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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2003

OR

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.

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

          As of March 31, 2003, 37,487,394 shares of the registrant’s Common Stock, no par value, were issued and outstanding.

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SCICLONE PHARMACEUTICALS, INC.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

SCICLONE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements

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SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

See notes to condensed consolidated financial statements

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SCICLONE PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

See notes to condensed consolidated financial statements

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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, 2002 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, 2002 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. 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 Loss Per Share
		Net loss per share is computed using the weighted average number of shares of common stock outstanding. Potentially dilutive common shares from convertible debt, stock options and warrants are excluded, as their effect is antidilutive.

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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 at fair market value.
		Pro forma information regarding net loss and net loss per share is required by Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“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 the three month period ended March 31, 2003 and the corresponding period in 2002: risk-free interest rates of 2.00% and 2.00%, respectively; dividend yield of 0%; volatility factors of the expected market price of the Company’s common stock of 0.95 and 0.96, respectively, and a weighted average expected life of the option of 4.00 years and 4.00 years, respectively.
		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.
		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 2003 and 2002 consistent with the provisions of SFAS 123, the Company’s net loss and net loss per share would have been the pro forma amounts indicated below:

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 due to the different number of options granted each year.

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3.		Comprehensive Loss
		For the three-month periods ended March 31, 2003 and 2002, the Company’s total comprehensive loss amounted to $(2,883,000) and $(2,365,000), respectively.
4.		Available-For-Sale Securities
		The following is a summary of available-for sale securities at March 31, 2003 and December 31, 2002:

		As of March 31, 2003, the available-for-sale securities are included as follows: $13,108,000 in cash and cash equivalents; $685,000 in restricted short-term investments and $213,000 in other short-term investments. As of December 31, 2002, the available-for-sale securities are included as follows: $13,723,000 in cash and cash equivalents; $685,000 in restricted short-term investments and $232,000 in other short-term investments.
5.		Inventories
		The following is a summary of inventories at March 31, 2003 and December 31, 2002:

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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 expense for the three-month periods ended March 31, 2003 and 2002 was $17,000 and $101,000, respectively. Amortization expense in 2002 was based on an estimated useful life of six years. For the years ending December 31, 2003 through 2012, annual amortization expense is expected to be $70,000. The Company reassessed the estimated useful life of the assets to be an additional eight years as of December 31, 2002. The Company reassessed the useful life to be eight years as the European patent for the use of ZADAXIN in the treatment of hepatitis C expires in 2012 and the Company, based upon the progress in the ZADAXIN clinical trials and the Company’s actual experience of product sales, has assessed that the acquired product rights will be useful to the Company through 2012. 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 reassesses the useful life of these assets in accordance with current facts and circumstances.
7.		Minimum Purchase Requirements
		The Company does not have any minimum purchase requirements under its contract manufacturing supply agreements for ZADAXIN and CPX.
8.		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 is being recognized as contract revenue over the course of the ZADAXIN hepatitis C U.S. clinical program beginning in April 2002 and the period of sharing the clinical data from this program with Sigma-Tau, the substantive performance requirements under the contract. For the three-month period ended March 31, 2003, the Company recognized $224,000 as contract revenue.

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9.		Shareholders’ Equity
		In January 2003, the Company completed a $1,800,000 direct placement to affiliates of Sigma-Tau less $13,000 in financing-related costs. The affiliates purchased 504,938 shares of the Company’s common stock at $3.5648 per share. The shares issued were restricted securities, and Sigma-Tau and its affiliates are not permitted to sell any of the shares purchased in this private placement until January 24, 2004.

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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 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 sales and demand for ZADAXIN, working capital, cash flow, our future financial results, the timing and outcome of clinical trials, anticipated sales and cost of product sales, allocation of financial resources to certain trials and programs, research and development expense levels, sales and marketing expense levels, future commercialization and marketing efforts and general and administrative and other 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 engaged in the development and commercialization of therapeutics to treat life-threatening diseases. Our lead product ZADAXIN is in several late-stage clinical trials, including two phase 3 hepatitis C clinical trials in the U.S., a recently completed 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. In addition to ZADAXIN, our other drug development opportunities include SCV-07, a potentially orally available therapeutic to treat viral and infectious diseases, and products to address the protein-based disorder that causes cystic fibrosis.

     ZADAXIN has been approved for sale by the ministries of health in over 30 countries including in the first quarter of 2003 the approval for use as a vaccine adjuvant.in Hong Kong. ZADAXIN is marketed in China and selected other countries outside the U.S, and the cash flow generated by these operations contributes significant support to our ZADAXIN late-stage clinical trials. ZADAXIN has been administered to over 10,000 patients to date in both clinical and commercial use, alone and in combination with antiviral and anticancer drugs, without producing any known ZADAXIN related significant side effects or toxicities. ZADAXIN is manufactured by third party manufacturers in the U.S. and Europe in compliance with U.S. Food and Drug Administration (FDA) current Good Manufacturing Practices (cGMP), or the foreign equivalent of such standards.

     Our business strategy focuses on developing late-stage products to treat life-threatening diseases that offer significant market opportunities. ZADAXIN is currently in multiple phase 3 and phase 2 clinical trials for the treatment of viral diseases and cancer. These therapeutic categories currently represent multi-billion dollar markets in the U.S., Europe, and Japan. We design our clinical trials with the input of leading physicians and selected major pharmaceutical

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companies, and we structure trials to support regulatory approval for ZADAXIN in the U.S., Europe, and Japan.

Results of Operations

     Total Revenue

     Product sales were $5,000,000 for the three-month period ended March 31, 2003, as compared to $3,948,000 for the corresponding period in 2002. The growth was largely due to increased sales volume of ZADAXIN to our importers in China.

     For the three-month period ended March 31, 2003, all of our product sales were derived from sales of ZADAXIN, and China accounted for approximately 87% of this revenue.

     Contract revenue was $224,000 for the three-month period ended March 31, 2003, as compared to none for the corresponding period in 2002. The contract revenue we recognized was in connection with funds we received from Sigma-Tau in January 2002 which will be 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.

     Cost of Product Sales

     Cost of product sales were $1,016,000 for the three-month period ended March 31, 2003 as compared to $792,000 for the corresponding period in 2002 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 associated with excess or expiring finished product inventory.

     Research and Development

     Research and development expenses were $3,783,000 for the three-month period ended March 31, 2003, as compared to $2,526,000 for the corresponding period in 2002. The increase in the three-month period ended March 31, 2003 was primarily to support our ZADAXIN phase 3 clinical trials in the U.S. and Japan. The initiation and continuation of ZADAXIN clinical trials have had, and will continue to have, the largest and most significant effect on our research and development expenses. In general, we expect product research and development expenses to increase in absolute dollars over the next several years and to vary quarter to quarter as we pursue our strategy of initiating additional preclinical and clinical trials and testing, acquiring product rights, and expanding regulatory activities.

     Sales and Marketing

     Sales and marketing expenses were $2,229,000 for the three-month period ended March 31, 2003, as compared to $2,008,000 for the corresponding period in 2002. The increase was related to the expansion of our markets for ZADAXIN. We expect our sales and marketing expenses to vary quarter to quarter and to increase in the next several years as we expect to expand our commercialization and marketing efforts.

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     General and Administrative

     General and administrative expenses were $1,012,000 for the three-month period ended March 31, 2003, as compared to $992,000 for the corresponding period in 2002. In the near term, we expect general and administrative expenses to vary quarter to quarter as we increase our general and administrative activities and resources to support increased expenditures on preclinical and clinical trials and testing, and regulatory, pre-commercialization and marketing activities.

     Interest and Investment Income

     Interest and investment income was $53,000 for the three-month period ended March 31, 2003, as compared to $76,000 for the corresponding period in 2002. The decrease was primarily due to lower average invested cash balances and lower interest rates.

     Interest and Investment Expense

     Interest and investment expense was $91,000 for the three-month period ended March 31, 2003, as compared to $90,000 for the corresponding period in 2002.

     Liquidity and Capital Resources