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SECURITIES AND EXCHANGE COMMISSION

For the transition period from            to            .

Commission file number 0-19825

(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, $0.001 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. [X]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [  ]

     The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $320,101,054 as of June 30, 2003, 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 February 20, 2004, there were 44,583,412 shares of the Registrant’s Common Stock outstanding.

     Part III incorporates by reference from the definitive proxy statement for the Registrant’s 2004 Annual Meeting of Stockholders 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.

 

TABLE OF CONTENTS

PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Consolidated Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
		REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9A. Controls and Procedures
PART III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Principal Accountant Fees and Services
PART IV
	Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
EXHIBIT 10.11
EXHIBIT 10.12
EXHIBIT 10.26
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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Table of Contents

TABLE OF CONTENTS

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NOTE REGARDING FORWARD-LOOKING STATEMENTS:

          This Annual Report on Form 10-K 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 and net sales and levels; the timing and outcome of clinical trials and the timing of reporting of clinical trial results; the timing of enrollment, treatment and follow-up for our clinical trials; the preparation and timing of our Japanese New Drug Application and other potential New Drug Applications in the United States; projected increases in the number of hepatitis C patients seeking treatment and re-treatment; ZADAXIN’s ability to complement existing therapies; prospects for ZADAXIN and our plans for its enhancement and commercialization; future marketing efforts and its effect on the Company’s value; our ability to expand our product pipeline; partnering prospects for ZADAXIN; research and development and other expense levels; future inventory 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 Annual Report on Form 10-K. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

PART I

Item 1. Business

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, we are also evaluating ZADAXIN 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 and other international clinical trials, particularly an ongoing HCV pilot clinical trial in Mexico. Our other principal drug development candidate is SCV-07, a potentially orally available therapeutic to treat viral and infectious diseases.

     We are currently evaluating ZADAXIN in the United States in two multi-center, randomized, placebo controlled and double-blinded phase 3 clinical studies for the treatment of patients with HCV who have failed previous FDA-approved HCV therapies. The World Health Organization estimates that more than 170 million people are infected with HCV worldwide, including, according to Datamonitor, an estimated 10 million people in the three major pharmaceutical markets — the United States, Europe and Japan. The National Institutes of Health estimate that in the United States alone 4 million people are infected with HCV. The current HCV therapy of pegylated interferon alpha in combination with ribavirin is not effective in approximately half of all treated patients. Our clinical trials are designed to demonstrate that ZADAXIN, in combination with pegylated interferon alpha, is effective in treating HCV patients who have not responded to prior HCV therapies. We completed full enrollment of our first 500 patient phase 3 hepatitis C clinical trial in September 2003 and expect full enrollment of our second 500 patient trial near the end of the second quarter of 2004. We expect all patients to have completed the 12 month therapy and six month follow-up observation period by the end of 2005.

     To explore ways to further improve therapy for HCV patients who have not responded to prior therapy, we also are evaluating ZADAXIN in an HCV triple therapy pilot clinical trial in Mexico. Interim data from this trial demonstrate that adding ZADAXIN to the combination therapy of pegylated interferon alpha and ribavirin increased early response rates for HCV non-responder patients. Based on these interim results, we intend to analyze subsequent data from this trial as well as consider future additional triple therapy clinical studies.

     In June 2003, we reported results from our ZADAXIN phase 3 HBV clinical trial in Japan. Efficacy measurements taken 12 months after the end of therapy showed that 22% of patients receiving standard dose of ZADAXIN demonstrated a sustained seroconversion, defined by the loss of the hepatitis B virus e-antigen and the development of antibody to the e-antigen. Patients with

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chronic hepatitis B who demonstrate formation of the antibody to the hepatitis B e-antigen are generally considered to be cured of their chronic hepatitis B. We believe the data reported from this trial show that ZADAXIN administered as a monotherapy would be a beneficial addition to therapies currently available in Japan for the treatment of hepatitis B. We are preparing for a regulatory filing for ZADAXIN in Japan and are targeting to file a Japanese New Drug Application by the end of 2004.

     In Europe, we are working with Sigma-Tau for the development and commercialization of ZADAXIN. We and Sigma-Tau intend to use data from our U.S. phase 3 HCV clinical trials, if they are positive, to pursue regulatory approval for ZADAXIN for this indication in Europe. In addition, Sigma-Tau is evaluating ZADAXIN in Europe in a phase 2 malignant melanoma clinical trial.

     ZADAXIN has been approved for sale in China for the treatment of HBV and by the ministries of health in over 30 other countries principally for treatment of viral indications. ZADAXIN has not produced any reported significant side effects or toxicities in over 6 years of commercial use and over a decade of clinical development.

     ZADAXIN is a synthetic preparation of a naturally occurring peptide known as thymosin alpha 1, generically known as thymalfasin. We have maintained exclusive commercial and marketing rights to ZADAXIN for all indications in the United States. We are the licensee or owner of patents relating to the use of ZADAXIN as a therapy for HCV that do not expire until 2015 in the United States and until 2012 in Japan and the major commercial markets in Europe. We also are the licensee or owner of patents relating to the use of ZADAXIN in Japan as a therapy for HBV that do not expire until 2012. In certain European countries and in Japan, the period of patent protection may be extended by up to five years depending on the relevant dates of patent grant and market authorization.

Hepatitis C and the Limitations of the Current Standard of Care

     HCV is one of the world’s most prevalent blood borne chronic infectious diseases, and there is currently no approved or available vaccine to prevent HCV infection. The World Health Organization estimates that 170 million people are infected with HCV worldwide, including, according to Datamonitor, 10 million in the three major pharmaceutical markets — the United States, Europe and Japan. The National Institutes of Health estimate that in the United States alone 4 million people are infected with HCV. We believe the worldwide market for HCV therapies could grow from $3 billion in 2003 to over $8 billion in 2012. This projection is based on an expected significant increase in the number of patients seeking treatment for the first time or re-treatment after failing therapy. Following the relatively high rate of infection prior to 1990 and the slow progression of the disease, the number of individuals diagnosed with HCV and seeking treatment for the first time is expected to increase. Since approximately 50% of patients fail current HCV therapies, the number of patients seeking re-treatment is also expected to increase.

     HCV is a systemic disease that localizes itself in the liver and for the majority of patients, if not successfully treated, leads to more serious complications, including cirrhosis of the liver, liver failure and liver cancer. The American Liver Foundation estimates that the number of deaths in the United States caused by HCV is currently between 8,000 and 10,000 annually and may increase to 30,000 deaths annually in the next twenty years. Frequently, people with HCV are not aware that they have the disease since symptoms at the onset of infection are generally mild. Typically, liver damage develops gradually over a period of as much as 20 years or more before serious symptoms of the disease become apparent. In the United States, Europe and Japan, many people infected with HCV acquired the disease from blood transfusions received prior to the implementation of screening the blood supply for HCV in the early 1990s.

     At this time, the only products approved by the U.S. FDA for the treatment of hepatitis C are interferon alpha, in both standard and pegylated forms, and the antiviral drug ribavirin, which must be used in combination with interferon alpha. The current standard of care for HCV patients is the pegylated form of interferon alpha used in combination with ribavirin. Interferon alpha, an injectable drug, is a recombinant version of a natural substance the body produces in response to viral infection. Interferon alpha helps uninfected cells resist infection and assists in stimulation of the body’s immune system to clear infected cells. Ribavirin is a nucleoside analogue that improves the efficacy of interferon alpha therapy for HCV, however, ribavirin by itself has not been shown to be effective in the treatment of HCV. Interferon alpha therapy often induces severe toxicities, and treatment with ribavirin introduces additional toxicities. Many patients cannot, or will not, tolerate a complete 12 month course of interferon alpha and ribavirin at approved optimal doses, and dose reduction of one or both drugs is commonly prescribed. Consequently, efficacy may be reduced.

     Current HCV therapy of pegylated interferon alpha and ribavirin is effective as a first course of treatment for just over half of all patients. For patients who fail this therapy, re-treatment with pegylated interferon alpha and ribavirin is effective for only approximately 10% of such patients. One of the primary factors in determining the chances of successful therapy for a patient is the strain of the hepatitis C virus infecting the patient. In the United States, we estimate that 75%, or 3 million, of all HCV carriers are infected with a particularly difficult to treat strain called genotype 1. Of these carriers, we estimate that 2 million have been infected

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with HCV for 10 years or more and have high levels of HCV genotype 1, for whom current therapy is even less effective, producing a sustained response in only approximately 30% of these patients. The large majority of patients who fail current therapy have a high viral load of HCV genotype 1. It has been estimated that 62% of HCV carriers in Europe and 69% in Japan are infected with genotype 1.

ZADAXIN Treatment for HCV

     We are currently developing ZADAXIN to be used in combination with pegylated interferon alpha to be the first FDA approved therapy specifically for the treatment of HCV in patients who have failed therapy, commonly referred to as non-responders. If this combination therapy is approved by the FDA, we believe that ZADAXIN could be beneficial in combination with current therapy (pegylated interferon alpha with or without ribavirin) as a first course of therapy for all HCV patients. ZADAXIN is a pure synthetic preparation of thymosin alpha 1, a natural substance that circulates in the body and is instrumental in the immune response to viral infections and certain cancers. After the administration of a single, standard 1.6 mg subcutaneous dosage of ZADAXIN, the circulating levels of thymosin alpha 1 are temporarily increased 50 to 100 times its normal level in the body. Published scientific and clinical studies have shown that ZADAXIN helps stimulate and direct the body’s immune response to eradicate HCV, HBV, other infectious diseases and certain cancers. ZADAXIN has not produced any reported significant side effects or toxicities in over 6 years of commercial use and over a decade of clinical development.

     ZADAXIN elicits a variety of immune system responses against viruses and cancer cells. One such response is the increase in white blood cell production and their differentiation into CD-4 helper-cells, specifically towards differentiation of T helper 1 cells (Th1 cells secrete cytokines such as interleukin-2 (IL-2) and gamma interferon). Studies have shown that a Th1-directed immune response is fundamental to the eradication of certain viral diseases, such as HCV and HBV as well as certain cancers.

     Similarly, ZADAXIN helps increase the production of CD-8 and NK, or natural killer cells, a population of cells able to directly attack and kill virally-infected and certain cancer cells. As ZADAXIN increases Th1 cells, it also decreases production of Th2 cytokines such as IL-4. Both of these activities are important in an effective cellular response to an HCV infection. Moreover, ZADAXIN reduces T-cell apoptosis, or programmed cell death, which allows these beneficial cells to circulate for a longer period of time. ZADAXIN also exhibits direct antiviral effects by enhancing the expression of surface-marker proteins (antigens) on virally-infected and certain cancer cells. These surface markers help the body’s immune system recognize and target both virally infected and cancer cells for eradication.

HCV Clinical Trials

     We are conducting two phase 3 HCV clinical trials involving 1,000 patients at over 80 sites in the United States using ZADAXIN in combination with pegylated interferon alpha as a therapy for HCV non-responder patients. These two trials are multi-centered, randomized, placebo-controlled and double-blinded.

     In September 2003, one of these trials completed full enrollment of 500 patients with no cirrhosis, or tissue damage of the liver. The other trial is currently enrolling 500 patients with mild cirrhosis of the liver and is expected to reach full enrollment near the end of the second quarter of 2004. Patients with cirrhosis of the liver are generally more difficult to treat and are more difficult to qualify for enrollment in clinical trials. In each of the clinical trials, patients are being assigned to a 12-month course of ZADAXIN (1.6 mg/twice a week) plus pegylated interferon alpha (180 #g/once a week) or placebo plus pegylated interferon alpha. After completing treatment, the patients will be followed for a six-month observation period. Primary endpoints are a sustained virological response (SVR), defined as clearance of the hepatitis C virus measured by PCR (polymerase chain reaction), and an improvement in the liver histological activity index, both measured at the end of the six-month observation period. These treatments and follow-up periods are designed to be consistent with the FDA standard for demonstrating sustained response to HCV therapy.

     We currently expect all patients to have completed therapy and the follow-up period by the end of 2005. Successful completion of two parallel phase 3 trials is normally necessary for regulatory approval in the United States. Therefore, we expect to report data upon completion of both trials. These trials are designed to provide statistically significant results, and together represent one of the largest HCV clinical studies conducted using only patients in the United States.

     The PEGASYS brand of pegylated interferon alpha is being provided for both trials at no cost to us by F. Hoffmann La-Roche (Roche), which receives the right to use the data resulting from the trials but does not receive any marketing rights to ZADAXIN or the combination therapy.

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     Published data indicate ZADAXIN in combination with pegylated interferon alpha has the potential to benefit HCV non-responder patients. In a 12-week dose-ranging study, we treated 31 non-responders, all with a high viral load of genotype 1 HCV, with 3 different ZADAXIN doses (0.8 mg, 1.6 mg and 3.2 mg/twice a week) in combination with standard dose (180 µg/once a week) pegylated interferon alpha. The data showed an early virologic response (EVR) for patients in each dosing regimen, ranging from 20 to 36 percent across the groups. These data, combined with immunological parameters, showed the standard dose (1.6 mg/twice a week) to have the best probable clinical profile. EVR is defined as a 2 log or greater reduction in HCV RNA measured after 12 weeks of therapy. A patient who demonstrates an EVR may or may not achieve a SVR, and therefore EVR may not be predictive of a successful outcome, especially for a non-responder patient. Without an EVR, a patient is highly unlikely to achieve an SVR.

     In addition to the 12-week study, a pooled analysis from several previous clinical studies showed that 22% of non-responder patients treated with a combination of ZADAXIN and non-pegylated interferon alpha had a SVR. By comparison, in separate studies 8-15% of non-responder patients retreated with a combination of non-pegylated interferon alpha and ribavirin had a SVR. Comparisons between trials conducted under various conditions are informative, but should not be relied upon as conclusive evidence as to relative therapeutic benefit.

     To explore ways to further enhance ZADAXIN therapy for HCV non-responder patients, our licensee in Mexico is conducting a triple therapy pilot clinical trial. Interim data from this trial demonstrate that adding ZADAXIN to the combination therapy of pegylated interferon alpha and ribavirin increased early response rates for HCV non-responder patients. Based on these interim results, we intend to analyze subsequent data from this trial as well as consider future additional triple therapy clinical studies. This study could help determine if higher EVR rates can lead to higher SVR rates.

     This ongoing triple therapy pilot clinical trial plans to enroll approximately 50 HCV non-responder patients at five sites. All of the patients in this trial have failed to show a response to prior therapy of at least six months of interferon in combination with ribavirin. During the course of this trial, patients will receive 12 months of triple therapy [ZADAXIN (1.6 mg/twice a week) in combination with pegylated interferon alpha (180 µg/once a week) and ribavirin (800-1,000 mg/daily)] and will be measured for a sustained response six months after completing therapy. The primary endpoint of the study is a sustained virologic response measured at week 48 (end of therapy) and week 72 (end of observation). The secondary endpoints are normalization of ALT (a liver enzyme) measured at week 48 and 72 and reduction in HCV load (or concentration of the virus in the blood) measured at week 12, 24, 48, and 72.

     Preliminary data for this trial showed that after 24 weeks of therapy with ZADAXIN in combination with pegylated interferon alpha and ribavirin, 41% of the initial 22 HCV non-responder patients enrolled tested negative for HCV RNA and 50% showed a virologic response to therapy (a 2 log or greater reduction in the level of HCV RNA). By comparison, separate recent studies show that after 24 weeks of therapy with pegylated interferon alpha plus ribavirin approximately 30% of HCV non-responder patients test negative for HCV RNA. Comparisons between trials conducted under various conditions are informative, but should not be relied upon as conclusive evidence as to relative therapeutic benefit. Earlier data reported from our trial showed that after 12 weeks of therapy with ZADAXIN in combination with pegylated interferon alpha and ribavirin, 61% of the initial 23 HCV non-responder patients enrolled reported an EVR (a 2 log or greater reduction in the level of HCV RNA) and 48% tested negative for HCV RNA. By comparison, separate recent studies show that pegylated interferon alpha plus ribavirin produce an EVR in approximately 15-21% of non-responders after 12 weeks of therapy.

ZADAXIN Treatment for HBV

     HBV is another highly prevalent blood borne chronic viral infectious disease that localizes itself in the liver. The chronic phase of the disease often leads to liver cirrhosis and progression to liver cancer. The World Health Organization estimates that more than 350 million people worldwide are infected with HBV, the vast majority of those infected are in Asia and Africa, and to a lesser extent in the Middle East. There is a relatively low incidence of the virus in certain countries, such as the United States and those in northern Europe. There are effective HBV vaccines that are used worldwide, however, in many areas of the world, particularly in Asia, HBV is transmitted from mother to child at birth.

     We estimate the worldwide market for HBV therapeutics was approximately $320 million in 2003. Compared to the current size and projected growth of the HCV therapeutics market worldwide, we believe the HBV therapeutics market opportunities are more modest. Based on the prevalence of HBV and the economic demographics in these territories, we believe the most important HBV markets are in Asia, particularly China and Japan, Southern Europe and the Middle East. In the United States, we believe the nature of the limited hepatitis B patient population limits the market opportunity for ZADAXIN as a monotherapy for HBV. To enhance the use of ZADAXIN in treating HBV patients, we continue to explore ZADAXIN in combination with other approved HBV therapies.

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     To cure chronic HBV infection, a therapy must induce a durable interruption of viral replication which will lead to a sustained response after therapy has ended. This is indicated by the disappearance of the marker called HBV e-antigen and the detection of antibody to the HBV e-antigen, a process which is also known as HBV e-antigen seroconversion. We believe that current HBV therapies in the United States, Europe and Japan are inadequate in safely achieving this goal of a sustained response. In Japan, these therapies include interferon alpha and the nucleoside analogue lamivudine. Interferon alpha, an injected drug, is effective in producing a sustained response in approximately 40% of patients. However, many patients are unable to tolerate the recommended four months of therapy at doses three to four times that of interferon alpha’s recommended HCV therapy dose. The severe side effects frequently require dose reduction and even termination of therapy. Lamivudine, an oral nucleoside analogue, is effective in suppressing the virus and slowing the progression of liver disease. However, after therapy is stopped or interrupted the virus typically rebounds. Another concern is that prolonged use of lamivudine causes the hepatitis B virus to mutate, sometimes to a form resistant to the drug, making therapy even more problematic. Viral mutations are common after just one year of therapy and there is debate among physicians concerning how long to administer this drug. Adefovir, an oral drug recently approved in the United States and Europe but presently not in Japan, is a nucleotide analogue that, like lamivudine, suppresses hepatitis B viral replication while the drug is taken. It is uncertain yet whether prolonged use of adefovir will lead to resistant viral mutations.

HBV Clinical Trials

     The combined data from ZADAXIN’s hepatitis B clinical trials in the United States, Europe and particularly Asia have resulted in regulatory and marketing approvals for ZADAXIN as a hepatitis B therapy in Asia, Latin America and the Middle East.

     In Japan, we completed our phase 3 clinical trial using ZADAXIN as a monotherapy for hepatitis B. This clinical trial was designed to demonstrate a clinical benefit, measured by an analysis of a combination of safety and efficacy data points. Similar in design to some other Japanese HBV studies, this trial did not include an untreated group of patients. Patients received either a standard 1.6 mg/twice a week dose of ZADAXIN or a lower 0.8 mg/twice a week dose of ZADAXIN for six months and were observed for a period of 12 months after ending therapy. Of the patients in this trial, 39% had failed prior therapy with interferon alpha and 24% had severe liver fibrosis. A total of 283 patients were compliant with the 18-month protocol and qualified for evaluation at the end of the study. No significant drug-related side effects or toxicities were reported.

     At the end of the follow-up period, efficacy measurements from both arms of the trial combined showed that 27% of patients had negative HBV viral DNA, 23% of patients demonstrated a successful interruption of viral replication, defined as clearance of the HBV e-antigen, and 20% of patients demonstrated a sustained seroconversion of the HBV e-antigen to HBV e-antibody. Patients with chronic HBV who demonstrate a sustained seroconversion after therapy and follow-up observation are widely considered to be cured of their chronic HBV. In the standard 1.6 mg arm of the trial, 29% of patients had negative HBV viral DNA, 23% of patients demonstrated a successful interruption of viral replication and 22% of patients demonstrated a sustained seroconversion of the HBV e-antigen. In the lower dose 0.8 mg arm of the trial, 26% of patients had negative hepatitis B viral DNA, 23% of patients demonstrated a successful interruption of viral replication and 19% of patients demonstrated a sustained seroconversion of the HBV e-antigen.

     We believe the results of this study compare favorably to the published data from other approved HBV therapies. Lamivudine produced a seroconversion of the HBV e-antigen in 16% of Asian patients after 12 months of therapy in a trial which did not have a follow-up observation period. In a separate study, adefovir dipivoxil produced a seroconversion of the HBV e-antigen in 12% of patients after 12 months of therapy (no follow up observation period). The lamivudine and adefovir dipivoxil studies had different treatment regimens from our Japanese trial. Comparisons between trials conducted under various conditions are informative, but should not be relied upon as conclusive evidence as to relative therapeutic benefit.

     We are preparing for the filing of the JNDA, or Japanese New Drug Application, and are targeting to have it filed by the end of 2004. We have closed all 49 sites and are using the final data set to prepare the JNDA. The new drug approval process in Japan involves several levels of review by the Japanese Ministry of Health before safety and efficacy data are presented to the medical reviewers of the Ministry’s Evaluation and Licensing Division. If the safety and efficacy review is successful, the Ministry of Economy evaluates comparable pricing information before establishing a reimbursement price for a drug. This entire process is demanding and typically requires 18 months or more from the date of submission of a JNDA. We are the licensee or owner of patents in Japan relating to the use of ZADAXIN to treat HBV that expire in 2012 and which may be extended by up to five years depending on the relevant dates of patent grant and market authorization.

     In 1994, Alpha 1 Biomedicals Inc., from which we acquired certain rights to thymosin alpha 1, completed their 99 patient U.S. phase 3 clinical trial of thymosin alpha 1 as a monotherapy for HBV. After six months of therapy and six months of follow up observation, 25% of patients treated with thymosin alpha 1 achieved the endpoints of the study, negative HBV DNA and loss of the

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hepatitis B e-antigen, compared to 13% of patients in the placebo control arm. Although nearly twice the number of patients treated with thymosin alpha 1 achieved the endpoints versus the placebo control arm, the small number of patients did not provide enough power to achieve statistical significance. Consequently, Alpha 1 Biomedicals Inc. never submitted these data to the FDA. Thymosin alpha 1 scientific data published subsequent to 1994 have allowed us to improve the design of our clinical trials, which we believe will lead to more definitive results.

Hepatitis Advisory Board

     Our Hepatitis Advisory Board provides advice for the research and clinical development of ZADAXIN. The Board includes highly respected thought leaders in the field of hepatology. As of December 31, 2003, the members of our Hepatitis Advisory Board included the following:

ZADAXIN Treatment in Oncology

     We believe that ZADAXIN’s mechanism of action and highly specific role in activating and directing an immune response make it a potential therapeutic agent for various cancers, including malignant melanoma and liver cancer.

     Malignant melanoma is one of the deadliest forms of cancer. There are 50,000 new melanoma cases diagnosed annually in the United States and Europe and the median survival for late-stage malignant melanoma patients is only five months. Current malignant melanoma therapies include interferon alpha and the chemotherapy drug dacarbazine (DTIC).

     Our partner in Europe, Sigma-Tau, is currently enrolling patients in a phase 2 malignant melanoma clinical trial intended to involve over 65 sites throughout Europe. The trial is designed to demonstrate a clinical benefit from using ZADAXIN in combination with standard chemotherapy and low-dose interferon alpha. This clinical trial is being funded and conducted by Sigma-Tau, which has exclusive marketing rights for ZADAXIN in most Western European countries. Sigma-Tau is currently enrolling stage 4 (metastatic) malignant melanoma patients and plans to enroll over 300 patients in this trial. All patients in this four-arm study are receiving DTIC chemotherapy. In addition to receiving DTIC, each patient is randomly assigned to receive either ZADAXIN, interferon alpha, or ZADAXIN (in varying doses) plus interferon alpha. Patients are receiving six months of therapy and will be observed for a period of 12 months after the end of therapy. The endpoints are tumor response and survival. The results of this clinical trial, if positive, are expected to be used in the design of a ZADAXIN combination therapy phase 3 clinical trial for malignant melanoma.

     We are also conducting two phase 2 pilot studies to explore the use and effectiveness of ZADAXIN in the treatment of hepatocellular carcinoma (HCC), or primary liver cancer. We estimate there are approximately 5,000 new cases of liver cancer diagnosed annually in the U.S. Due to the relatively low incidence of this disease and the transplant criteria for liver cancer patients established by the United Network for Organ Sharing (UNOS) Organ Procurement and Transplantation Network (OPTN), the rate of patient recruitment for our trials has been slow. However, we believe that recent changes by the UNOS/OPTN to the transplant criteria for liver cancer patients may facilitate enrollment. We are following the tumor response and survival of the enrolled patients.

SCV-07

     Our other principal product development candidate is SCV-07, a potentially orally administered therapeutic to treat viral and infectious diseases. We acquired the worldwide rights, except in Russia, to a new class of immunomodulators that stimulate the immune system in a manner similar to ZADAXIN. SCV-07 is the lead candidate in this group and has been used in clinical trials in Russia for the treatment of tuberculosis and has demonstrated promising results. We are working with our collaborator Verta, Ltd. in Russia to develop an oral formulation for SCV-07. We are seeking to conduct additional clinical trials to test the optimal dosing and oral administration of SCV-07 in the treatment of infectious diseases with the intention of opening an Investigational New Drug application (IND) to study SCV-07 in the United States.

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Our Strategy

Our objective is to be a leader in the development and commercialization of novel drugs that can be effective primarily in the treatment of infectious diseases and cancer. We focus our financial resources on the late-stage development of products rather than devoting these resources to discovery. In doing so, we leverage the resources and expertise of third party organizations, such as clinical research organizations and contract manufacturers. Our international sales operations contribute positive cash flow to help fund product development and targeted expansion of our marketing efforts.

Our specific near term plans include:

• Obtaining regulatory approvals for ZADAXIN in the United States, Europe and Japan. We are conducting late-stage clinical trials for ZADAXIN targeting regulatory approval in the major pharmaceutical markets. In the United States, we are conducting two ZADAXIN phase 3 HCV clinical trials and intend to use the data from these trials, if favorable, to pursue regulatory approvals in the United States, Europe and Japan. Similarly, we intend to pursue clinical development, obtain regulatory approvals and commercialize ZADAXIN in the European Union (EU), initially in HCV and cancer, through our marketing and development partner, Sigma-Tau. In Japan, we intend to use the data from our ZADAXIN phase 3 HBV clinical trial to pursue regulatory approval in that country. We will continue to seek approvals and expand marketing opportunities for our products in important markets in the developing world through our wholly-owned international subsidiary, SciClone Pharmaceuticals International Ltd. (SPIL) and believe regulatory approvals in the major markets would benefit our efforts in the developing world.

• Introducing ZADAXIN in the major pharmaceutical markets and expanding current international sales. In the United States, we have retained all of the commercialization rights to ZADAXIN. We will continue to evaluate a number of strategic options for commercializing this product if it is approved by the FDA, including developing or contracting a professional sales force or licensing certain rights to ZADAXIN to a pharmaceutical company. Sigma-Tau is our exclusive ZADAXIN marketing and development partner for most of Western Europe and Schering-Plough is our exclusive ZADAXIN marketing partner in Japan. We intend to continue to expand sales of ZADAXIN worldwide by seeking approvals in new markets and seeking expanded approvals in existing markets.

• Enhancing the use of ZADAXIN through new delivery technologies. We intend to identify and develop new delivery technologies for ZADAXIN in order to enhance its use as a treatment for HCV in combination with current and future therapies.

• Expanding product pipeline by in-licensing or acquiring new products. We intend to further leverage our core expertise in immunology and cancer product development by selectively in-licensing or acquiring product development candidates in the areas of infectious disease and cancer. We specifically focus on in-licensing or acquiring products in pre-clinical or later stages of development that we can better exploit through our development expertise. We also intend to further leverage our international sales capabilities by selectively in-licensing, acquiring, co-promoting or co-marketing products in selected markets.

Intellectual Property and Proprietary Rights

Patents

     An important element of our product development strategy is to seek regulatory approval for our products for indications with significant market potential and where we have a strong proprietary position through patents covering use, process, or composition of matter of our products. For our lead product ZADAXIN, we are the licensee or owner of patents relating to the use of thymosin alpha 1 for certain diseases and its process of manufacture.

     We are the exclusive licensee or owner of patents relating to the use of ZADAXIN as a therapy for HCV that do not expire until 2015 in the United States and until 2012 in Japan and the major commercial markets in Europe. We also are the licensee or owner of patents relating to the use of ZADAXIN in Japan as a therapy for HBV that do not expire until 2012. In addition, patents relating specifically to the use of thymosin alpha 1 in treating HCV in non-responders to interferon alpha treatment have been issued to us in the United States and various international markets. In certain European countries and in Japan, the period of patent protection may be extended by up to five years depending on the relevant dates of patent grant and market authorization, and we may, depending on the timing of any future approval, be eligible for such an extension.

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     We are the exclusive licensee or owners of patents that have been issued in the United States, Japan, China and other international markets relating to the treatment of HBV using thymosin alpha 1. We are also the exclusive licensee of patents that have been issued in the United States, a majority of European countries, Japan, and other international markets that relate to the use of thymosin alpha 1 to treat small cell and non-small cell lung cancer. Several corresponding additional patent applications have been issued or patent applications are pending in other countries for each of the above named indications.

     For process patents, we are either a patentee or exclusive licensee of use and process patents related to the method of making and therapeutic uses of thymosin alpha 1. Our process patents are directed to methods of making thymosin alpha 1 and have been issued in the United States, a majority of European countries, Japan, Canada, Hong Kong, Taiwan and South Korea. Although the composition of matter patents related to thymosin alpha 1 have expired in the major pharmaceutical markets, we have several composition of matter patents and applications directed to analogues and derivatives of thymosin alpha 1 which have been granted in the United States and in important international markets. Our commercialized product, and the product we are using in our clinical trials, is thymosin alpha 1 and not an analogue or derivative. However, we continue to seek additional proprietary rights relating to the use of thymosin alpha 1. We are the exclusive licensee of an issued U.S. patent relating to the composition of matter of SCV-07 and related compounds, as well as similar pending foreign patent applications.

Proprietary Rights

     In addition to our patent protection, we intend to use other means to protect our proprietary rights. We may pursue marketing exclusivity periods that are available under regulatory provisions in certain countries including the United States, Europe and Japan.

     Orphan drug protection has been or may be sought where available if such protection also grants additional market exclusivity. We hold an orphan drug product designation for thymosin alpha 1 for hepatocellular carcinoma, HBV, and DiGeorge Anomaly in the United States and for hepatocellular carcinoma in Europe.

     We have filed trademark applications worldwide for ZADAXIN and other trademarks that appear on our commercial packaging and promotional literature. Copyrights for the commercial packaging may prevent counterfeit products or genuine but unauthorized products from entering a particular country by parallel importation. We have also implemented anti-counterfeiting measures on commercial packaging and plan to register the packaging with customs departments in countries where such procedures exist. We also rely upon trade secrets, which we seek to protect in part by entering into confidentiality agreements with our employees, consultants, corporate partners, suppliers and licensees.

Marketing and Sales

     We or our distributors on our behalf have received from the ministries of health approvals to market and sell ZADAXIN in over 30 countries primarily in Asia, the Middle East and Latin America. ZADAXIN’s approvals are principally for the treatment of HBV and also in certain countries for the treatment of HCV, as a vaccine adjuvant or as a chemotherapy adjuvant for cancer patients with weakened immune systems. In addition, we are currently conducting clinical trials and, if successful, will pursue regulatory approvals in the United States, Europe and Japan, which, if obtained, would allow us to market and sell ZADAXIN in those markets.

     We currently sell ZADAXIN in various international markets, particularly China, through SPIL. SPIL is registered in the Cayman Islands, headquartered in Hong Kong has and has representative offices in Beijing, Hong Kong, Sao Paulo, Shanghai and Singapore. SPIL orders ZADAXIN from our European manufacturer and contracts with a third party for the storage of our finished goods inventory at warehousing facilities in Hong Kong. SPIL then distributes our product worldwide from these warehousing facilities based on purchase orders from our customers. Under our established distribution arrangements, local importers and distributors are responsible for the importation, inventory, distribution and invoicing of ZADAXIN.

     Our largest single market for ZADAXIN is currently China, which accounted for 88%, 88% and 89% of ZADAXIN sales for the years ended December 31, 2003, 2002 and 2001, respectively. China is the world’s most populous nation and also has the largest population of HBV, HCV and liver cancer patients.

     Health care programs and insurance in China and other developing countries generally do not reimburse patients for relatively expensive therapies such as ZADAXIN and consequently the drug has been used by patients mostly on a private payment basis in these countries.

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     In China, SPIL sells ZADAXIN to well-established, government licensed importing agents. Sales are made on a no returns basis, except under limited terms regarding product quality. These importing agents in turn sell ZADAXIN to licensed distributors who then distribute ZADAXIN to hospital pharmacies and physicians throughout the country. In addition to its Hong Kong office, SPIL also operates representative offices in Beijing and Shanghai, and employs a medical education team of approximately 63 full time employees in China to promote physicians’ knowledge and use of ZADAXIN.

     In China and the other markets where ZADAXIN is approved and actively marketed, our marketing activities include providing ZADAXIN-related medical education, clinical experience programs and participation in regional and international liver disease related medical conferences. When appropriate, these programs will extend into other markets where ZADAXIN has regulatory approval.

     In the United States, we currently are conducting phase 3 clinical trials for the treatment of HCV patients who have failed previous HCV therapies. If these clinical trials are successful we intend to seek FDA approval. We estimate there are approximately 3,000 hepatologists and gastroenterologists that treat hepatitis C patients in the United States. We believe that approximately 50 professional sales representatives could effectively market ZADAXIN to this physician group. We believe that we would be able to execute this strategy or other options, including co-promotion, co-marketing or licensing arrangements, which could be similarly attractive.

     Sigma-Tau is our exclusive marketing and development partner for ZADAXIN for 18 European countries. As part of our collaborative agreement, we have agreed to provide our U.S. HCV phase 3 clinical trial data to Sigma-Tau to assist their efforts in obtaining regulatory approval in the EU for ZADAXIN in HCV therapy. In addition, Sigma-Tau intends to seek EU regulatory approval for ZADAXIN for other indications and is currently conducting and funding a large phase 2 clinical trial using ZADAXIN in combination therapy for malignant melanoma.

     In Japan, we completed our phase 3 clinical trial for ZADAXIN as a monotherapy for HBV, and we interpret the data from this trial as positive. We have begun the preparation process for a Japanese New Drug Application. Schering-Plough is our exclusive marketing partner for ZADAXIN in Japan.

Manufacturing

     ZADAXIN is manufactured for us by third parties under exclusive contract manufacturing and supply agreements. We closely monitor production runs of ZADAXIN and regularly conduct our own quality assurance audit programs. We believe the manufacturing facilities of our contract suppliers are in compliance with the FDA’s current Good Manufacturing Practices, and the Japanese or European equivalents of such standards.

     For our phase 3 clinical trials in the United States and Japan, ZADAXIN is manufactured by our contract suppliers in the United States. For our phase 2 clinical trial in Europe and for sale in other international markets where approved, ZADAXIN is manufactured by our contract suppliers in Europe.

     In the event of the termination of an agreement with any single supplier, we believe that we would be able to enter into arrangements with similar terms with other suppliers. We do not intend to acquire or establish our own dedicated manufacturing facilities for any of our products at this time. We believe that our current manufacturing partners have enough manufacturing capacity to meet potential market demand should ZADAXIN be approved in the United States, Europe and Japan.

Competition

     Our competitors include biopharmaceutical companies, biotechnology firms, universities and other research institutions, both in the United States and abroad, that are actively engaged in research and development of products in the therapeutic areas we are pursing, particularly HCV, HBV and cancer. Competitors are currently marketing drugs for HCV, HBV and cancer, or have products in clinical trials. We believe that the principal competitive factors in this industry include the efficacy, safety, price, therapeutic regimen, manufacturing, quality assurance, patents associated with a given drug and marketing capabilities.

     Most of our competitors, particularly large biopharmaceutical companies, have substantially greater financial, technical, regulatory, manufacturing, marketing and human resource capabilities than we do. Most of them also have extensive experience in undertaking the pre-clinical and clinical testing and in obtaining the regulatory approvals necessary to market drugs. Additional mergers and acquisitions in the pharmaceutical industry may result in even more resources being concentrated with our competitors. Where comparable products are marketed by other companies, price is a competitive factor. In China, our largest market, generic versions of thymosin alpha 1 are marketed by local manufacturers and distributors at typically significantly less cost to the patient.

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     At this time, the only products approved by the U.S. FDA for the treatment of hepatitis C are interferon alpha, in both standard and pegylated forms, and ribavirin, which must be used in combination with interferon alpha. There are currently two versions of pegylated interferon alpha being marketed, one by Schering-Plough under the trade name “Peg-Intron,” the other by Roche under the trade name “PEGASYS.” Schering-Plough markets ribavirin under the trade name “Rebetol” and Roche sells a separate brand of ribavirin under the trade name “COPEGUS.”

     In the United States, our product ZADAXIN is being evaluated in combination with pegylated interferon alpha for the treatment of hepatitis C patients who have failed to respond to prior therapy with interferon alpha (pegylated or non-pegylated) plus ribavirin or with either form of interferon alpha alone. We intend to position ZADAXIN as a complementary rather than competitive drug to many of these therapies, although we may not be successful. Other companies are researching, developing, or marketing other products for use alone or in combination with interferon alphas or pegylated interferon alphas for clinical indications including HCV and HBV. Such competitive products include ribavirin, allegedly improved ribavirin molecules and other products not yet in late stage clinical trials such as therapeutic vaccines, protease, polymerase and reverse transcriptase inhibitors. In addition, we expect continuing advancements in and increasing awareness of the use of immune system enhancer therapy to fight cancer and infectious diseases and that this development may create new competitors. Future clinical trials may or may not show ZADAXIN to have advantages or clinically significant synergistic value over such existing or future competitive products.

     For the treatment of HBV, current therapies being marketed by competitors include interferon alpha, marketed by several companies, nucleoside analogues such as lamivudine, marketed by GlaxoSmithKline PLC, and the nucleotide analogue adefovir, marketed by GlaxoSmithKline and Gilead Sciences, Inc. In previous clinical studies, ZADAXIN as a monotherapy has demonstrated up to the same efficacy as interferon alpha without producing adverse side effects. Moreover, in small pilot studies ZADAXIN in combination with interferon alpha or lamivudine has demonstrated significantly higher efficacy rates than those drugs used alone and without producing additional side effects. Interferon alpha and ZADAXIN are intended to cure HBV by inducing a durable interruption of viral replication which will lead to a sustained response. Nucleoside analogues, nucleotide analogues and several therapies currently under development are intended to suppress HBV viral replication while taking the therapy, but the virus typically rebounds after therapy is stopped.

Employees

     As of December 31, 2003, we had 105 employees, 27 in the United States and 78 in foreign offices. From time to time, we engage the services of consultants worldwide with pharmaceutical and business backgrounds to assist in our product development and ZADAXIN commercialization activities. We plan to leverage our key personnel by continuing to make extensive use of clinical research organizations, contract laboratories, development consultants and collaborations with pharmaceutical companies to develop and market our products.

Government Regulation

     Regulation by governmental authorities in the United States and foreign countries is a significant factor in the manufacturing and marketing of our products, as well as in ongoing research and development activities and in pre-clinical and clinical trials and testing related to our products. When our products are manufactured, tested or sold in the United States, they will be regulated in accordance with the Federal Food, Drug, and Cosmetic Act, commonly referred to as the FD&C Act and the U.S. Public Health Service Act. In addition to obtaining FDA approval for each product, each manufacturing establishment must be registered with the FDA. 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 complying with cGMP standards, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance.

     The steps required before a new drug or biological product may be distributed commercially in the United States generally include:

• conducting appropriate pre-clinical laboratory evaluations, including animal studies, in compliance with the FDA’s Good Laboratory Practice (GLP) requirements, to assess the potential safety and efficacy of the product, and to characterize and document the product’s chemistry, manufacturing controls, formulation and stability;

• submitting the results of these evaluations and tests to the FDA, along with manufacturing information and analytical data, in an Investigational New Drug Application (IND), and receiving approval from the FDA that the studies proposed under the IND are allowed to proceed;

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• obtaining approval of Institutional Review Boards (IRBs) to introduce the drug into humans in clinical studies;

• conducting adequate and well-controlled human clinical trials in compliance with the FDA’s Good Clinical Practice (GCP) requirements that establish the safety and efficacy of the drug product candidate for the intended use, typically in the following three sequential, or slightly overlapping stages:

• Phase 1: The drug is initially introduced into healthy human subjects or patients and tested for safety, dose tolerance, absorption, metabolism, distribution and excretion;

• Phase 2: The drug is studied in patients to identify possible adverse effects and safety risks, to determine dose tolerance and the optimal dosage and to collect initial efficacy data;

• Phase 3: The drug is studied in an expanded patient population at multiple clinical study sites, to confirm efficacy and safety at the optimized dose, by measuring a primary endpoint established at the outset of the study, and comparing it to that of established therapies, if any; and when required,

• Phase 4: The drug is studied in an expanded patient population in a post-approval setting for continued monitoring of safety and sometimes continued efficacy;

• submitting to the FDA the results of pre-clinical studies, clinical studies, and adequate data on chemistry, manufacturing and control information to ensure reproducible product quality batch after batch in a New Drug Application (NDA) or Biologics License Application (BLA); and

• obtaining FDA approval of the NDA or BLA, including inspection and approval of the product manufacturing facility as compliant with cGMP requirements, prior to any commercial sale or shipment of the pharmaceutical agent.

     When used 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 we believe are comparable trials and filings in these other countries.

     The process of obtaining regulatory approval is lengthy, uncertain, and requires the expenditure of substantial resources.

     After FDA approval has been obtained, the FDA will require post-marketing reporting to monitor the side effects of the drug. Further studies may be required to provide additional data on the product’s risks, benefits, and optimal use, and will be required to gain approval for the use of the product as a treatment for clinical indications other than those for which the product was initially tested. Results of post-marketing programs may limit or expand the further marketing of the product. Further, if there are any modifications to the drug, including changes in indication, labeling, or a change in the manufacturing process or manufacturing facility, a NDA or BLA supplement may be required to be submitted to the FDA.

     Additionally, after the FDA has authorized a drug product to enter commercial distribution, numerous regulatory requirements apply. These include, among others, the cGMPs, which require manufacturers to follow extensive design, testing, control, documentation and other quality assurance procedures during the manufacturing process; labeling regulations; the FDA’s general prohibition against promoting drug products for unapproved or “off-label” uses; and adverse event reporting regulations, which require that manufacturers report to the FDA if their drug may have caused or contributed to a death or serious injury. The FDA has broad post-market and regulatory and enforcement powers. Failure to comply with the applicable U.S. drug regulatory requirements could result in, among other things, warning letters, fines, injunctions, consent decrees, civil penalties, refunds, recalls or seizures of products (which would result in the cessation or reduction of production volume), total or partial suspension of production, withdrawals or suspensions of current product applications and criminal prosecution. Adverse events related to our products in any of our existing or future markets could cause regulatory authorities to withdraw market approval for such products, if any.

     The FD&C Act includes provisions intended to facilitate and expedite the development and review of drugs and biological products intended for treatment of serious or life-threatening conditions that demonstrate the potential to address unmet medical needs for such conditions. These provisions set forth a 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, and the FDA is required to respond within 60 days.

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     An advantage of fast track designation is that sponsors may submit, and the FDA may commence review of, portions of an application before the complete application is submitted, provided that the FDA approves a schedule for submission of the completed application. The sponsor of a fast track product 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. A product approved on this basis is subject to rigorous postmarket compliance requirements, and the sponsor may be required to conduct post-approval studies to validate and/or confirm the endpoint. The FDA may withdraw approval of a fast track product if, for example, the sponsor fails to conduct required post-approval studies or disseminates false or misleading promotional materials.

     The Orphan Drug provisions of the FD&C Act provide incentives to drug and biologics suppliers to develop and supply drugs for the treatment of rare diseases, currently defined as diseases that affect fewer than 200,000 individuals in the United States or, for a disease that affects more than 200,000 individuals in the United States, where the sponsor does not realistically anticipate its product becoming profitable. Under these provisions, a supplier 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. The marketing exclusivity of an orphan drug would prevent other sponsors from obtaining approval of the same drug for the same indication without a showing of clinical superiority. It would not prevent other types of drugs from being approved for the same use. We have been granted orphan designation by the FDA for ZADAXIN for treatment of chronic active HBV, DiGeorge Anomaly and hepatocellular carcinoma.

     In the European Union, incentives for suppliers to develop medicinal products for the treatment of rare diseases are provided pursuant to the Orphan Medicinal Products Regulation. Orphan medicinal products are those products designed to diagnose, treat or prevent a condition which occurs so infrequently that the cost of developing and bringing the product to the market would not be recovered by the expected sale of the product. In the EU, the criterion for designation is a prevalence of the relevant condition in no more than 5 per 10,000 of the population. The incentives include, amongst others, a reduction in the fees payable in respect of the marketing authorization application, protocol assistance for clinical trials in support of the application, and marketing exclusivity once the authorization is granted. In the EU, marketing exclusivity is granted to products with an orphan drug designation for a period of 10 years during which the EU will not accept another application for a marketing authorization for the same therapeutic indication in respect of a similar medicinal product, unless the second applicant can show its product is safer, more effective or otherwise clinically superior. A similar medicinal product is defined as a medicinal product containing a similar active substance as contained in the authorized orphan medicinal product.

     We have been granted orphan designation throughout the EU for ZADAXIN for treatment of hepatocellular carcinoma. However, it should be noted that, as in the United States, the granting of orphan drug status in the EU does not affect the likelihood of success of obtaining regulatory approval or marketing authorization for the relevant product in any way.

     Under the Drug Price Competition and Patent Term Restoration Act of 1984, or 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, or ANDA, which is the application form typically used by suppliers seeking approval of a generic drug, or 505(b)(2) application. The DPCPTRA 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. The Best Pharmaceuticals for Children Act provides an additional six months of marketing exclusivity for new or marketed drugs for certain pediatric testing conducted at the written request of the FDA.

     We may seek the benefits of additional orphan, DPCPTRA, or fast track provisions, with respect to ZADAXIN but we cannot assure that we will be able to obtain any such benefits.

     We are 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 our products in those countries. The approval process varies from country to country and the time required for approval may be longer or shorter than that required for FDA approval. In general, foreign countries use one of three forms of regulatory approval process. In one form, local clinical trials must be undertaken and the data must be compiled and submitted for review and approval. In Japan, for example, the process is time consuming and costly because certain pre-clinical studies and clinical trials 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

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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 United States, Japan, most European Union countries or Australia, among others, is often sufficient for approval in countries using this third form of approval process.

     The FDA regulates the export of drugs or bulk pharmaceuticals from the United States. In general, a drug that has been approved for commercial sale in the United States may be exported for commercial sale. An unapproved drug may be exported to a “listed country” (Australia, Canada, Israel, Japan, New Zealand, Switzerland, South Africa, and countries in the European Union and the European Economic Area) for investigational purposes without FDA authorization if exported in accordance with laws of the foreign country, and in accordance with the export requirements. Export of drugs to an unlisted country for clinical trial purposes continues to require FDA approval. 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 United States that do not have marketing authorization in a listed country continue to require FDA export approval. We have obtained, where necessary, FDA approval for all exports of ZADAXIN from the United States for clinical trial purposes, and will seek to obtain FDA approval, where necessary, for any future shipments from the United States to any unlisted country.

     We are 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 that might result from future legislation or administrative action in these areas cannot be accurately predicted and could prevent or delay regulatory approval of any of our products.

     The level of revenues and profitability of pharmaceutical companies may be affected by the continuing efforts of governmental and third party payors to contain or reduce the costs of health care through various means, including the extent and availability of reimbursement. We are unable to predict when any proposed health care reforms will be implemented, if ever, or the effect of the implemented reforms on our business.

Third-Party Reimbursement

     Our ability to successfully commercialize our products may depend in part on the extent to which coverage and reimbursement to patients for our 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, such as ZADAXIN. In most of the markets in which we sell or intend to sell ZADAXIN, reimbursement for ZADAXIN under government or private health insurance programs is not yet widely available, and in many of these countries government resources and per capita income may be so low that our products will be prohibitively expensive. In the United States, Europe and Japan, proposed health care reforms could limit the amount of governmental or third-party reimbursement available for our products. Various governments and third-party payors are trying to contain or reduce the costs of health care through various means. We expect that there will continue to be a number of legislative proposals to implement government controls.

Available Information

     We file electronically with the Securities and Exchange Commission (or SEC) our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov.

     You may obtain a free copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports on the day of filing with the SEC on our website on the World Wide Web at http:///www.sciclone.com, by contacting the Investor Relations Department at our corporate offices by calling 800-724-2566 or by sending an e-mail message to investorrelations@sciclone.com.

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Executive Officers of the Registrant

     As of February 20, 2004, the executive officers of the Company, who are elected by and serve at the discretion of the Board of Directors, were as follows:

     Donald R. Sellers has served as our President and one of our directors since January 1996 and our Chief Executive Officer since March 1996. From 1993 to present, he has also served as Managing Director of SciClone Pharmaceuticals International Ltd. Mr. Sellers has nearly 30 years of experience in the global pharmaceutical industry, working with SciClone, Pfizer, Revlon Healthcare Group and Sterling Drug International. Mr. Sellers spent five years in U.S. Military Intelligence serving with Special Forces and as a Counter-Intelligence Special Agent. He has an A.B. degree from Lafayette College and a Master of International Management degree with honors from the American Graduate School of International Management.

     Alfred R. Rudolph, M.D., has served as our Chief Operating Officer since 1998. Dr. Rudolph has over 30 years of experience in the biopharmaceutical industry. Since joining us in April 1997, Dr. Rudolph has been responsible for the clinical, research, regulatory, manufacturing, and quality assurance functions of our company. Before joining us, Dr. Rudolph was President and Chief Operating Officer of Neptune Pharmaceuticals, Inc., a marine-based natural product screening company. Previously, Dr. Rudolph was Senior Vice President of T Cell Sciences, Inc., Director of Clinical Operations at Cetus Corporation, and Clinical Assistant Professor of Medicine at University of California, San Francisco. He began his pharmaceutical career with Bristol Myers, where he worked in cancer drug development. Dr. Rudolph earned a B.S. in Electrical Engineering from the University of Rochester, and completed his medical training in Hemotology-Oncology at Syracuse University.

     Richard A. Waldron has served as our Chief Financial Officer since 2001. Mr. Waldron has over 20 years of experience in the finance and management of biotechnology companies. Prior to joining us in March 2001, he was Vice President and Chief Financial Officer from June 1999 to August 2000 for Genelabs Technologies, Inc. and from July 1995 through March 1999, he was Vice President and Chief Financial Officer of GeneMedicine, Inc. From 1990 to 1995, he was a managing director and the head of finance for technology-based companies at Rauscher Pierce Refsnes, Inc., an investment banking firm. From 1985 to 1990, he was a senior vice president responsible for health care investment banking at Cowen & Company. Mr. Waldron received his M.B.A. degree with honors from Harvard University and his A.B. degree magna cum laude in Economics from Princeton University.

     Hans P. Schmid has served as Vice President, Finance, Administration and Business Development for SciClone Pharmaceuticals International Ltd. since 2001. Mr. Schmid also has line responsibility for international operations outside the Greater China region. He has 25 years of financial and pharmaceutical experience in the U.S. and international markets. Prior to joining SciClone, Mr. Schmid was Chief Financial Officer of Questcor Pharmaceuticals, Inc. and before that Senior Vice President, International Business Development of Oread, Inc., a contract pharmaceutical company. He also worked at Syntex Corporation as Vice President of Finance and Administration for Pharmaceutical Operations Asia/Pacific region, at F. Hoffmann-LaRoche as Senior Vice President, Finance and Head of Administrative Services for Roche Bioscience and held financial and operational positions with Itel Corporation in Germany, Japan, England and the United States. He received his B.A. degree from the Commercial Trade School, Lucerne, Switzerland, and has studied International Business Management and Finance at San Francisco State University.

     There are no family relationships among any of the directors or executive officers of the Company.

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Item 2. Properties

     We currently lease approximately 15,368 square feet of office space at our headquarters in San Mateo, California and limited office space in Beijing, Hong Kong, Rome, Sao Paulo, Shanghai, Singapore, and Tokyo. We believe that our existing facilities will be adequate for our current needs and that additional space will be available as needed.

Item 3. Legal Proceedings

     None

Item 4. Submission of Matters to a Vote of Security Holders

     No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2003.

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

     Our 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 quarterly 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.

Recent Sales of Unregistered Securities

     On January 21, 2003, we completed a direct placement to affiliates of Sigma-Tau pursuant to the exemption from registration provided under section 4(2) of the Securities Act of 1933, as amended. The affiliates purchased 504,938 shares of SciClone’s common stock at $3.5648 per share, resulting in an aggregate purchase of $1,800,003. No underwriters were involved in this transaction. The shares issued were restricted securities, and Sigma Tau and its affiliates were not permitted to sell any of the shares purchased in this private placement until January 24, 2004. Prior to this transaction, 400,000 warrants held by Sigma-Tau to purchase shares of SciClone’s common stock were cancelled.

Stockholders

     As of February 20, 2004, there were approximately 400 holders of record of our common stock and 44,583,412 shares of common stock issued and outstanding.

Dividends

     We have not paid any dividends on our common stock during the fiscal years ended December 31, 2003, 2002, and 2001 and currently intend to retain any future earnings for use in our business.

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Item 6. Selected Consolidated Financial Data

     This section presents selected historical financial data for each of the last five fiscal years and 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.