
Common Stock outstanding.
Part III incorporates by reference from the definitive proxy statement for
the Registrant's 1999 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. The Company has
attempted to identify such statements with an asterisk (*). 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 the U.S., Europe or Japan; (iii) risks
associated with the manufacture and supply of ZADAXIN; (iv) the unavailability
of immediate and adequate financing; (v) 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;
(vi) decisions and timing of decisions made by the U.S. Food and Drug
Administration and comparable foreign agencies regarding the indications for
which the Company's products may be approved; (vii) market acceptance of the
Company's products; (viii) the Company's ability to obtain reimbursement for its
products from third-party payers, where appropriate; (ix) 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 "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
INTRODUCTION
SciClone is a global biopharmaceutical company that acquires, develops, and
commercializes specialist-oriented drugs for treating chronic and
life-threatening diseases, such as hepatitis B, hepatitis C, cancer, immune
system disorders and cystic fibrosis. SciClone has two drugs in clinical
development, ZADAXIN and CPX, and has other drug candidates in preclinical
development.
ZADAXIN, SciClone's lead drug, boosts the immune system. The Company's
therapeutic targets for ZADAXIN include hepatitis B, hepatitis C, cancer, viral
vaccine enhancement and certain immune system disorders. ZADAXIN is approved for
marketing in 13 countries: Argentina, Cambodia, Italy, Kuwait, Mexico, Myanmar,
Pakistan, the People's Republic of China, Peru, the Philippines, Singapore,
Venezuela and Vietnam. SciClone has filed for approval to market ZADAXIN in 19
additional countries outside the U.S., Europe and Japan. In 1998, ZADAXIN
generated over $3.6 million in sales, primarily 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. As a result of
transactions completed during 1998, the Company now has worldwide rights to
ZADAXIN. In Japan, SciClone has sublicensed its ZADAXIN development and
marketing rights to Schering-Plough K.K., the Japanese subsidiary of
Schering-Plough Corporation, the leading marketer of viral hepatitis therapies
worldwide.
The Company is pursuing corporate partnering arrangements for development
in the U.S. and Europe of a combination therapy of ZADAXIN plus interferon for
treatment of hepatitis C.* Hepatitis C is a worldwide epidemic. Over 170 million
people worldwide are infected with hepatitis C, including a total of more than
10 million people in the U.S., Europe and Japan, the world's largest
pharmaceutical markets. Clinical data demonstrate that the combination of
ZADAXIN plus interferon could be a significant therapeutic advance in the fight
against the hepatitis C epidemic. Interferon, the only established therapy
worldwide to treat hepatitis C, leads to a sustained response in only 5% to 20%
of patients and causes unpleasant side effects.
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Interferon plus ribavirin, a nucleoside analogue, was approved for treatment of
hepatitis C in the U.S. and certain other countries in 1998. This combination is
beneficial to certain patients. However, ribavirin, by adding its own side
effects and toxicities to those of interferon, increases the risk of side
effects and toxicities when combined with interferon. Importantly, ZADAXIN
combined with interferon has demonstrated clinical importance for treatment of
hepatitis C without increasing the risk of additive side effects or toxicities.
In Japan, the world's leading market for viral hepatitis therapies,
SciClone has licensed exclusive development and marketing rights to ZADAXIN to
Schering-Plough K.K. In the second quarter of 1998, Schering-Plough K.K. started
a 300-patient pivotal phase 3 study of ZADAXIN monotherapy for treatment of
hepatitis B in Japan. Interferon monotherapy, including Schering-Plough K.K.'s
interferon, is the established first-line therapy for hepatitis B in Japan.
Schering-Plough K.K. also is developing ZADAXIN in a phase 2 program for
treatment of 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"), the most common fatal genetic disease in the U.S. and Europe. 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 of the gene that encodes the CFTR. 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 preclinical data
demonstrating that CPX corrects the two key protein-associated defects causing
CF in patients with the delta F508 mutation -- impaired chloride ion transport
and abnormal CFTR trafficking. CPX is the only drug in clinical development with
the potential to correct these two key protein-associated defects in most CF
patients. The Company has obtained orphan drug designation for CPX from the
United States Food and Drug Administration ("FDA"). In 1997, the FDA awarded
SciClone a $100,000 Orphan Drug Grant for phase 1 development of CPX as a
treatment for CF. The Company completed phase 1 development of CPX in CF
patients in April 1998. In October 1998, the FDA awarded SciClone a prestigious
$200,000 Orphan Drug Grant for phase 2 development of CPX as a treatment for CF.
The Company started phase 2 development of CPX in the U.S. in September 1998.
The Cystic Fibrosis Foundation ("CF Foundation") provided substantial financial
support for early research on CPX at the NIH. The CF Foundation also supported
SciClone in its application for an Investigational New Drug ("IND") exemption to
gain approval from the FDA to begin the testing of CPX directly in CF patients
rather than the standard process of testing first in healthy volunteers. The CF
Foundation continues to support SciClone with protocol review, patient
recruitment and investigator and study center selection.
SciClone has other drug candidates in early preclinical development. The
Company plans to continue to evaluate the pharmaceutical potential of its
preclinical drug candidates in 1999.
Internationally, SciClone has entered into 41 ZADAXIN distribution
arrangements covering 46 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 Schering-Plough K.K. for
exclusive rights to develop and market ZADAXIN in Japan and its arrangements
with its ZADAXIN distributors. The Company is currently pursuing corporate
partnering arrangements in the U.S. and Europe for development of ZADAXIN,
particulary the combination of ZADAXIN plus interferon for hepatitis C.* The
Company intends to produce 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 domestic and international drug development,
regulatory affairs and sales and marketing expertise as follows:
INCREASE ZADAXIN SALES. In 1998, SciClone's lead product, ZADAXIN, achieved
over $3.6 million in sales, primarily as a monotherapy for treatment of
hepatitis B. In 1999, the Company intends to expand its international sales and
marketing capabilities and increase sales of ZADAXIN.* During 1998 and early
1999, SciClone received ZADAXIN marketing approvals in 10 new countries. ZADAXIN
is now approved for certain uses in one or more countries in Asia, Latin
America, the Middle East and Southern Europe. ZADAXIN marketing applications are
pending in 19 additional countries. 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.
LEVERAGE STRONG DISTRIBUTION NETWORK IN ASIA, LATIN AMERICA AND THE MIDDLE
EAST. Unlike nearly all public biopharmaceutical companies, SciClone has
established a unique business asset -- a growing international network,
currently 41 strong, of leading local importers/distributors covering 46
countries in Asia, Latin America and the Middle East. Originally established to
enable SciClone to market directly its lead compound, ZADAXIN, outside of the
U.S. and Europe without paying a substantial margin to a major pharmaceutical
company, management believes that this network now represents a growing business
opportunity for Company.* The Company's distribution network, which is designed
to manage specialist-oriented, high priced medical products such as ZADAXIN, is
an attractive distribution alternative for biopharmaceutical companies that are
close to having a registered product and want to participate directly in its
international marketing. In 1999, the Company intends to consider product
licensing opportunities designed to enable it to leverage its strong
distribution network.*
EXPAND PRODUCT PIPELINE. SciClone concentrates its resources on drug
development and commercialization, not early drug discovery. The Company
evaluates new compounds for acquisition or in-licensing from various sources,
including government agencies, universities, and pharmaceutical and
biotechnology companies. SciClone seeks early 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 comparable
companies engaged in both drug discovery and drug development.*
LEVERAGE KEY THIRD-PARTY RESOURCES. Through collaborative arrangements,
SciClone seeks to leverage key third-party resources on a flexible, as-needed
basis rather than establish and maintain such resources during periods when they
are not necessary. For example, 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
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process patents. Management believes this strategy will enable the Company to
further protect the increased use and value of its product portfolio.*
PRODUCT DEVELOPMENT ACTIVITIES
The following table summarizes the Company's current significant product
development activities:
INDICATION/
PRODUCT LOCATION APPLICATION STATUS
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ZADAXIN People's Republic of China Hepatitis B Marketed
thymosin alpha 1 Philippines, Singapore
Cambodia, Kuwait, Myanmar Hepatitis B Approved in 1998
Peru, Pakistan
Venezuela, Vietnam Approved in 1999
Cambodia, Myanmar, Philippines Hepatitis C Approved in 1998
Singapore, Venezuela Approved in 1999
Argentina, Mexico Influenza vaccine adjuvant Approved in 1998
Italy Approved; Acquired in 1998
People's Republic of China Approved
Argentina, Bangladesh, Brazil, Hepatitis B Application File Pending
Brunei, Chile, Colombia,
Cyprus, Egypt, Hong Kong,
India, Indonesia, Laos,
Lebanon, Malaysia, Mexico,
Nepal, New Zealand, Sri Lanka,
Taiwan, Turkey
Argentina, Egypt, Mexico, Peru, Hepatitis C Application File Pending
Turkey
Thailand Influenza vaccine adjuvant Application File Pending
Japan Hepatitis B Started Phase 3(2)
U.S./Europe Hepatitis C Phase 3(1)
Japan Hepatitis C Started Phase 2(2)
CPX U.S. Cystic Fibrosis Completed Phase 1(3)
U.S. Cystic Fibrosis Started Phase 2(3)
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(1) A successful, non-pivotal U.S. phase 3 study of the combination of ZADAXIN
plus interferon for the treatment of hepatitis C has been completed.
Subsequently, the Company met 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 additional phase 3
development has been proposed and refined in a workshop with numerous
leading international hepatologists. The Company is pursuing corporate
partnering arrangements for further development in the U.S. and Europe of
ZADAXIN plus interferon for treatment of hepatitis C.*
(2) Clinical trial being conducted by Schering-Plough K.K.
(3) In the second quarter of 1998, the Company completed dosing 37 patients in a
multi-center, single ascending oral dose phase 1 clinical study of CPX in
the U.S. In the third quarter of 1998, the Company started its 50 patient,
multi-center, multiple-ascending oral dose phase 2 clinical study of CPX for
cystic fibrosis in the U.S.
ZADAXIN FOR HEPATITIS B AND HEPATITIS C
ZADAXIN 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 demonstrated significant
immunomodulatory properties. Data show that ZADAXIN boosts the immune system in
many ways in a substantial number of patients. ZADAXIN appears to act on cells
of the immune system that have been
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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 or toxicities 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 drugs, especially interferon
or nucleoside analogues such as famciclovir and lamivudine, may have application
across a broad spectrum of diseases, including hepatitis B, hepatitis C, cancer
and immune system disorders.
HEPATITIS B
Hepatitis B is one of the most common infectious diseases in the world. It
can be transmitted whenever blood to blood contact occurs, including 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 hepatitis B virus.
Among carriers of the hepatitis B virus, 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 10 countries as a safe and effective treatment
for hepatitis B. Used alone or in combination with other immunomodulatory agents
such as interferon or antiviral agents such as the nucleoside analogues
famciclovir and lamivudine, ZADAXIN has not caused any significant drug related
side effects.
CONTROLLED ZADAXIN HEPATITIS B TRIALS
The Company commissioned a meta analysis of randomized and controlled
trials of ZADAXIN in hepatitis B. 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's meta analysis of ZADAXIN was performed by MetaWorks, Inc. of Boston,
Massachusetts, and included two U.S. hepatitis B trials sponsored by Alpha 1
Biomedicals and the Company's Taiwan hepatitis B trial. A statistically
significant benefit (p = 0.04) was demonstrated in the meta analysis with an
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.
COMPETITIVE PRODUCTS
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 U.S., Europe, and Japan as well as in
numerous countries in Asia, Latin America and the Middle East. A meta analysis
by Wong et al., published in the Annals of Internal Medicine, of interferon as a
treatment for hepatitus B demonstrated a 33% response compared to 12% for
controls. A significant number of interferon treated patients had interferon
related side effects.
Other agents under development, and approved in certain countries,
including the U.S., for the treatment of hepatitis B, include nucleoside analogs
such as lamivudine. Efficacy (i.e., sustained elimination of the hepatitus B
virus after cessation of therapy) for lamivudine is 16%. Nucleoside analogs may
suppress viral replication in the blood but seldom eradicate the virus from the
infected liver cells. In most cases, viral replication resumes when nucleoside
analogs are discontinued. Data reported in the October 1997 supplement to
Hepatology show that lamivudine may be associated with fatal rebound viral
hepatitis B.
Importantly, there is evidence that ZADAXIN can be additive or synergistic
with the products mentioned above, complementing their approved uses without
increasing the risk of additive side effects or toxicities.
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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. ZADAXIN is still the only imported finished pharmaceutical
approved for treatment of hepatitis B in The People's Republic of China since
the introduction of interferon. Although, lamivudine recently received approval
in this market as a product to be manufactured locally, the Chinese Ministry of
Public Health (MOPH) approval of ZADAXIN was for an imported product -- the most
difficult drug approval to obtain in the People's Republic of China. ZADAXIN's
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
managed by the Company's Hong Kong branch of its wholly-owned international
subsidiary, SciClone Pharmaceuticals International Ltd. (SPIL). SPIL focused its
1998 sales efforts on the major population centers in the Chinese market,
including, among others, the southern province of Guangdong, the capital city of
Beijing, and Shanghai. In each region, local distribution teams are used to sell
and place ZADAXIN on hospital formularies of Chinese city and provincial
hospitals. The Company expects to increase ZADAXIN sales in the Chinese market
in 1999. The Company is in the process of establishing Representative Offices in
Shanghai and Beijing.
JAPAN. In Japan, the world's largest market for viral hepatitis therapies,
the Company has licensed exclusive ZADAXIN development and marketing rights to
Schering-Plough K.K. Schering-Plough K.K. is in the final stages of a ZADAXIN
Development Plan for the purpose of submitting a Japanese New Drug Application.
Schering-Plough K.K. has completed the phase 1 single and multiple dose safety
and pharmacokinetics trial, has successfully completed the dose ranging phase 2
safety and efficacy trial involving approximately 60 patients, and currently is
managing a 300 patient, pivotal phase 3 study of ZADAXIN monotherapy for the
treatment of hepatitis B, the largest ZADAXIN clinical trial to date.
TAIWAN. The Company sponsored a multicenter, randomized and controlled
phase 3 ZADAXIN monotherapy hepatitis B trial in Taiwan. The results of this
trial showed 37% of the patients treated with ZADAXIN monotherapy for 6 months
responded, compared to a 25% response in 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. The trial had three study sites. The principal site, which had
two-thirds of the total patient population, demonstrated statistically
significant results. At this site, 41% of the patients treated for 6 months
responded to ZADAXIN therapy versus 9% of the control group (p = 0.004). These
results were reported in May 1998 in the peer-reviewed journal Hepatology. The
Company filed for marketing registration in Taiwan in the third quarter of 1998.
ASIA, LATIN AMERICA AND THE MIDDLE EAST. ZADAXIN is approved for the
treatment of Hepatitis B in 10 countries in Asia, Latin America and the Middle
East: Cambodia, Kuwait, Myanmar, the People's Republic of China, Pakistan, Peru,
the Philippines, Singapore, Venezuela and Vietnam. SciClone has 19 ZADAXIN
marketing applications pending in Asia, Latin America and the Middle East and
expects to receive approvals in these territories as well as to file additional
ZADAXIN marketing applications in 1999.
SOUTHERN EUROPE. In April 1998, SciClone acquired ZADAXIN development and
marketing rights in Italy, Spain and Portugal, completing the Company's
acquisition of worldwide rights of the drug. The Company believes these three
Southern European territories, particularly Italy, represent over 50% of the
potential European market for viral hepatitis therapies. In connection with this
acquisition, the Company acquired a ZADAXIN marketing approval in Italy as an
influenza vaccine adjuvant and a ZADAXIN marketing application. In 1998, the
Company established SciClone Italy Srl to pursue aggressively ZADAXIN business
opportunities in Southern Europe.
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HEPATITIS C
Hepatitis C is a worldwide epidemic, infecting over 170 million people,
including approximately 10 million in the world's leading pharmaceutical
markets, the U.S., Europe and Japan. According to the Centers for Disease
Control and Prevention ("CDC"), approximately 4 million Americans are infected
with the hepatitis C virus. The CDC estimates that up to 230,000 new hepatitis C
cases are reported each year in the U.S. The American Liver Foundation ("ALF")
estimates that up to 12,000 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, approximately 4 million
people infected, is similar to that in the U.S. 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 20% of
hepatitis C carriers may develop cirrhosis, and 5% of these individuals may
develop liver cancer within five years of developing cirrhosis. Hepatitis C,
accompanied by cirrhosis and liver failure, is the leading cause of liver
transplantation in the U.S. Currently, alpha interferon monotherapy and alpha
interferon in combination with ribavirin, are the only therapies approved in the
U.S. for hepatitis C. Unfortunately, the combination of interferon plus
ribavirin is associated with significant side effects and toxicities. A
combination therapy which does not increase the risk of side effects and
toxicities compared to interferon alone, but has improved efficacy, would be a
therapeutic advance over existing therapies. 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 the combination of ZADAXIN
plus interferon could represent 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 the combination of 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 the
combination of ZADAXIN plus interferon and followed for 6 to 12 months after
treatment. Interferon-treated patients from the randomized controlled trials and
historical 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 compared.
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 of 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 the
combination of 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 indicating that the combination of
ZADAXIN plus interferon was significantly superior to interferon monotherapy.
SUSTAINED BIOCHEMICAL AND VIROLOGICAL RESPONSE
Pooled intent-to-treat analysis revealed a trend showing sustained
biochemical (ALT) response of 22.3% in the combination of 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 overlapping 1, indicating that the
combination of ZADAXIN plus interferon was superior to interferon monotherapy.
This sustained biochemical response analysis demonstrates a statistical trend in
favor of the combination of ZADAXIN plus interferon group and suggests that
there is only a small chance that this difference occurred by chance alone. Meta
analysis of sustained virological response also
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showed an odds ratio and 95% confidence interval of greater than 1, indicating
that the combination of ZADAXIN plus interferon was significantly superior to
interferon monotherapy.
The three studies also showed there were no increased or new side effects
or toxicities in the combination of ZADAXIN plus interferon group compared to
patients treated with interferon monotherapy.
Set forth below is more detailed information regarding the development
status of the combination of ZADAXIN plus interferon for treatment of hepatitis
C.
U.S. AND EUROPE. The Company is currently pursuing corporate partnering
arrangements for phase 3 development of the combination of 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 phase 3 hepatitis C program.
Fifteen additional leading hepatologists have agreed to be co-investigators in
this program.
JAPAN. In Japan, SciClone has licensed exclusive development and marketing
rights to ZADAXIN to Schering-Plough K.K. In November 1997, Schering-Plough K.K.
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.
Schering-Plough K.K. 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, AND THE MIDDLE EAST. The Company has marketing
approval for use of ZADAXIN as a treatment for hepatitis C in Cambodia, Myanmar,
the Philippines, Singapore and Venezuela. The Company is working to expand its
current approvals and pending marketing applications throughout Asia, Latin
America and the Middle East to include use of the combination of ZADAXIN plus
interferon to treat hepatitis C.
SOUTHERN EUROPE. In April 1998, SciClone acquired ZADAXIN development and
marketing rights in Italy, Spain and Portugal, completing the Company's
acquisition of worldwide rights of the drug. The Company believes these three
Southern European territories, particularly Italy, represent over 50% of the
potential European market for viral hepatitis therapies, especially hepatitis C.
In connection with this acquisition, the Company acquired a ZADAXIN marketing
approval in Italy as an influenza vaccine adjuvant and a ZADAXIN marketing
application. In 1998, the Company established SciClone Italy Srl to pursue
aggressively ZADAXIN business opportunities in Southern Europe.
CPX FOR CYSTIC FIBROSIS
CYSTIC FIBROSIS.
Cystic fibrosis is the most common fatal genetic disease in the U.S. and
Europe 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., approximately 1,000 new cases of CF are diagnosed each year. Currently,
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
protein-associated 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. More than 10 million people, one in 29 Americans, are unknowing,
symptomless carriers 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 protein-associated 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.
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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
aerosolized formulations. In addition, mucolytic (mucus-thinning) drugs are used
to thin the viscosity of the mucus. Since CF also 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. This cost includes hospitalizations, drug
therapy and physical therapy.
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 preclinical data demonstrating that
CPX corrects the two key protein-associated defects causing CF in most
patients -- 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. CPX is the only
drug in clinical development with the potential to correct the two
protein-associated defects in most 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 in healthy volunteers. The CF Foundation
provided substantial financial support in the NIH's early CPX research and
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 designation for CPX from the FDA. In 1997, the FDA awarded SciClone a
$100,000 Orphan Drug Grant for phase 1 development of CPX as a treatment for CF.
In October 1998, the FDA awarded SciClone a prestigious $200,000 Orphan Drug
Grant for phase 2 development of CPX as a treatment for CF. The CF Foundation
continues to support SciClone with protocol review, patient recruitment and
investigator and study center selection.
U.S. DEVELOPMENT OF CPX FOR CYSTIC FIBROSIS
In the second quarter of 1998 the Company successfully completed dosing 37
CF patients in its multicenter phase 1 clinical study of CPX. The primary
objectives of the study were to evaluate the safety and pharmacokinetic profile
of CPX. Single oral dose CPX was found to be safe and well absorbed. In the
third quarter of 1998, SciClone started a multicenter, multiple-ascending oral
dose phase 2 CPX clinical trial involving 50 CF patients in the U.S. The primary
objectives of the phase 2 trial are to evaluate safety, pharmacokinetics and
surrogate markers for efficacy. The four participating CF centers in the
Company's phase 2 trial are: 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 Matthews CF Center, Rainbow Babies and
Children's Hospital in Cleveland, Ohio; and The Emory University CF Center,
Egleston Children's Hospital in Atlanta, Georgia. Additional centers have
indicated interest in joining the study and are being evaluated by the Company.
MARKETING AND SALES
The Company plans to market and sell ZADAXIN in the U.S., Europe and Japan
in collaboration with corporate partners. Outside these territories, the Company
currently is and plans to market and sell ZADAXIN on its own.
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In the U.S. and Europe, SciClone is currently pursuing corporate partnering
arrangements for the phase 3 development and commercialization of the
combination of ZADAXIN plus interferon for the treatment of hepatitis C* in
these territories.
In Japan, SciClone has licensed exclusive ZADAXIN development and marketing
rights to Schering-Plough K.K.
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
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) at the leading
local hospitals in each of its approved markets as well as markets in which the
Company anticipates ZADAXIN approval on a near term or medium term basis. Local
importers/distributors assist SciClone with 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, has
international offices in Japan, the Philippines, Singapore and Taiwan and is
opening representative offices in Shanghai and Beijing. 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 wholesale/distribution
companies covering 46 countries outside of the U.S., Europe and Japan. In those
markets where ZADAXIN is approved in Asia, Latin America and the Middle East,
SciClone has established or plans to establish in the near term ZADAXIN
marketing programs.* Local ZADAXIN sales in the Company's approved markets are
or will be managed by SciClone employees utilizing dedicated
wholesale/distribution distributor employees nominated and supported by
SciClone.
In the U.S., CPX is in phase 2 clinical development. Currently, the Company
plans to create its own marketing and sales organization to market and sell CPX
in the U.S. In other markets, the Company is evaluating plans for marketing and
selling CPX.
MANUFACTURING
The Company has entered into contract manufacturing and supply agreements
to produce ZADAXIN and CPX.
To supply markets in Asia (except Japan), Europe, Latin America and the
Middle East, SciClone has a collaborative arrangement with 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
all markets outside the U.S. and Japan. To supply the U.S. and Japanese markets,
the Company has contracted with two cGMP bulk manufacturers and a separate cGMP
finishing plant, all in the U.S. SciClone has established an inventory of
ZADAXIN sufficient to fulfill its expected near term commercial requirements.
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 either a patentee or exclusive licensee of composition of
matter, process and use patents and pending applications related to thymosin
alpha 1, in the U.S. and abroad.
The Company is the exclusive licensee 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. The Company is a
co-patentee of thymosin alpha 1 composition of matter patents in New Zealand and
South Africa. Most of these foreign composition of matter patents have expired.
However, the Company is a patentee of a number of composition of matter patents
and applications directed to analogs and derivatives
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of thymosin alpha 1 and is seeking numerous other proprietary rights for
thymosin alpha 1. The Company is either a patentee or exclusive licensee and is
directing prosecution of use and process patents related to the method of making
and therapeutic uses of thymosin alpha 1.
Process patents owned by SciClone are directed to methods of making
thymosin alpha 1 and have issued in the U.S., a majority of European countries,
Hong Kong, Canada, Japan, Korea and Taiwan.
SciClone is also a co-patentee of patents and pending applications covering
numerous uses of thymosin alpha 1. Patents covering use of thymosin alpha 1 for
treatment of hepatitis C have issued in the U.S. and a majority of European
countries, Taiwan, Australia, Indonesia, Malaysia and South Africa. Patents for
which SciClone is a co-patentee have additionally issued in the U.S., South
Africa and Taiwan covering the use of thymosin alpha 1 to treat autoimmune
hepatitis; in Australia and South Africa for the use of thymosin alpha 1 in
treating hepatitis C in non-responders to interferon treatment; and in the U.S.
and New Zealand covering the use of thymosin alpha 1 to treat decompensated
liver disease. Patents which SciClone owns have issued in the U.S., Japan,
Taiwan, Malaysia and South Africa covering the use of thymosin alpha 1 to treat
hepatitis B carriers with minimal disease. SciClone is the exclusive licensee of
patents which have issued in the U.S. and Australia which cover the use of
thymosin alpha 1 to treat small cell and non-small cell lung cancer; in Japan
covering the treatment of hepatitis B using thymosin alpha 1; in the U.S.,
Taiwan and South Africa covering the use of thymosin alpha 1 to treat septic
shock; and in the U.S., Australia, the Philippines, Taiwan and South Africa
covering the treatment of infertility in mammalian males using thymosin alpha 1.
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. 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
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 entering into 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.
SPONSORED RESEARCH AND DEVELOPMENT
For the years ended December 31, 1998, 1997 and 1996, the Company expended
$9,293,000, $8,642,000 and $9,904,000, respectively, in Company sponsored
research and development activities.
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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, as well as 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 ("FD&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
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 U.S. 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 Product Licensing
Application for approval to commence commercial sales. In responding to an NDA,
the FDA may grant marketing approval or deny the application if 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," "new drug application" and "marketing application" refer
to what the Company believes are comparable trials and filings in such other
countries.
Congress recently amended the FD&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
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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 FD&C Act, once
regulations are implemented, certain manufacturing changes will not require
submission of a supplement.
The orphan drug provisions of the FD&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 chronic active 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 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
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process is time-consuming and costly because clinical trials and 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 Union 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
1999 are: (1) $272,282 one-time fee for an application requiring clinical data,
or $136,141 fee for an application not requiring clinical data; (2) $128,435
annual establishment fee; and (3) $18,364 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 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. The
Company is currently pursuing regulatory approvals of ZADAXIN in a number of
countries, and of CPX in the U.S., but there can
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be no assurance that the Company will ultimately obtain approvals in such
countries in a timely and cost-effective manner or at all. 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, 1998, the Company had 39 employees, 28 in the U.S., and
11 abroad. Additionally, the Company has direct access to and control of 77
employees of its overseas distributors. The Company considers its relations with
its employees to be satisfactory.
RECENT DEVELOPMENTS
On July 23, 1997, the Company loaned to Thomas E. Moore, its former
Chairman/CEO, $5,944,000 in exchange for a promise to repay the loan on demand
and the pledge of 1,882,500 shares of SciClone Common Stock owned by Mr. Moore
as collateral for such loan.
During 1998 it was determined that the value of the collateral underlying
the loan made to Mr. Moore was more than temporarily impaired and that a
writedown of the book value of the note would be required. Upon further
investigation relative to the collectibility of the demand note, it was
determined that the entire $5.944 million, plus accumulated interest of
approximately $689,000, was in substantial doubt. As a result of this
determination the Company elected to write off the entire remaining book value
in a non-cash charge to earnings in the fourth quarter of 1998 and cancel the
1,882,500 shares held as collateral. Under a new agreement, Mr. Moore received
credit against his total indebtedness of approximately $6.633 million. This
credit is calculated as the value of Mr. Moore's 1,882,500 shares of SciClone
Common Stock cancelled by the Company based on the greater of two stock prices.
The first stock price is calculated as the average 5-day closing stock price at
closing of this agreement. The second stock price is calculated as the average
5-day closing stock price at September 30, 1999. After calculating and applying
the appropriate credit, the balance of the remaining debt, if any, will be paid
in five installments according to a schedule beginning on October 1, 1999 at
$20,000 and increasing by a factor of 4 each six month anniversary thereafter
with final payment due no later than October 1, 2001. In the event that the
higher 5-day average stock price exceeds the amount of the indebtedness such
excess will be remitted to Mr. Moore in cash or stock, at the Company's sole
discretion. If in stock, the number of shares will not exceed 1,882,500 shares.
See "Note 8 -- Shareholder's Equity of Notes to Consolidated Financials."
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ITEM 2. PROPERTIES
The Company has leased approximately 12,000 square feet of office space at
its headquarters in San Mateo, California and limited office space for marketing
purposes in Singapore, Hong Kong, Shanghai and Taiwan. 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.
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
---------------------
HIGH LOW
------ -----
1998
4th quarter....................................... $ 2 $ 15/16
3rd quarter....................................... 3 15/16 1 11/16
2nd quarter....................................... 5 1/8 3 1/8
1st quarter....................................... 4 11/16 1 25/32
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
On April 1, 1998, the Company issued and sold 661,157 shares of Series C
preferred stock ("Preferred Stock") at $6.05 per share to three institutional
investors, and received $3,931,000 in net proceeds from the offering. During the
fourth quarter ended December 31, 1998, 354,867 shares of Series C preferred
stock were converted into 1,894,086 shares of common stock.
Through December 31, 1998, all but 58,356 shares of Series C preferred
stock were converted into a total of 3,168,404 shares of Common Stock. In
January 1999, 46,922 of the remaining 58,356 shares of Series C preferred stock
were converted into 299,483 shares of common stock and 11,434 of such remaining
shares of Series C preferred stock were redeemed at a conversion price of
approximately $0.95 per common share. As a result, there are no outstanding
shares of Series C preferred stock.
As of March 12, 1999, there were approximately 282 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.
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
STATEMENTS OF OPERATIONS DATA:
Product sales............................ $ 3,625,000 $ 2,223,000 $ 703,000 $ 273,000 $ --
Contract revenue......................... 100,000 -- -- -- --
Cost of product sales.................... 1,036,000 990,000 740,000 737,000 --
------------ ------------ ------------ ------------ ------------
Gross margin............................. 2,689,000 1,233,000 (37,000) (464,000) --
Operating expenses:
Research and development............... 9,293,000 8,642,000 9,904,000 10,386,000 9,282,000
Special research and development
charges.............................. -- -- -- -- 3,470,000
Marketing.............................. 5,391,000 4,145,000 4,240,000 4,323,000 4,375,000
General and administrative............. 3,714,000 3,662,000 3,183,000 2,904,000 3,811,000
------------ ------------ ------------ ------------ ------------
Total operating expenses................. 18,398,000 16,449,000 17,327,000 17,613,000 20,938,000
------------ ------------ ------------ ------------ ------------
Loss from operations..................... (15,709,000) (15,216,000) (17,364,000) (18,077,000) (20,938,000)
Writedown of note receivable from former
officer................................ (5,944,000) -- -- -- --
Interest and investment income, net...... 582,000 1,219,000 2,618,000 3,302,000 3,057,000
------------ ------------ ------------ ------------ ------------
Net loss................................. $(21,071,000) $(13,997,000) $(14,746,000) $(14,775,000) $(17,881,000)
Deemed dividend on issuance of preferred
stock.................................. (3,143,000) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss attributable to common
stockholders........................... $(24,214,000) $(13,997,000) $(14,746,000) $(14,775,000) $(17,881,000)
============ ============ ============ ============ ============
Basic net loss per share................. $ (1.48) $ (0.85) $ (0.85) $ (0.88) $ (1.02)
============ ============ ============ ============ ============
Weighted average shares used in computing
basic net loss per share amounts....... 16,335,096 16,472,765 17,421,312 16,882,000 17,507,564
BALANCE SHEET DATA:
Cash, cash equivalents and investments... $ 5,410,000 $ 12,901,000 $ 35,106,000 $ 47,390,000 $ 63,670,000
Working capital.......................... 3,845,000 7,416,000 9,224,000 19,283,000 44,797,000
Total assets............................. 11,727,000 19,196,000 42,728,000 54,151,000 67,013,000
Total shareholders' equity............... 6,428,000 15,724,000 37,466,000 49,555,000 62,754,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a global biopharmaceutical company that acquires, develops
and commercializes specialist-oriented proprietary drugs for treating chronic
and life-threatening diseases, such as 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, 1998, the Company
incurred a cumulative net loss of approximately $109.6 million. The Company
expects its sales, gross margin and operating expenses to increase over the next
several years as it expands its sales, research and development, clinical
testing and marketing capabilities.* The Company's ability to achieve profitable
operations is primarily dependent on obtaining additional financing to support
its operations and long-term product development and commercialization programs,
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.
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
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the Company's products, the regulatory approval process, and the acquisition of
additional product rights. Setbacks in the launch, sale or distribution of
ZADAXIN, preclinical and clinical development of the Company's products,
particularly CPX, 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 $3,625,000, $2,223,000 and $703,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Sales in 1996 were largely
fourth quarter sales into the People's Republic of China to establish
importation duty rates and internal distribution patterns. In 1997, sales were
relatively flat through the quarters as the four geographic regions of the
People's Republic of China, northern, central, southern and Guangzhou area, were
established. In 1998, both unit and U.S. dollar sales grew at an average of 25%
quarter to quarter as the awareness and use of ZADAXIN expanded. Currently, the
Company has received approval to market ZADAXIN in Argentina, Cambodia, Italy,
Kuwait, Mexico, Myanmar, the People's Republic of China, Pakistan, Peru, the
Philippines, Singapore, Venezuela, and Vietnam. The People's Republic of China,
like Japan and certain other Asian markets, uses a tiered method to import and
distribute products. The distributors make the sales in the country, but the
product is imported for them by licensed importers. In 1997, the Company sold to
one principal importer/agent who then resold to four distributors inside the
People's Republic of China. Reflecting the expansion and stability of the
Company's sales to the People's Republic of China in 1998, the Company began
working extensively with a second importing agent in addition to the agent used
in 1997. This enabled the expansion of sales to the four distributors. For the
year ended December 31, 1998, four distributors in China accounted for 84% of
the Company's product sales. In addition, the Company has filed for approval to
market ZADAXIN in 19 additional countries and anticipates additional filings in
other countries. The Company expects product sales to increase in its existing
approved markets in 1999 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 $1,036,000, $990,000 and $740,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. The increase is
attributable to increased product sales. The Company expects cost of product
sales to vary from quarter to quarter, depending upon the level of product
sales, the absorption of fixed product-related costs, and any charges associated
with excess or expiring finished product.
Research and development expenses were $9,293,000, $8,642,000, and
$9,904,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
For the year ended December 31, 1998, the increase in research and development
expenses as compared to 1997 was due to increased clinical trial expenses.
Additional pilot clinical studies to expand the use of ZADAXIN in overseas
markets were started in 1998. Clinical trial expenses in 1998 also increased due
to clinical trial expenses in Japan, and additional clinical trial expenses for
the clinical development of CPX. 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 in the immediate future. For
the year ended December 31, 1997, the decrease in research and development
expenses as compared to 1996 was primarily attributable to decreases in
regulatory expenses and in costs associated with decreased ZADAXIN clinical
trials, essentially due to the completion of the Company's ZADAXIN phase 3
hepatitis B in Taiwan 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
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initiating additional clinical trials and testing, entering into one or more
corporate partnering arrangements, acquiring product rights, and expanding
regulatory activities.
Marketing expenses were $5,391,000, $4,145,000, and $4,240,000 for the
years ended December 31, 1998, 1997, and 1996, respectively. The increase in
1998 over 1997 reflected the increases in activities related to expanding
distribution and marketing efforts around the world in addition to increased
professional services related to the 1998 sales increase. The slight reduction
in expenses in 1997 compared to 1996 was largely related to the preparatory
marketing expenses in 1996, which were beneficial throughout 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 $3,714,000, $3,662,000, and
$3,183,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
The increase in 1997 as compared to 1996 was primarily due to increased general
office expenses associated with increased rent and office relocation expenses,
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. 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.
On July 23, 1997, the Company loaned to Thomas E. Moore, its former
Chairman/CEO, $5,944,000 in exchange for a promise to repay the loan on demand
and the pledge of 1,882,500 shares of SciClone Common Stock owned by Mr. Moore
as collateral for such loan.
During 1998 it was determined that the value of the collateral underlying
the loan made to Mr. Moore was more than temporarily impaired and that a
writedown of the book value of the note would be required. Upon further
investigation relative to the collectibility of the demand note, it was
determined that the entire $5.944 million, plus accumulated interest of
approximately $689,000, was in substantial doubt. As a result of this
determination the Company elected to write off the entire remaining book value
in a non-cash charge to earnings in the fourth quarter of 1988 and cancel the
1,882,500 shares held as collateral. Under a new agreement, Mr. Moore received
credit against his total indebtedness of approximately $6.633 million. This
credit is calculated as the value of Mr. Moore's 1,882,500 shares of SciClone
Common Stock cancelled by the Company based on the greater of two stock prices.
The first stock price is calculated as the average 5-day closing stock price at
closing of this agreement. The second stock price is calculated as the average
5-day closing stock price at September 30, 1999. After calculating and applying
the appropriate credit, the balance of the remaining debt, if any, will be paid
in five installments according to a schedule beginning on October 1, 1999 at
$20,000 and increasing by a factor of 4 each six month anniversary thereafter
with final payment due no later than October 1, 2001. In the event that the
higher 5-day average stock price exceeds the amount of the indebtedness such
excess will be remitted to Mr. Moore in cash or stock, at the Company's sole
discretion. If in stock, the number of shares will not exceed 1,882,500 shares.
See "Note 8 -- Shareholder's Equity of Notes to Consolidated Financials."
A non-cash charge to earnings was recorded in April 1998 for $3,143,000
representing a deemed dividend associated with the issuance of the Series C
preferred stock.
Net interest and investment income was approximately $582,000, $1,219,000,
and $2,618,000 for the years ended December 31, 1998, 1997, and 1996,
respectively. The decrease in 1998 as compared to 1997 and in 1997 as compared
to 1996 resulted from lower average invested cash balances.
LIQUIDITY AND CAPITAL RESOURCES
In April 1998, the Company received approximately $4,000,000 (before
deducting expenses) from the sale of 661,157 shares of Series C preferred stock
in a private placement. As of December 31, 1998, all but 58,356 shares of Series
C preferred stock were converted into 3,168,404 shares of common stock. In
January 1999, 46,922 of the remaining 58,356 shares of Series C preferred stock
were converted into 299,483 shares of common stock and 11,434 of such remaining
shares of Series C preferred stock were redeemed at a conversion price of
approximately $0.95 per common share. As a result, there are no outstanding
shares of Series C
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preferred stock. 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 November 1998 the Company
settled a note with a former executive officer by accepting payment of
approximately $950,000 in cash and offsetting approximately $181,000 in retained
salary and housing allowance accruals against the debt.
At December 31, 1998, 1997, and 1996, the Company had $5,410,000,
$12,901,000, 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
$13,353,000, $14,056,000, and $14,641,000, for the years ended December 31,
1998, 1997, and 1996, respectively. Net cash used in operating activities for
the year ended December 31, 1998 was less than the net loss primarily due to
increases in clinical trial expense accruals primarily for Japan, inventory
decreases, a deemed dividend in connection with the issuance of the Company's
Series C preferred stock and impairment of a note receivable from a former
officer. These amounts were partially offset by increases in prepaid expense
primarily for product marketing rights acquired for the U.S. and Europe. Net
cash used in operating activities for the year ended December 31, 1997 was
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 provided by investing activities for the year ended December 31,
1998 primarily related to the net sale of $7,388,000 in marketable securities
offset by the purchase of approximately $99,000 in equipment and furniture. Net
cash provided by investing activities for the year ended December 31, 1997
primarily related to the net sale of $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 $12,319,000 in marketable securities offset by the
purchase of approximately $94,000 in equipment and furniture.
Net cash provided by financing activities for the year ended December 31,
1998 consisted of $6,342,000 in proceeds, approximately $3,931,000 of which
related to the Company's sale and issuance of 661,157 shares of Series C
preferred stock, approximately $529,000 of which related to the issuance of
common stock and approximately $1,882,000 of which related to the payment on
notes receivable from former and current officers. Net cash used in financing
activities for the year ended December 31, 1997 consisted of $4,267,000 related
to Company's repurchase of its common stock under the Company's approved stock
repurchase plan and the amounts loaned to Mr. Moore referred to above of
$5,944,000 offset by $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 $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.
The report of the independent auditors on the Company's financial
statements contains an explanatory paragraph indicating that the Company's
historical operating losses and lack of sufficient significant revenues from
product sales raises substantial doubt about the Company's ability to continue
as a going concern. Without additional financing, significant reduction in
operation expenses or sales growth beyond management's expectations, or a
combination thereof, management believes its existing capital resources and
interest
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on funds available are adequate to maintain its current and planned operations
only through June 1999. To support such operations beyond June 1999, the Company
will need to raise additional financing in the near term. The Company is
pursuing additional financings including a private placement of common stock and
common stock warrants, use of its Equity Line (see Note 8 to Consolidated
Financial Statements), bank debt financing and corporate partnering to develop
ZADAXIN in the U.S. and Europe.* The Company plans to conclude one or more of
such additional financings over the next two 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'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.
IMPACT OF THE YEAR 2000
As is true for most companies, the Year 2000 computer issue could create a
risk for the Company. If systems do not correctly recognize date information
when the year changes to 2000, there could be an adverse impact on the Company's
operations. The risk for the Company exists in the following areas: systems used
by the Company to run its business and systems used by the Company's vendors.
The Company is currently evaluating its exposure in both of these areas.
The Company has reviewed its current systems and has been evaluating
whether it is appropriate to replace or upgrade systems that are known to be
Year 2000 non-compliant. For those areas which have been identified as Year 2000
non-compliant, the cost to upgrade or replace is not expected to be material to
the Company's operating results.
The Company is in the process of contacting its critical vendors to
determine that the vendors' operations and the products and services they
provide are Year 2000 compliant. To varying degrees, the Company is dependent
upon a large number of third parties that provide information, goods and
services to the Company. These include financial institutions, suppliers,
vendors, research partners and governmental entities. If significant numbers of
these third parties experience failures in their computer systems or equipment
due to Year 2000 non-compliance, it could affect the Company's ability to
process transactions, manufacture products or engage in similar normal business
activities. While some of these risks are outside the control of the Company,
the Company has instituted programs, including internal records review and use
of external questionnaires to identify key third parties, assess their level of
Year 2000 compliance, update contracts and address any non-compliance issues.
The total costs related to Year 2000 compliance cannot be known precisely
at this time but it is not expected to be material to the Company's financial
position, results of operations or cash flows.
RISK FACTORS
Dependence on ZADAXIN(R) 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 major pharmaceutical markets. Sales of ZADAXIN commenced
in 1997. While ZADAXIN has been approved for commercial sale in 13 countries, no
assurance can be given that ZADAXIN approvals will be obtained in additional
countries or for the treatment of additional indications, such as 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 was the first commercial
introduction of ZADAXIN by the Company, and no assurance can be given that
continued commercialization of ZADAXIN will prove successful. The Company has
not yet launched ZADAXIN in Argentina, Cambodia, Italy, Kuwait, Mexico, Myanmar,
Pakistan, Peru or Vietnam and no assurance can be given that future launches of
ZADAXIN will prove successful in these countries or in any additional countries.
Future sales of ZADAXIN will depend on market acceptance and successful
distribution. In particular, although the People's Republic of China has the
highest
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hepatitis B prevalence 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, its drug in phase 2 clinical development for treatment of cystic
fibrosis ("CF"). 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 safety and efficacy of CPX in a CF
clinical trial, obtain regulatory approval of CPX for CF or successfully
commercialize CPX could have a material adverse effect on the Company.
No History of Significant Revenues; Continuing Operating Losses. The
Company has only recently generated revenues from the commercialization of its
lead product, ZADAXIN, 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 has a substantial accumulated deficit.
If sales increase over the next several years, the Company expects its operating
expenses also 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
obtaining additional financing to support its operations and its long-term
product development and commercialization efforts, 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 development in the U.S. and Europe
of a combination therapy for hepatitis C including ZADAXIN plus interferon,
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. Since inception,
the Company has financed its operations primarily through sales of equity
securities. However, the Company will need to obtain substantial additional
financing before June 1999 to support its operations and its long-term product
development and commercialization programs. Without additional financing,
management believes its existing capital resources and interest on funds
available are adequate to maintain its current and planned operations only
through June 1999. The Company is exploring corporate partnering, a private
placement of equity securities, the sale of equity securities under its Equity
Line and other opportunities, including debt instruments, to increase its
capital resources. However, the Company's future capital requirements will
depend on many factors, including the level of ZADAXIN product sales, the
availability of complementary products, technologies and businesses, the
initiation of preclinical and clinical development expenses and opportunities,
the timing and cost of regulatory approvals, patent costs, competing
technological and market developments, the nature of existing and future
collaborative relationships, the ability to use the Equity Line and the
Company's ability to establish development, sales, manufacturing and marketing
arrangements. There can be no assurance that such financing will be available on
acceptable terms or a timely basis, if at all. Other than the Equity Line the
Company has no commitments or arrangements for additional funding and may not be
able to obtain needed financing. Draws under the equity line are subject to the
satisfaction of certain conditions, including registration of the investor's
resale of the shares, a minimum trading price per share, volume limitations,
limitations on the number of shares that can be issued without shareholder
approval and limitations on the number of shares of the Company's common stock
the investor may hold at any point in time. Unless the Company and the investor
agree otherwise, the facility is not available when the Company's stock is
trading at less than $1.50 per share, which price has been decreased to $1.00
pursuant to an oral agreement between the parties. The unavailability or timing
of financing could prevent or delay the Company's long-term product development
and commercialization programs and would require the Company to curtail or cease
operations.
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Compliance With Nasdaq Listing Requirements: Disclosure Relating to
Low-Priced Stock. The Company's common stock is quoted on the Nasdaq National
Market (the "National Market"). However, in order to continue to be included in
the National Market, a company must meet certain maintenance criteria. The
maintenance criteria require a minimum bid price of $1.00 per share, $4,000,000
in net tangible assets (total assets less total liabilities and goodwill) and
$5,000,000 market value of the public float (excluding shares held directly or
indirectly by any officer or director of the Company and by any person holding
beneficially more than 10% of the Company's outstanding shares). As of March 12,
1999 the closing bid price of the Company's Common Stock was $1.969 and as of
December 31, 1998 the Company had net tangible assets of $6,992,000.
Failure to meet these maintenance criteria may result in the delisting of
the Company's common stock from the National Market. Trading, if any, in the
Company's common stock would thereafter be conducted in the non-Nasdaq
over-the-counter market. If the Company's common stock were delisted from
trading on Nasdaq, an investor may find it more difficult to dispose of, or to
obtain accurate quotation as to the market value of, the Company's common stock,
which could severely limit the market liquidity of the common stock and limit
the ability of the Company's stockholders to sell the common stock in the
secondary market.
Dependence on Third Parties. The Company's strategy contemplates that it
will enter into various collaborative 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 Schering-Plough K.K.
Schering-Plough K.K. 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, including a
corporate partnering arrangement for development in the U.S. and Europe of a
combination therapy for hepatitis C including ZADAXIN plus interferon. 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.
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, difficulties and delays
in obtaining product health registration and importation permits, 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.
Patents and Proprietary Rights. The U.S. and most European composition of
matter patents for thymosin alpha 1 have expired. The Company will in the future
have only limited composition of matter patents for thymosin alpha 1 and this
could adversely affect the Company's proprietary rights. However, the Company
owns or has exclusive licenses for use and/or process patents or patent
applications in the U.S., Europe, Japan and other jurisdictions for thymosin
alpha 1, and for CPX in the U.S. and will seek to protect such products from
competition through such patent protection and through other means. 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,
24
25
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. See "Business -- Patents and
Proprietary Rights."
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. The Company is currently sponsoring clinical
trials and pursuing regulatory approvals of ZADAXIN in a number of countries and
is currently sponsoring clinical trials 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 results in
the Company's development programs also could result in the placement of
restrictions on the use of ZADAXIN and, if approved, CPX. 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. See "Business -- Government Regulation."
Manufacturing. The Company has entered into contract manufacturing and
supply agreements to source ZADAXIN and CPX. 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 and maintain manufacturing
relationships with experienced suppliers capable of meeting the Company's needs,
there can be no assurance that the Company will establish and maintain 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
25
26
supply of finished ZADAXIN for the near term. The Company has recently changed
and upgraded its manufacturing source of finished ZADAXIN for its international
markets, excluding Japan. In certain countries, this change may require
additional regulatory approvals. If regulatory approvals of such manufacturing
change, if required, are not obtained in a timely fashion, new ZADAXIN marketing
approvals may be delayed or sales may be interrupted until the manufacturing
change is approved. 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 impede commercialization of the Company's products, including sales
of ZADAXIN in approved markets, 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 importers and distribution companies covering
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, price 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
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 and international 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.
26
27
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.
Preferred Stock. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The
primary objective of the Company's investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company invests in highly liquid
and high quality debt securities. The Company's investments in debt securities
are subject to interest rate risk. To minimize the exposure due to adverse shift
in the interest rates the Company invests in short term securities and maintain
an average maturity of less than 2 years. A hypothetical 60 basis point increase
in interest rates would result in an approximate $36,300 decrease (less than
0.4%) in fair value of the Company's available-for-sale securities.
The potential change noted above is based on sensitivity analyses performed
on the Company's financial positions at December 31, 1998. Actual results may
differ materially.
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28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SCICLONE PHARMACEUTICALS, INC.
FINANCIAL STATEMENTS AT DECEMBER 31, 1998 AND 1997 AND FOR
EACH OF THE THREE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996.
28
29
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31, DECEMBER 31,
1998 1997
------------- ------------
Current assets:
Cash and cash equivalents................................. $ 3,490,000 $ 3,619,000
Short-term investments.................................... 1,513,000 3,866,000
Accounts receivable, net of allowances of $76,000 in 1998
and $250,000 in 1997................................... 1,301,000 1,025,000
Inventory................................................. 1,353,000 2,046,000
Prepaid expenses and other current assets................. 639,000 332,000
------------- -----------
Total current assets........................................ 8,296,000 10,888,000
Property and equipment, net................................. 391,000 525,000
Long-term investments....................................... 407,000 5,416,000
Notes receivable from officers.............................. 235,000 2,327,000
Other assets................................................ 2,398,000 40,000
------------- -----------
Total assets................................................ $ 11,727,000 $19,196,000
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 430,000 $ 563,000
Accrued compensation and employee benefits................ 731,000 759,000
Accrued clinical trials expense........................... 2,402,000 1,210,000
Accrued professional fees................................. 731,000 818,000
Other accrued expenses.................................... 157,000 122,000
------------- -----------
Total current liabilities................................... 4,451,000 3,472,000
Commitments and contingencies (Note 7)
Redeemable preferred stock, no par value; 10,000,000 shares
authorized; 58,356 issued and outstanding................. 848,000 --
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized; issuable in series (58,356 redeemable
preferred shares classified as outstanding -- see
above)................................................. -- --
Common stock, no par value; 75,000,000 shares authorized;
21,534,056 and 17,343,358 shares issued and
outstanding............................................ 115,981,000 107,034,000
Note receivable from former officer....................... -- (5,944,000)
Accumulated other comprehensive income.................... 9,000 (18,000)
Accumulated deficit....................................... (109,562,000) (85,348,000)
------------- -----------
Total shareholders' equity.................................. 6,428,000 15,724,000
------------- -----------
Total liabilities and shareholders' equity.................. $ 11,727,000 $19,196,000
============= ===========
See notes to consolidated financial statements
29
30
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Revenues:
Product sales.................................. $ 3,625,000 $ 2,223,000 $ 703,000
Contract revenue............................... 100,000 -- --
------------ ------------ ------------
Total revenues................................... 3,725,000 2,223,000 703,000
------------ ------------ ------------
Cost of product sales............................ 1,036,000 990,000 740,000
------------ ------------ ------------
Gross margin..................................... 2,689,000 1,233,000 (37,000)
------------ ------------ ------------
Operating expenses:
Research and development....................... 9,293,000 8,642,000 9,904,000
Marketing...................................... 5,391,000 4,145,000 4,240,000
General and administrative..................... 3,714,000 3,662,000 3,183,000
------------ ------------ ------------
Total operating expenses......................... 18,398,000 16,449,000 17,327,000
------------ ------------ ------------
Loss from operations............................. (15,709,000) (15,216,000) (17,364,000)
Writedown of note receivable from former
officer........................................ (5,944,000) -- --
Interest and investment income, net.............. 582,000 1,219,000 2,618,000
------------ ------------ ------------
Net loss......................................... (21,071,000) (13,997,000) (14,746,000)
Deemed dividend on issuance of preferred stock... (3,143,000) -- --
------------ ------------ ------------
Net loss attributable to common shareholders..... $(24,214,000) $(13,997,000) $(14,746,000)
============ ============ ============
Basic net loss per share......................... $ (1.48) $ (0.85) $ (0.85)
============ ============ ============
Weighted average shares used in computing basic
net loss per share amounts..................... 16,335,096 16,472,765 17,421,312
============ ============ ============
See notes to consolidated financial statements
30
31
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NOTE ACCUMULATED
COMMON STOCK RECEIVABLE OTHER TOTAL
------------------------- FROM FORMER DEFERRED ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT OFFICER COMPENSATION DEFICIT INCOME EQUITY
---------- ------------ ----------- ------------ ------------- ------------- -------------
Balance at December 31,
1995................. 16,807,257 $105,916,000 $ -- $(205,000) $ (56,605,000) $450,000 $49,556,000
Issuance of common
stock from exercise
of stock options and
warrants and employee
stock purchase
plan................. 802,938 3,731,000 -- -- -- -- 3,731,000
Repurchase of common
stock................ (78,000) (659,000) -- -- -- -- (659,000)
Amortization of
deferred
compensation......... -- -- -- 205,000 -- -- 205,000
Net loss............... -- -- -- -- (14,746,000) -- (14,746,000)
Net unrealized loss on
available-for-sale
securities........... -- -- -- -- -- (621,000) (621,000)
-----------
Total comprehensive
loss................. (15,367,000)
---------- ------------ ----------- --------- ------------- -------- -----------
Balance at December 31,
1996................. 17,532,195 108,988,000 -- -- (71,351,000) (171,000) 37,466,000
Issuance of common
stock from exercise
of stock options and
warrants and employee
stock purchase
plan................. 495,663 2,313,000 -- -- -- -- 2,313,000
Repurchase of common
stock................ (684,500) (4,267,000) -- -- -- -- (4,267,000)
Note receivable from
former officer....... -- -- (5,944,000) -- -- -- (5,944,000)
Net loss............... -- -- -- -- (13,997,000) -- (13,997,000)
Net unrealized gain on
available-for-sale
securities........... -- -- -- -- -- 153,000 153,000
-----------
Total comprehensive
loss................. (13,844,000)
---------- ------------ ----------- --------- ------------- -------- -----------
Balance at December 31,
1997................. 17,343,358 107,034,000 (5,944,000) -- (85,348,000) (18,000) 15,724,000
Issuance of common
stock from exercise
of stock options and
warrants and employee
stock purchase
plan................. 97,591 529,000 -- -- -- -- 529,000
Conversion of preferred
C shares to common
stock................ 3,168,404 3,083,000 -- -- -- -- 3,083,000
Shares issued in asset
purchase............. 924,703 2,192,000 -- -- -- -- 2,192,000
Writedown of note
receivable from
former officer....... -- -- 5,944,000 -- -- -- 5,944,000
Net loss............... -- -- -- -- (21,071,000) -- (21,071,000)
Net unrealized gain on
available-for-sale
securities........... -- -- -- -- -- 27,000 27,000
-----------
Total comprehensive
loss................. (21,044,000)
Deemed dividend on
issuance of preferred
stock................ -- 3,143,000 -- -- (3,143,000) -- --
---------- ------------ ----------- --------- ------------- -------- -----------
Balance at December 31,
1998................. 21,534,056 $115,981,000 $ -- $ -- $(109,562,000) $ 9,000 $ 6,428,000
========== ============ =========== ========= ============= ======== ===========
See notes to consolidated financial statements
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32
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
Operating activities:
Net loss......................................... $(21,071,000) $(13,997,000) $(14,746,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 233,000 178,000 313,000
Writedown of note receivable from former
officer..................................... 6,139,000 -- --
Non-cash charge on acquisition of technology
rights...................................... 1,511,000 -- --
Changes in operating assets and liabilities:
Prepaid expenses and other assets........... (1,381,000) 1,770,000 (490,000)
Accounts receivable......................... (276,000) (780,000) (137,000)
Inventory................................... 693,000 563,000 (248,000)
Accounts payable and other accrued
expenses.................................. (97,000) (401,000) 802,000
Accrued clinical trials expense............. 1,192,000 246,000 (1,090,000)
Accrued professional fees................... (87,000) (1,576,000) 1,224,000
Accrued compensation and benefits........... (209,000) (59,000) (269,000)
------------ ------------ ------------
Net cash used in operating activities............ (13,353,000) (14,056,000) (14,641,000)
------------ ------------ ------------
Investing activities:
Purchase of property and equipment............. (99,000) (404,000) (94,000)
Payment on acquisition of technology rights.... (407,000) -- --
Sale of marketable securities, net............. 7,388,000 21,335,000 12,319,000
------------ ------------ ------------
Net cash provided by investing activities........ 6,882,000 20,931,000 12,225,000
------------ ------------ ------------
Financing activities:
Proceeds from issuance of Series C preferred
stock net................................... 3,931,000 -- --
Proceeds from issuance of common stock, net.... 529,000 2,313,000 3,731,000
Payment on notes receivable from former &
current officers............................ 1,882,000 -- --
Note receivable from former officer............ -- (5,944,000) --
Repurchase of common stock..................... -- (4,267,000) (659,000)
------------ ------------ ------------
Net cash provided by (used in) financing
activities..................................... 6,342,000 (7,898,000) 3,072,000
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents.................................... (129,000) (1,023,000) 656,000
Cash and cash equivalents, beginning of period... 3,619,000 4,642,000 3,986,000
------------ ------------ ------------
Cash and cash equivalents, end of period......... $ 3,490,000 $ 3,619,000 $ 4,642,000
============ ============ ============
See notes to consolidated financial statements.
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33
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 a global
biopharmaceutical company that acquires, develops and commercializes
specialist-oriented proprietary drugs for treating chronic and life-threatening
diseases, such as 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses in
each period since its inception and expects to incur additional losses over the
next several years.
Obtaining additional funds will be critical to the Company's ability to
maintain operations beyond June 1999. The Company will continue to seek funding
from equity financing sources including a private placement of common stock and
common stock warrants. The Company signed an agreement in March 1999 with an
investment banker to assist it in raising additional capital. The Company plans
to raise $4.0 to $6.0 million in equity privately placed with accredited
investors in the next two to six months. Raising additional funds from public or
private sources may result in significant dilution to then existing
shareholders. Additionally, the Company is seeking funding from debt sources as
well as corporate partners to develop and commercialize ZADAXIN in the U.S. and
Europe. If adequate funding is not available on a timely basis, the Company will
be required to curtail its operations significantly or to cease operation.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. 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 original
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 investment 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 included in accumulated
other comprehensive income. 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.
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34
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
For the years ended December 31, 1998 and 1997, net unrealized gains of
approximately $27,000 and $153,000, respectively, were charged to accumulated
other comprehensive income.
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.
Notes Receivable from Officers
At December 31, 1998 and 1997, the fair value of the notes receivable from
officers was $235,000 and $2,327,000 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.
In August 1996, the Company extended a loan to one of its then 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. Approximately $750,000 was repaid against this note in March 1998.
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 November 1998, the Company settled this loan by accepting payment
of approximately $950,000 in cash and offsetting approximately $181,000 in
retained salary and housing allowance accruals against the debt. Approximately
$194,000 was written off.
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, 1998, these loans had not been repaid. In
January 1999, the Company foreclosed on the loans, is in possession of the
underlying property and is actively seeking to sell the property. No entry
reflecting this transaction has been recorded in the Company's financial
statements.
Other Assets
Other assets include the following:
DECEMBER 31,
---------------------
1998 1997
---------- -------
Intangible product rights -- net.............. $2,338,000 $ --
Other......................................... 60,000 40,000
---------- -------
$2,398,000 $40,000
========== =======
Product rights acquired are being amortized over 6 years beginning in
September 1998.
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.
34
35
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment.
The Company has recognized contract revenue as a result of receiving orphan drug
grants for CPX. These revenues are recognized at the time of grant.
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
$24,000, $26,000 and $25,000 for the years ended December 31, 1998, 1997, and
1996, respectively. The plan commenced on January 1, 1991.
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 excludes 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 3,548,978, 3,058,734 and 2,526,265 shares in
1998, 1997 and 1996, 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.
35
36
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Reporting Comprehensive Income (Loss)
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components. SFAS 130 requires unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, be included in comprehensive income (loss). Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
For the year periods ended December 31, 1998, 1997 and 1996, total comprehensive
loss attributable to common shareholders amounted to $21,044,000, $13,844,000
and $15,367,000 respectively.
Segment Information
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers The Company is evaluating the impact, if
any, on SFAS 131 disclosures, but does not believe the disclosures are material.
The adoption of SFAS 131 had no significant effect on results of operations or
the financial position of the Company.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which is required to be adopted for the year ending December 31, 2000.
Management does not anticipate that the adoption of SFAS 133 will have a
significant effect on results of operations or the financial position of the
Company.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
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, 1998:
U.S. government & agency
obligations..................... $ 399,000 $ 9,000 $ -- $ 408,000
Corporate obligations.............. 1,512,000 -- (1,000) 1,511,000
Corporate equity securities........ -- 1,000 -- 1,000
---------- ------- -------- ----------
$1,911,000 $10,000 $ (1,000) $1,920,000
========== ======= ======== ==========
DECEMBER 31, 1997:
U.S. government & agency
obligations..................... $3,873,000 $17,000 $ (4,000) $3,886,000
Corporate obligations.............. 5,357,000 7,000 (40,000) 5,324,000
Corporate equity securities........ 100,000 8,000 (36,000) 72,000
---------- ------- -------- ----------
$9,330,000 $32,000 $(80,000) $9,282,000
========== ======= ======== ==========
36
37
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
The amortized cost and estimated fair value of debt and investments at
December 31, 1998 by contractual maturity are shown below.
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ----------
Due in one year or less............................. $1,512,000 $1,513,000
Due after one year through three years.............. 399,000 407,000
---------- ----------
$1,911,000 $1,920,000
========== ==========
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,
------------------------
1998 1997
---------- ----------
Raw materials....................................... $1,298,000 $1,568,000
Finished goods...................................... 55,000 478,000
---------- ----------
$1,353,000 $2,046,000
========== ==========
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
------------------------
1998 1997
---------- ----------
Office furniture and fixtures....................... $ 318,000 $ 300,000
Office equipment.................................... 871,000 799,000
Leasehold improvements.............................. 213,000 204,000
---------- ----------
1,402,000 1,303,000
Less accumulated depreciation....................... 1,011,000 778,000
---------- ----------
Net property and equipment.......................... $ 391,000 $ 525,000
========== ==========
NOTE 5 -- LICENSE AGREEMENTS
In September 1998, the Company acquired all rights of Sclavo S.p.A., its
Italian licensee, to thymosin alpha 1 in Italy, Spain and Portugal. This
agreement with Sclavo S.p.A. ("Sclavo"), an international pharmaceutical
company, resulted in the acquisition of Sclavo's marketing approval for ZADAXIN
thymosin alpha 1 in Italy as an influenza vaccine adjuvant, a marketing
application in Italy for use of ZADAXIN to treat non-small cell lung cancer, as
well as all of Sclavo's development and marketing rights to ZADAXIN in Italy,
Spain and Portugal. The purchase price consisted of $297,000 in cash, 375,000
shares of the Company's common stock, and warrants to purchase 375,000 shares of
common stock at an exercise price of $4.125 per share.
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 acquired A1B's
37
38
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
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. In July
1998, the Company and A1B closed the Asset Purchase Agreement. This agreement
was approved by A1B's stockholders at A1B's 1998 Annual Meeting of Stockholders
in July 1998. In accordance with the agreement, the Company has issued to A1B
549,703 shares of common stock (444,115 shares issued in July 1998 and 105,588
shares issued in October 1998) and loaned to A1B $210,000 in exchange for the
assets described above. The Company is required to issue to A1B an additional
50,297 shares under the agreement.
The Company has commissioned an independent appraisal of the rights
acquired in both the Sclavo and A1B acquisitions. The results of the valuations
have resulted in a $707,000 charge for in-process research and development and
$2,456,000 in capitalized product rights. The product rights will be amortized
over 6 years.
In October 1996, the Company entered into an expanded and amended license
and supply agreement with Schering-Plough K.K., giving Schering-Plough K.K.
exclusive development and marketing rights to ZADAXIN in Japan. Under the
amended agreement, the Company expects Schering-Plough K.K. to continue
development of ZADAXIN monotherapy for the treatment of hepatitis B and
hepatitis C and to initiate investigation of the combination ZADAXIN plus
Schering-Plough K.K.'s INTRON(R) A (interferon alfa-2b) for the treatment of
hepatitis C, with the parties sharing certain development expenses. Schering-
Plough K.K. 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, the NIH will receive a milestone payment in
addition to royalties based on a percentage of CPX net sales revenue.
NOTE 6 -- INCOME TAXES
The Company uses the liability method to account for income taxes as
required by FASB Statement No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities. Deferred
tax assets and liabilities are measured using enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
The domestic and foreign components of loss before income tax are as
follows at December 31:
1998 1997 1996
------------ ------------ ------------
Domestic................................. $(19,384,000) $ (8,516,000) $ (6,125,000)
Foreign.................................. (4,830,000) (5,481,000) (8,610,000)
------------ ------------ ------------
Loss before income tax expense........... $(24,214,000) $(13,997,000) $(14,735,000)
============ ============ ============
38
39
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
at December 31:
1998 1997
------------ ------------
ASSETS
Net operating loss carryforwards......................... $ 16,170,000 $ 12,640,000
Note receivable written off for financial reporting...... 2,150,000 --
Other.................................................... 2,420,000 2,500,000
------------ ------------
Gross deferred tax assets................................ 20,740,000 15,140,000
Valuation allowance...................................... (20,740,000) (15,070,000)
------------ ------------
Total deferred tax asset....................... $ -- $ 70,000
------------ ------------
LIABILITIES
Net unrealized gains on available-for-sale securities.... $ -- $ --
Other.................................................... -- 70,000
------------ ------------
Total deferred tax liability................... -- 70,000
------------ ------------
Net deferred tax assets.................................. $ -- $ --
============ ============
The valuation allowance increased by approximately $5,670,000 and
$3,600,000 in the years ended December 31, 1988 and 1997, respectively. Deferred
tax assets relating to carryforwards as of December 31, 1998 include
approximately $3,400,000 associated with stock option activity for which any
subsequently recognized tax benefits will be credited directly to stockholders'
equity.
At December 31, 1998, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $43,500,000 which expire in the
years 2006 through 2018. The difference between the cumulative looses for
financial reporting purposes and federal income tax purposes is primarily
attributable to losses incurred by the Company's foreign subsidiaries. At
December 31, 1998, the Company has federal tax credit carryforwards of
approximately $1,100,000 which expire in the years 2009 through 2018.
Because of the "change in ownership" provisions of the Internal Revenue
Code, a portion of the Company's net operating loss carryforwards and tax credit
carryforwards may be subject to an annual limitation regarding their utilization
against taxable income in future periods. As a result of the annual limitation,
a portion of these carryforwards may expire before ultimately becoming available
to reduce future income tax liabilities.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its main office facility under a non-cancelable lease
agreement which expires in August 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 1999. Rental expense in 1998,
1997, and 1996 was $461,000, $462,000, and $397,000 respectively. Minimum future
rental commitments amount to $395,000 in 1999, and $293,000 in 2000 and $4,000
in 2001.
Royalties
Under the August 1997 Thymosin Alpha 1 Patent License Agreement with The
Fitzsimons Army Medical Center of the U.S. Army ("Army"), the Company is
obligated to pay the Army a minimum annual royalty, and upon commercialization
of thymosin alpha 1, the Company will be obligated to pay to Army a royalty
based on a percentage of thymosin alpha 1 net sales revenue.
39
40
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
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, the Company will be obligated to pay to NIH a royalty based on a percentage
of CPX net sales revenue. During 1998, and 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 service 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 to the Japanese trading company with respect to this agreement.
NOTE 8 -- SHAREHOLDERS' EQUITY
Common Stock, Preferred Stock and Warrants
In June 1998, the Company entered into an agreement with an institutional
investor for an equity line which allows the Company to access up to $32 million
through sales of its common stock over a two-year period, subject to certain
limitations. The decision to draw any funds and the timing for any such draw is
solely at the Company's discretion. The Company is not obligated to draw any
minimum amount under the equity line. The agreement provides that the Company,
at its option, can obtain up to $4,000,000 per quarter for two years through
sales of its common stock. Should the Company elect to draw upon the equity
line, any shares sold will be at a 3% discount to the lowest trading price of
the Company's common stock over a specified period of time prior to the date of
each sale. As a commitment fee to the investor, the Company issued a five-year
warrant to purchase 200,000 shares of its common stock at an exercise price of
$5.53 per share. Additional warrants to purchase up to 300,000 additional shares
of common stock at no less than $5.53 per share will be issued to the investor
based upon the number of shares of common stock purchased by the investor each
calendar year during the term of the financing. Draws under the equity line are
subject to the satisfaction of certain conditions, including registration of the
investor's resale of the shares, a minimum trading price per share, volume
limitations, limitations on the number of shares that can be issued without
shareholder approval and limitations on the number of shares of the Company's
common stock the investor may hold at any point in time. Unless the Company and
the investor agree otherwise, the facility is not available when the Company's
stock is trading at less than $1.50 per share, which price has been decreased to
$1.00 pursuant to an oral agreement between the parties.
In April 1998, the Company sold 661,157 shares of Series C preferred stock
at $6.05 per share and received $3,931,000 in net proceeds from the offering.
The preferred stock is convertible into common stock at any time over the next
five years at prices based on the market price of the common stock during a
pricing period preceding conversion. As of December 31, 1998 all but 58,356
shares of Series C preferred stock was converted into 3,168,404 shares of common
stock. In January 1999, 46,922 of the remaining 58,536 shares were converted
into 299,483 shares of common stock and 11,434 of such remaining shares of
Series C preferred stock were redeemed at a conversion price of approximately
$0.95 per common share. In conjunction with the offering, the Company granted to
the investors 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. In the second quarter ended June 30, 1998,
the Company recognized a deemed dividend in the amount of $3,143,000 in
connection with the issuance of the Series C preferred stock. This amount
increased net loss per share attributable to common shareholders and was
calculated as required by the SEC.
In July 1997, the Company loaned to Thomas E. Moore, its former
Chairman/CEO $5.944 million secured by approximately 1.9 million shares of the
Company's common stock owned by him. 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
40
41
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
individual's SciClone common stock by retiring his SciClone common stock at a
fixed discount rate from the offering price.
As of December 31, 1997 the loan was classified as an offset to
shareholders' equity. During 1998 it was determined that the value of the
collateral underlying the loan made to Mr. Moore was more than temporarily
impaired and that a writedown of the book value of the note would be required.
Upon further investigation relative to the collectibility of the demand note, it
was determined that the entire $5.944 million, plus accumulated interest of
approximately $689,000, was in substantial doubt. As a result of this
determination the Company elected to write off the entire remaining book value
in a non-cash charge to earnings in the fourth quarter of 1998 and cancel the
1,882,500 shares held as collateral. Under a new agreement, Mr. Moore received
credit against his total indebtedness of approximately $6.633 million. This
credit is calculated as the value of Mr. Moore's 1,882,500 shares of SciClone
Common Stock cancelled by the Company based on the greater of two stock prices.
The first stock price is calculated as the average 5-day closing stock price at
closing of this agreement. The second stock price is calculated as the average
5-day closing stock price at September 30, 1999. After calculating and applying
the appropriate credit, the balance of the remaining debt, if any, will be paid
in five installments according to a schedule beginning on October 1,1999 at
$20,000 and increasing by a factor of 4 each six month anniversary thereafter
with final payment due no later than October 1, 2001. In the event that the
higher 5-day average stock price exceeds the amount of the indebtedness such
excess will be remitted to Mr. Moore in cash or stock, at the Company's sole
discretion. If in stock, the number of shares will not exceed 1,882,500 shares.
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, 1998 the Company repurchased
no shares of its common stock. In the years ended December 31, 1997, and 1996,
the Company repurchased 684,500 and 78,000 shares of its common stock for an
aggregate cost of $4,267,000, and $659,000, 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 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. In June 1998, the Board of Directors
and shareholders of the Company approved a 1,150,000 share increase in the
shares reserved under the 1995 Plan.
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
41
42
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
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 46,738, 20,432 and 5,675 shares to employees in 1998, 1997 and 1996
respectively.
The following table summarizes the stock option activity under the 1991,
1992 and 1995 plans and the Noneemployee Director Plan:
WEIGHTED AVERAGE
EXERCISE PRICE OF
SHARES AVAILABLE SHARES UNDER SHARES UNDER
FOR GRANT OPTION PLAN
---------------- ------------ -----------------
BALANCE AT DECEMBER 31, 1995................. 4,179,173 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................. 3,383,682 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................. 2,840,977 3,058,734 5.80
Options canceled........................... 478,456 (478,456) 5.60
Options granted............................ (1,018,500) 1,018,500 2.51
Options exercised.......................... -- (49,800) 3.00
---------- ---------
BALANCE AT DECEMBER 31, 1998................. 2,300,933 3,548,978 $4.92
========== =========
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1998:
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 2.75 $0.30 14,000 $0.30
$1.56 - $ 2.38...................... 661,000 9.62 2.34 0 0.00
$2.47 - $ 4.38...................... 566,245 7.44 3.13 242,912 3.81
$4.50 - $ 7.25...................... 1,985,900 7.27 5.44 1,463,306 5.56
$7.59 - $12.50...................... 321,833 5.58 10.36 296,333 10.56
--------- ---- ----- --------- -----
3,548,978 7.56 $4.92 2,016,551 $6.05
========= ==== ===== ========= =====
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.
42
43
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
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 1998, 1997 and
1996: risk-free interest rates of 4.73%, 6.16% and 5.14%, respectively; dividend
yields of 0%; volatility factors of the expected market price of the Company's
stock of .87 for 1998 and .83 for 1997 and .84 for 1996; and a weighted average
expected life of the option of 4.30 years for 1998 and 4.31 years for 1997 and
4.37 for 1996. The fair value for the employee stock purchases was also
estimated using the Black-Scholes model with the following assumptions for 1998
and 1997: risk-free interest rate of 4.73% and 5.23% respectively; dividend
yield of 0%; expected volatility of .80 and .74 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 year ended
December 31, 1996, approximately $205,000 of deferred compensation related to
stock option grants was charged to compensation expense. There was no deferred
compensation charged to compensation expense for the years ended December 31,
1998 and 1997.
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
1998, 1997 and 1996 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:
1998 1997 1996
------------ ------------ ------------
Net loss -- as reported.................. $(24,214,000) $(13,997,000) $(14,746,000)
============ ============ ============
Net loss -- pro forma.................... $(26,142,000) $(15,726,000) $(15,821,000)
============ ============ ============
Net loss per share -- as reported........ $ (1.48) $ (0.85) $ (0.85)
============ ============ ============
Net loss per share -- pro forma.......... $ (1.60) $ (0.95) $ (0.91)
============ ============ ============
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, 1998 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
The Company operates in one business segment, the development and
commercialization of specialist-oriented proprietary drugs for the treatment of
chronic and life threatening diseases. Currently, the Company's principal focus
has been the development and commercialization of ZADAXIN and the development of
CPX.
The Chief Executive Officer has been identified as the Chief Operating
Decision Maker ("CODM") because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about the individual components.
43
44
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
The Company's total revenues for the year ended December 31, 1998, 1997 and
1996 were to regions outside of the United States. For the years ended December
31, 1998, 1997 and 1996, customers comprising more that 10% of net sales are as
follows:
1998 1997 1996
---- ---- ----
Customer 1.................................. 45% 66% 24%
Customer 2.................................. 37% * *
Customer 3.................................. * 10% 41%
Customer 4.................................. * * 12%
- ---------------
* Less than 10%
44
45
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, 1998 and 1997 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that
SciClone Pharmaceuticals, Inc. will continue as a going concern. As more fully
described in Note 1, the Company's recurring losses from operations raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to these matters are also described in Note 1. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability or classification of assets or the amounts and classifications of
liabilities that might result from the outcome of the uncertainty.
ERNST & YOUNG LLP
Palo Alto, California
March 17, 1999
45
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company, their ages as of March
15, 1999 and certain other information about them are set forth below:
NAME AGE POSITION
---- --- --------
Donald R. Sellers................. 54 President, Chief Executive Officer and Director
Alfred R. Rudolph, M.D. .......... 51 Chief Operating Officer
Shawn K. Singh, J.D. ............. 35 Senior Vice President, Corporate Development and
Secretary
David A. Karlin, M.D. ............ 55 Vice President and Medical Director
Jere E. Goyan, Ph.D. ............. 68 Chairman of the Board of Directors
John D. Baxter, M.D. ............. 58 Director
Edwin C. Cadman, M.D. ............ 53 Director
Rolf H. Henel..................... 61 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. Mr. Sellers spent five years in Military Intelligence
serving with Special Forces and as a Counter-Intelligence Special Agent. He has
an AB degree from Lafayette College and a Masters of International Management
degree with honors from the American Graduate School of International
Management.
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. Dr. Rudolph was Director of Clinical
Operations at Cetus Corporation from 1984 to 1989, and Clinical Assistant
Professor of Medicine at UCSF during this period. Prior to that, he worked at
Bristol Myers in cancer drug development. His fellowship training in
Hemotology-Oncology was done at Syracuse University.
Shawn K. Singh, J.D. has served as the Company's Senior Vice President,
Corporate Development since January 1998, with responsibility for corporate
finance, business development and investor and public relations, and as
Secretary since December 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.
46
47
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 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 USAF MC for the Department of
Medicine Staff Gastroenterology Service and Staff Hematology Oncology Service at
the Lackland Air Force Base in Texas. Dr. Karlin received his MD degree from 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.
Jere E. Goyan, Ph.D. has been a Chairman of the Board of Directors of the
Company since July 1997 and has been a director of the Company since January
1992. Currently, Dr. Goyan is President of Goyan and Hart Associates, a private
consulting firm. From May 1993 until December 1998, Dr. Goyan was President,
Chief Operating Officer, and a director of Alteon, Inc., a biotechnology
company. He also served Alteon as Acting Chief Executive Officer from July 1993
until May 1994 and as Senior Vice President for Research and Development from
January 1993 to May 1993. Dr. Goyan was the Commissioner of the United States
Food and Drug Administration from October 1979 to January 1981. He was Dean of
the School of Pharmacy University of California, San Francisco and Professor of
Pharmacy and Pharmaceutical Chemistry from 1967 through 1992. He joined the
faculty of UCSF in 1963 as an associate professor after serving on the faculty
of the University of Michigan, College of Pharmacy from 1956 to 1963. Dr. Goyan
also currently serves as a director of Atrix Laboratories, Emisphere
Technologies, Inc., PenWest Pharmaceuticals and of Boehringer Ingelheim
Pharmaceuticals Corporation. Dr. Goyan also serves as a consultant to various
companies and corporations.
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 from 1980 to 1997 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.), and of Kao Bio A.B., both
biotechnology companies.
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.
Rolf H. Henel joined the Company as a director in June 1997. Mr. Henel is a
partner in Naimark & Associates, Inc., a healthcare consulting firm, since
September 1994. 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 American
Cyanamid Company, most recently as President of the Cyanamid International
Lederele Division. Mr. Henel is also a director of Penwest Pharmaceuticals, a
pharmaceutical company, based in Patterson, New York.
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.
47
48
The information required by Item 405 of Regulation S-K is incorporated by
reference from the definitive proxy statement for the Company's 1999 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 "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from 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."
48
49
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 28-42 of this Report on Form 10-K:
Consolidated Balance Sheets at December 31, 1998 and 1997.
Consolidated Statements of Operations for each of the three years ended
December 31, 1998, 1997 and 1996.
Consolidated Statement of Shareholders' Equity for the three years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1998, 1997 and 1996.
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, 1998, 1997 and 1996.
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.
None
(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
4.2(14) Rights Agreement dated as of July 25, 1997 between the
Registrant and Chase Mellon Shareholder Services, L.L.C.
10.2(3) License, Development and Supply Agreement, dated January 12,
1993, between the Registrant and Schering-Plough K.K.
10.4(4)** Manufacturing Services Agreement dated as of July 27, 1993
by and between SciClone Pharmaceuticals International
Limited and Sclavo S.p.A.
49
50
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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
10.10(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
10.16(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
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
10.23(17) Preferred Stock Investment Agreement by and among the
Company, Halifax Fund, L.P., Themis Partners L.P. and
Heracles Fund dated as of March 27, 1998.
10.24(17) Registration Rights Agreement by and among Registrant,
Halifax Fund, L.P., Themis Partners L.P. and Heracles Fund
dated as of April 1, 1998.
10.25(18) Structured Equity Line Flexible Financing(SM) Agreement by
and between the Company and Cheyenne LLC dated as of June
30, 1998.
10.26(18) Warrant to purchase up to 200,000 shares of Common Stock of
the Company issued to Cheyenne LLC dated as of June 30,
1998.
10.27(18) Registration Rights Agreement by and between the Company and
Cheyenne LLC dated as of June 30, 1998.
10.28(19) Acquisition Agreement between the Company and Sclavo S.p.A.
dated April 20,1998.
10.29(19) First Amendment to Acquisition Agreement between the Company
and Sclavo S.p.A., dated April 20, 1998.
10.30(19) Stock Purchase Warrant dated September 3, 1998.
10.31 Letter Agreement dated as of March 5, 1999 between SciClone
Pharmaceuticals, Inc. and Thomas Moore.
50
51
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.32 Promissory Note dated as of March 5, 1999 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.
(17) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(18) Incorporated by reference to the Company's Current Report on form 8-K filed
on July 23, 1998.
(19) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
on November 17, 1998.
51
52
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.
By: /s/ DONALD R. SELLERS
------------------------------------
Donald R. Sellers,
Chief Executive Officer
Date: March 31, 1999
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, March 31, 1999
- ----------------------------------------------------- Director (Principal Executive
Donald R. Sellers Officer)
/s/ DIANE LEE Director of Corporate Finance March 31, 1999
- ----------------------------------------------------- and Administration (Principal
Diane Lee Financial and Accounting
Officer)
/s/ JOHN D. BAXTER, M.D. Director March 31, 1999
- -----------------------------------------------------
(John D. Baxter, M.D.)
/s/ EDWIN C. CADMAN, M.D Director March 31, 1999
- -----------------------------------------------------
(Edwin C. Cadman, M.D.)
/s/ JERE E. GOYAN, PH.D. Chairman of Board of Directors March 31, 1999
- -----------------------------------------------------
(Jere E. Goyan, Ph.D.)
/s/ ROLF H. HENEL Director March 31, 1999
- -----------------------------------------------------
(Rolf H. Henel)
52
53
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, 1998
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectable
accounts......................... $250,000 -- -- 174,000 $ 76,000
Inventory Reserve.................. 325,000 -- -- 196,000 129,000
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.................. 175,000 -- 225,000(1) 75,000(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.................. 115,000 60,000 -- -- 175,000
- ---------------
(1) Transfer from General Reserve
(2) Adjustment to Reserve
53
54
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
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..........................
4.2(14) Rights Agreement dated as of July 25, 1997 between the
Registrant and Chase Mellon Shareholder Services, L.L.C. ...
10.2(3) License, Development and Supply Agreement, dated January 12,
1993, between the Registrant and Schering-Plough K.K. ......
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.......................................
10.10(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.................
10.16(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.........................................
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........................................................
55
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
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. .............................
10.23(17) Preferred Stock Investment Agreement by and among the
Company, Halifax Fund, L.P., Themis Partners L.P. and
Heracles Fund dated as of March 27, 1998....................
10.24(17) Registration Rights Agreement by and among Registrant,
Halifax Fund, L.P., Themis Partners L.P. and Heracles Fund
dated as of April 1, 1998...................................
10.25(18) Structured Equity Line Flexible Financing(SM) Agreement by
and between the Company and Cheyenne LLC dated as of June
30, 1998....................................................
10.26(18) Warrant to purchase up to 200,000 shares of Common Stock of
the Company issued to Cheyenne LLC dated as of June 30,
1998........................................................
10.27(18) Registration Rights Agreement by and between the Company and
Cheyenne LLC dated as of June 30, 1998......................
10.28(19) Acquisition Agreement between the Company and Sclavo S.p.A.
dated April 20,1998.........................................
10.29(19) First Amendment to Acquisition Agreement between the Company
and Sclavo S.p.A., dated April 20, 1998.....................
10.30(19) Stock Purchase Warrant dated September 3, 1998..............
10.31 Letter Agreement dated as of March 5, 1999 between SciClone
Pharmaceuticals, Inc. and Thomas Moore......................
10.32 Promissory Note dated as of March 5, 1999 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.
56
(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.
(17) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(18) Incorporated by reference to the Company's Current Report on Form 8-K filed
on July 23, 1998.
(19) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
on November 17, 1998.