UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

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.

(650) 358-3456
(Registrant’s telephone number, including area code)

Not Applicable

          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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

          Yes [X]   No [  ]

          As of June 30, 2004, 44,625,754 shares of the registrant’s Common Stock, $0.001 par value, were issued and outstanding.

SCICLONE PHARMACEUTICALS, INC.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

SCICLONE PHARMACEUTICALS, INC.

See notes to condensed consolidated financial statements

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SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to condensed consolidated financial statements

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SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to condensed consolidated financial statements

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SCICLONE PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

1.		Basis of Presentation
		SciClone was reincorporated in the State of Delaware on July 18, 2003. The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles consistent with those applied in, and should be read in conjunction with, the audited financial statements for the year ended December 31, 2003 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The interim financial information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented and are not necessarily indicative of results for subsequent interim periods or for the full year. The condensed consolidated balance sheet data at December 31, 2003 is derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
2.		Significant Accounting Policies
		Revenue Recognition
		The Company recognizes revenue from product sales at the time of shipment. There are no significant customer acceptance requirements or post shipment obligations on the part of the Company. Sales to importing agents or distributors are recognized at time of shipment when title to the product is transferred to them, and they do not have contractual rights of return except under limited terms regarding product quality. However, the Company will replace products that have expired or are deemed to be damaged or defective when delivered. Payments by the importing agents and distributors are not contingent upon sale to the end user by the importing agents or distributors.
		Contract revenue for research and development is recorded as earned based on the performance requirements of the contract. Nonrefundable contract fees for which no further performance obligations exist, and there is no continuing involvement by the Company, are recognized on the earlier of when the payments are received or when collection is assured.
		Revenue associated with substantive performance milestones is recognized based on the achievement of the milestones, as defined in the respective agreements and provided that (i) the milestone event is substantive and its achievement is not reasonably assured at the inception of the agreement, and (ii) there are no future performance obligations associated with the milestone payment.
		Net Income (Loss) Per Share
		Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted net income (loss) per share includes any dilutive impact from convertible debt, stock options and warrants outstanding using the treasury stock method.
		The following is a reconciliation of the numerator and denominator used in basic and diluted income (loss) per share computations for the three-month and six-month periods in 2004 and 2003, respectively:

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		Accounting For Stock-Based Compensation
		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 to employees and directors granted with exercise prices at fair market value.
		Pro forma information regarding net income (loss) and net income (loss) per share is required by Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) as amended by Statement of Financial Accounting Standards No. 148 “Accounting for Stock-Based Compensation-Transition and Disclosure” (“SFAS 148”) 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 the three-month and six-month periods ended June 30, 2004 and the corresponding periods in 2003:

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 and director stock options and stock purchases.

The following table illustrates the Company’s pro forma net income (loss) and net income (loss) per share, had compensation expense for the Company’s option and employee purchase plans been

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determined based on the fair value at the grant date consistent with the provisions of SFAS 123, as amended by SFAS 148:

		The effects of applying SFAS 123 for pro forma disclosures are not likely to be representative of the effects on reported net income (loss) for future years due to the different number of options granted each year.
3.		Comprehensive Income (Loss)
		Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes net unrealized gains and losses on our available-for-sale securities. For the three-month periods ended June 30, 2004 and 2003, the Company’s total comprehensive income (loss) amounted to $(2,910,000) and $5,233,000, respectively. For the six-month periods ended June 30, 2004 and 2003, the Company’s total comprehensive income (loss) amounted to $(5,987,000) and $2,350,000, respectively.
4.		Available-For-Sale Securities
		The following is a summary of available-for-sale securities at June 30, 2004 and December 31, 2003:

As of June 30, 2004, the available-for-sale securities are included as follows: $30,665,000 in cash            and cash equivalents; $694,000 in restricted short-term investments and $9,457,000 in other short-term investments. As of December 31, 2003, the available-for-sale securities are included as follows: $38,259,000 in cash and cash equivalents; $695,000 in restricted short-term investments and $9,380,000 in other short-term investments. As of June 30, 2004 and December 31, 2003 all available-for sale securities excluding the short-term municipal securities had maturities of 12 months or less. The short-term municipals are auction rate securities which have long final maturities, however,

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because they are highly rated, highly liquid and their interest rate is reset at auction every 30 days, they are included as available-for sale securities. Our interest rate risk associated with the auction rate securities is limited due to this interest rate reset mechanism.

5.		Inventories
		The following is a summary of inventories at June 30, 2004 and December 31, 2003:

6.		Intangible Assets
		The following is a summary of intangible assets:

		Acquired ZADAXIN product rights are being amortized on a straight-line basis beginning in September 1998. Amortization expenses for the three-month and six-month periods ended June 30, 2004 and 2003 were both $17,500 and $35,000, respectively. For the years ending December 31, 2004 through 2012, annual amortization expense is expected to be $70,000. Based upon the progress in the ZADAXIN clinical trials and the Company’s actual experience of product sales, the Company assessed that the acquired product rights will be useful to the Company through 2012 when the European patent for the use of ZADAXIN in the treatment of hepatitis C expires. The Company’s policy is to identify and record impairment losses, as circumstances dictate, on intangible product rights when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.
7.		Contract Revenue
		In January 2002, the Company received $2,685,000 from its European partner, Sigma-Tau, under the terms of its collaborative agreement announced in late December 2001. This receipt has been recorded as deferred revenue and is being recognized as contract revenue over the course of the ZADAXIN hepatitis C U.S. clinical program and the period of sharing the clinical data from this program with Sigma-Tau, the substantive performance requirements under the contract. In June 2004, the Company received a $1,000,000 milestone payment from Sigma-Tau for the enrollment of 1,000 patients into the U.S. hepatitis C clinical trials. This milestone payment has been recognized as contract revenue in the three-month period ended June 30, 2004 as the substantive milestone event has been completed and there are no future performance obligations associated with the milestone payment.

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8.		Subsequent Event
		We recently announced that Donald Sellers has resigned as President and Chief Executive Officer of SciClone. Mr. Sellers also resigned from our Board of Directors, but will continue to act as a consultant to the Company. The Board of Directors is actively working to identify a successor. In the interim, Alfred Rudolph, M.D., Chief Operating Officer, and Richard Waldron, Chief Financial Officer, have jointly formed an Office of the President to manage the operations of the Company along with the Board’s continuing oversight.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

     This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on our current expectations, estimates and projections about our business, industry, management’s beliefs and certain assumptions made by us. Words such as “anticipate,” “expect,” “intend,” “plan,” “believe” or similar expressions are intended to identify forward-looking statements including those statements we make regarding our future financial results; anticipated product sales; the sufficiency of our resources to complete clinical trials; and other new product development initiatives; the timing and outcome of clinical trials; the timing of completion of therapy and observation for our clinical trials; the ability of the Company to function effectively while we work to identify a new Chief Executive Officer; the preparation and timing of our Japanese New Drug Application and other potential New Drug Applications in the United States and other countries; ZADAXIN’s ability to complement existing therapies; prospects for ZADAXIN and our plans for its enhancement and commercialization; future size of the worldwide hepatitis C virus market; research and development and other expense levels; cash and other asset levels; levels of gross margin and cost of product sales and the allocation of financial resources to certain trials and programs. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors including, but not limited to, those described under the caption “Risk Factors” in this Quarterly Report on Form 10-Q. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Overview

     SciClone Pharmaceuticals, Inc. is a biopharmaceutical company engaged in the development and commercialization of therapeutics to treat life-threatening diseases. We are currently evaluating our lead product, ZADAXIN, in several late stage clinical trials for the treatment of patients with the hepatitis C virus, or HCV, the hepatitis B virus, or HBV, and certain types of cancer. Our primary focus is the successful completion of our two ongoing ZADAXIN phase 3 HCV clinical trials in the United States. We believe the worldwide market for HCV therapies was approximately $3 billion in 2003 and could exceed $8 billion in 2012. If approved by the U.S. Food and Drug Administration (FDA), we expect ZADAXIN to complement other HCV therapies and to expand the HCV market opportunity. In addition to the HCV trials in the United States, ZADAXIN is also being evaluated in a recently completed phase 3 HBV clinical trial in Japan, an ongoing phase 2 malignant melanoma clinical trial in Europe with our exclusive marketing partner for Western Europe, Sigma-Tau, two ongoing phase 2 pilot studies in the United States for the treatment of liver cancer, an ongoing HCV pilot clinical trial in Mexico and an ongoing HBV clinical trial in Taiwan. We recently announced plans for a ZADAXIN phase 3 hepatitis C triple therapy clinical trial in Europe. Our other principal drug development candidate is SCV-07, a potentially orally available therapeutic to treat viral and other infectious diseases.

Results of Operations

     Total Revenue

     Product sales were $5,613,000 and $11,027,000 for the three-month and six-month periods ended June 30, 2004, as compared to $16,207,000 and $21,207,000 for the corresponding periods in 2003. All product sales in each period were derived from sales of ZADAXIN. The higher levels of sales in the 2003 periods were related to an unanticipated increase in volume of ZADAXIN product sold in response to the SARS epidemic in China. Product prices have remained stable throughout the 2003 and 2004 periods. Sales to

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customers in China accounted for approximately 91% and 90% of this revenue for the three-month and six-month periods ended June 30, 2004.

     For the three-month period ended June 30, 2004, sales to one importing agent in China accounted for approximately 91% of our product sales. However, for the six-month period ended June 30, 2004, the same importing agent in China accounted for only 65% of our product sales and another importing agent in China accounted for 25% of our product sales.

     Contract revenue was $1,135,000 and $1,363,000 for the three-month and six-month periods ended June 30, 2004 as compared to $224,000 and $448,000 for each of the corresponding periods in 2003. We recognized $134,000 and $268,000 of contract revenue for the three-month and six-month periods ended June 30, 2004, respectively, and all of the revenue in the corresponding 2003 periods, in connection with the $2,685,000 payment we received from Sigma-Tau in January 2002. This revenue is recognized as contract revenue over the course of the ZADAXIN hepatitis C U.S. clinical program and the period of sharing the clinical data from this program with Sigma-Tau in accordance with the requirements under our contract with Sigma-Tau. During the three-month period ended June 30, 2004, we also recognized a $1,000,000 milestone payment from Sigma-Tau for the enrollment of 1,000 patients in our phase 3 HCV clinical trials.

     Cost of Product Sales and Gross Margin on Product Sales

     Gross margin on product sales was 79% for the three-month and six-month periods ended June 30, 2004, as compared to 82% for the three-month period ended June 30, 2003 and 81% for the six-month period ended June 30, 2003. The higher levels of gross margin on product sales for the 2003 periods is primarily due to the significantly higher volume of product sales in those periods. We expect cost of product sales, and hence gross margin on product sales, to vary from period to period, depending upon the level of ZADAXIN sales, the absorption of product-related fixed costs, and any charges associated with excess or