SCICLONE PHARMACEUTICALS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2002

[ ] 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 incorporation or organization)		(I.R.S. employer Identification no.)


901 Mariner’s Island Blvd., Suite 205, San Mateo, California		94404

(Address of principal executive offices)		(Zip code)

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

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

As of September 30, 2002, 36,876,397 shares of the registrant’s Common Stock, no par value, were issued and outstanding.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Condensed Consolidated Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		Notes to Condensed Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
Exhibit 99.1
Exhibit 99.2

SCICLONE PHARMACEUTICALS, INC.

INDEX

PAGE NO.

PART I.

FINANCIAL INFORMATION

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001
3

Condensed Consolidated Statements of Operations for the Three-month and Nine-month periods ended September 30, 2002 and 2001
4

Condensed Consolidated Statements of Cash Flows for the Nine-month periods ended September 30, 2002 and 2001
5

Notes to Condensed Consolidated Financial Statements
6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations
9

Item 3.

Quantitative and Qualitative Disclosures About Market Risk
26

Item 4.

Controls and Procedures
26

PART II.

OTHER INFORMATION

Item 6.

Exhibits and Reports on Form 8-K
27

Signatures
29

Certifications
29

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

SCICLONE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS


		September 30,			December 31,
		2002			2001

		(unaudited)			(Note 1)
Current assets:
	Cash and cash equivalents	$	23,528,000		$	15,518,000
	Restricted short-term investments		633,000			633,000
	Other short-term investments		345,000			317,000
	Accounts receivable, net		9,009,000			8,792,000
	Inventories		3,326,000			4,059,000
	Prepaid expenses and other current assets		897,000			1,333,000

Total current assets			37,738,000			30,652,000
Property and equipment, net			119,000			167,000
Intangible assets, net			785,000			1,091,000
Other assets			169,000			186,000

Total assets		$	38,811,000		$	32,096,000





LIABILITIES AND SHAREHOLDERS’ EQUITY




Current liabilities:
	Accounts payable	$	2,533,000		$	1,575,000
	Accrued compensation and employee benefits		841,000			960,000
	Accrued clinical trials expense		771,000			296,000
	Accrued professional fees		645,000			633,000
	Deferred revenue		895,000			—
	Other accrued expenses		298,000			258,000

Total current liabilities			5,983,000			3,722,000
Deferred revenue			1,342,000			—
Convertible notes payable			5,600,000			5,600,000
Shareholders’ equity:
	Common stock, no par value; 75,000,000 shares authorized; 36,876,397 and 32,474,150 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively		156,240,000			145,713,000
	Accumulated other comprehensive income		45,000			39,000
	Accumulated deficit		(130,399,000	)		(122,978,000	)

Total shareholders’ equity			25,886,000			22,774,000

Total liabilities and shareholders’ equity		$	38,811,000		$	32,096,000

See notes to condensed consolidated financial statements

SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)


		Three months ended						Nine months ended
		September 30,						September 30,

		2002			2001			2002			2001

Product sales		$	4,298,000		$	3,580,000		$	12,294,000		$	9,943,000
Contract revenue			224,000			—			448,000			—

Total revenue			4,522,000			3,580,000			12,742,000			9,943,000
Cost of product sales			918,000			714,000			2,525,000			1,948,000

Gross profit			3,604,000			2,866,000			10,217,000			7,995,000
Operating expenses:
	Research and development		2,110,000			3,390,000			8,407,000			6,717,000
	Sales and marketing		2,217,000			2,256,000			6,291,000			7,184,000
	General and administrative		960,000			749,000			2,907,000			2,532,000

Total operating expenses			5,287,000			6,395,000			17,605,000			16,433,000

Loss from operations			(1,683,000	)		(3,529,000	)		(7,388,000	)		(8,438,000	)
Interest and investment income			100,000			174,000			252,000			672,000
Interest and investment expense			(91,000	)		(90,000	)		(271,000	)		(243,000	)
Other income (expense), net			2,000			3,272,000			(13,000	)		3,492,000

Net loss		$	(1,672,000	)	$	(173,000	)	$	(7,420,000	)	$	(4,517,000	)

Basic and diluted net loss per share		$	(0.05	)	$	(0.01	)	$	(0.22	)	$	(0.14	)

Weighted average shares used in computing basic and diluted net loss per share			36,869,133			32,429,345			34,365,118			32,272,682

See notes to condensed consolidated financial statements

SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)


			Nine months ended
			September 30,

			2002			2001

Operating activities:
Net loss			$	(7,420,000	)	$	(4,517,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization			421,000			399,000
	Changes in operating assets and liabilities:
		Accounts receivable, net		(217,000	)		(606,000	)
		Inventories		733,000			(575,000	)
		Prepaid expenses and other current assets		436,000			(358,000	)
		Accounts payable and other accrued expenses		998,000			(868,000	)
		Accrued compensation and employee benefits		(119,000	)		(51,000	)
		Accrued clinical trials expense		475,000			772,000
		Accrued professional fees		12,000			(15,000	)
		Deferred revenue		2,237,000			—

Net cash used in operating activities				(2,444,000	)		(5,819,000	)

Investing activities:
	Purchase of property and equipment			(49,000	)		(45,000	)
	Payment on purchase of marketable securities			(23,000	)		(343,000	)

Net cash used in investing activities				(72,000	)		(388,000	)

Financing activities:
	Proceeds from issuance of convertible note			—			1,600,000
	Proceeds from issuance of common stock, net of financing costs			10,526,000			849,000

Net cash provided by financing activities				10,526,000			2,449,000

Net increase (decrease) in cash and cash equivalents				8,010,000			(3,758,000	)
Cash and cash equivalents, beginning of period				15,518,000			21,981,000

Cash and cash equivalents, end of period			$	23,528,000		$	18,223,000

See notes to condensed consolidated financial statements

SCICLONE PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements
(unaudited)

1.    Basis of Presentation

   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, 2001 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The interim financial information reflects all 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, 2001 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. Certain prior year amounts have been reclassified to conform to the current period presentation.

2.    Significant Accounting Policies

   Revenue Recognition

   The Company recognizes revenue from product sales at the time of shipment and recognizes contract/grant revenue when services have been performed. 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 upon the achievement of the milestones, as defined in the respective agreements. Revenue under research and development cost reimbursement contracts is recognized as the related costs are incurred.

   Net Loss Per Share

   Net loss per share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and warrants are excluded, as their effect is antidilutive.

   Recent Accounting Pronouncements

   The Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, on January 1, 2002. There has been no impact on the Company’s operating results from the adoption of this standard.

3.    Comprehensive Loss

   For the three-month periods ended September 30, 2002 and 2001, the Company’s total comprehensive loss amounted to $(1,690,000) and $(223,000), respectively. For the nine-month periods ended September 30, 2002 and 2001, the Company’s total comprehensive loss amounted to $(7,414,000) and $(4,503,000), respectively.

4.    Available-For-Sale Securities

   The following is a summary of available-for sale securities at September 30, 2002 and December 31, 2001:


				Gross		Estimated
		Amortized		Unrealized		Fair
		Cost		Gains		Value

September 30, 2002:
	Certificate of deposit	$	882,000	$	—	$	882,000
	U.S. government obligations		17,447,000		—		17,447,000
	Corporate equity securities		51,000		45,000		96,000

		$	18,380,000	$	45,000	$	18,425,000

December 31, 2001:
	Certificate of deposit	$	865,000	$	—	$	865,000
	Corporate obligations		10,858,000		6,000		10,864,000
	Corporate equity securities		51,000		33,000		84,000

		$	11,774,000	$	39,000	$	11,813,000

   As of September 30, 2002, the available-for-sale securities are included as follows: $17,447,000 in cash and cash equivalents; $633,000 in restricted short-term investments and $345,000 in other short-term investments.

5.    Inventories

   The following is a summary of inventories at September 30, 2002 and December 31, 2001:


	September 30,			December 31,
	2002			2001

Raw materials	$	2,464,000		$	2,759,000
Work in progress		478,000			1,269,000
Finished goods		464,000			431,000
Reserve		(80,000	)		(400,000	)

	$	3,326,000		$	4,059,000

6.    Prepaid Expenses

   The Company’s prepaid expenses consist of payments to third party institutions conducting or managing our clinical trials and to insurance companies for business liability coverage.

7.    Intangible Assets

   The following is a summary of intangible assets at September 30, 2002 and December 31, 2001:


	September 30,			December 31,
	2002			2001

Intangible product rights	$	2,456,000		$	2,456,000
Accumulated amortization		(1,671,000	)		(1,365,000	)

	$	785,000		$	1,091,000

   ZADAXIN® product rights that the Company acquired are being amortized over six years beginning in September 1998. Amortization expense for the three-month and nine-month periods ended September 30, 2002 and 2001 was $102,000 and $307,000, respectively, for both years. Amortization expense for the years ended December 31, 2002, 2003 and 2004 is expected to be $409,000, $409,000 and $273,000, respectively. The Company reassesses the useful life of these assets in accordance with current facts and circumstances. 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. The Company to date has not identified any changes in useful life or impairment losses on these assets.

8.    Minimum Purchase Requirements

   The Company does not have any minimum purchase requirements under its contract manufacturing supply agreements for ZADAXIN and CPX.

9.    Deferred Revenue

   In January 2002, the Company received $2,685,000 from its European partner, Sigma-Tau under the terms of our collaborative agreement announced in late December 2001. This receipt has been recorded as deferred revenue and will be recognized as contract revenue over the next three years starting in April 2002, the estimated time to complete the ZADAXIN hepatitis C U.S. clinical program and anticipated FDA regulatory filings. For the three-month and nine-month periods ended September 30, 2002, the Company recognized $224,000 and $448,000, respectively as contract revenue.

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

Special Note Regarding Forward-Looking Statements

This Report 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 industry, management’s beliefs and certain assumptions made by us. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes” or similar expressions are intended to identify forward-looking statements including those statements we make regarding the timing and outcome of clinical trials, anticipated sales and cost of product sales, allocation of financial resources to certain trials and programs, reliance on third-party collaborators and research and development, sales and marketing, general and administrative and operating expense levels. 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 Form 10-Q. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Overview

SciClone Pharmaceuticals, Inc. (“SciClone” or the “Company”) is a biopharmaceutical company and its lead product ZADAXIN, an Immune System Enhancer, is in two phase 3 hepatitis C clinical trials in the U.S., a phase 3 hepatitis B clinical trial in Japan, a phase 2 malignant melanoma clinical trial in Europe, and two phase 2 liver cancer trials in the U.S. ZADAXIN has been approved for sale by the ministries of health in over 30 countries and is marketed in China and selected other countries outside the U.S. ZADAXIN has been administered to more than 10,000 patients in both clinical and commercial use, alone and in combination with anti-viral and anti-cancer drugs, without producing any ZADAXIN related significant side effects or toxicities.

Results of Operations

Total Revenue

Product sales were $4,298,000 and $12,294,000 for the three-month and nine-month periods ended September 30, 2002, as compared to $3,580,000 and $9,943,000 for the corresponding periods in 2001. The growth was largely due to increased sales of ZADAXIN to our importers in China.

Contract revenue was $224,000 and $448,000 for the three-month and nine-month periods ended September 30, 2002, respectively, as compared to none in 2001. The contract revenue we recognized in 2002 was in connection with funds we received from Sigma-Tau. These funds have been recorded as deferred revenue and are being recognized as contract revenue over three years starting in April 2002, the estimated time to complete the ZADAXIN U.S. hepatitis C clinical trial program and anticipated FDA regulatory filings.

For the three-month and nine-month periods ended September 30, 2002, all of our product sales were derived from sales of ZADAXIN, and in each period, China accounted for approximately 88% of this revenue. Sales emphasis is concentrated in China because, as our most developed market, marketing expenditures are more likely to result in sales and profits compared to newer markets, which require investment and development spending.

Cost of Product Sales

Cost of product sales were $918,000 and $2,525,000 for the three-month and nine-month periods ended September 30, 2002 as compared to $714,000 and $1,948,000 for the corresponding periods in 2001 with the increase being primarily due to higher product sales. We expect cost of product sales to vary from quarter to quarter, depending upon the level of ZADAXIN sales, the absorption of fixed product-related costs, and any charges associa

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			PAGE NO.

PART I.	FINANCIAL INFORMATION




Item 1.	Condensed Consolidated Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001		3




		Condensed Consolidated Statements of Operations for the Three-month and Nine-month periods ended September 30, 2002 and 2001		4




		Condensed Consolidated Statements of Cash Flows for the Nine-month periods ended September 30, 2002 and 2001		5




		Notes to Condensed Consolidated Financial Statements		6




Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			9




Item 3.	Quantitative and Qualitative Disclosures About Market Risk			26




Item 4.	Controls and Procedures			26




PART II.	OTHER INFORMATION




Item 6.	Exhibits and Reports on Form 8-K			27




Signatures				29




Certifications				29

1.		Basis of Presentation

		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, 2001 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission. The interim financial information reflects all 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, 2001 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. Certain prior year amounts have been reclassified to conform to the current period presentation.

2.		Significant Accounting Policies

		Revenue Recognition

		The Company recognizes revenue from product sales at the time of shipment and recognizes contract/grant revenue when services have been performed. 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 upon the achievement of the milestones, as defined in the respective agreements. Revenue under research and development cost reimbursement contracts is recognized as the related costs are incurred.

		Net Loss Per Share

		Net loss per share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and warrants are excluded, as their effect is antidilutive.

		Recent Accounting Pronouncements

		The Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, on January 1, 2002. There has been no impact on the Company’s operating results from the adoption of this standard.

3.		Comprehensive Loss

		For the three-month periods ended September 30, 2002 and 2001, the Company’s total comprehensive loss amounted to $(1,690,000) and $(223,000), respectively. For the nine-month periods ended September 30, 2002 and 2001, the Company’s total comprehensive loss amounted to $(7,414,000) and $(4,503,000), respectively.

4.		Available-For-Sale Securities

		The following is a summary of available-for sale securities at September 30, 2002 and December 31, 2001:

		As of September 30, 2002, the available-for-sale securities are included as follows: $17,447,000 in cash and cash equivalents; $633,000 in restricted short-term investments and $345,000 in other short-term investments.

5.		Inventories

		The following is a summary of inventories at September 30, 2002 and December 31, 2001:

6.		Prepaid Expenses

		The Company’s prepaid expenses consist of payments to third party institutions conducting or managing our clinical trials and to insurance companies for business liability coverage.

7.		Intangible Assets

		The following is a summary of intangible assets at September 30, 2002 and December 31, 2001:

		ZADAXIN® product rights that the Company acquired are being amortized over six years beginning in September 1998. Amortization expense for the three-month and nine-month periods ended September 30, 2002 and 2001 was $102,000 and $307,000, respectively, for both years. Amortization expense for the years ended December 31, 2002, 2003 and 2004 is expected to be $409,000, $409,000 and $273,000, respectively. The Company reassesses the useful life of these assets in accordance with current facts and circumstances. 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. The Company to date has not identified any changes in useful life or impairment losses on these assets.

8.		Minimum Purchase Requirements

		The Company does not have any minimum purchase requirements under its contract manufacturing supply agreements for ZADAXIN and CPX.

9.		Deferred Revenue

		In January 2002, the Company received $2,685,000 from its European partner, Sigma-Tau under the terms of our collaborative agreement announced in late December 2001. This receipt has been recorded as deferred revenue and will be recognized as contract revenue over the next three years starting in April 2002, the estimated time to complete the ZADAXIN hepatitis C U.S. clinical program and anticipated FDA regulatory filings. For the three-month and nine-month periods ended September 30, 2002, the Company recognized $224,000 and $448,000, respectively as contract revenue.