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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-19825
SCICLONE PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-3116852
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
901 MARINER'S ISLAND BOULEVARD
SAN MATEO, CALIFORNIA 94404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(650) 358-3456
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $39,287,889 as of March 12, 1999, based upon
the closing sale price of the Registrant's Common Stock on The Nasdaq National
Market on such date. Shares of Common Stock held by each executive officer and
director have been excluded from the calculation because such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 12, 1999, there were 20,067,028 shares of the Registrant's
Common Stock outstanding.
Part III incorporates by reference from the definitive proxy statement for
the Registrant's 1999 Annual Meeting of Shareholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this Form.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Annual Report on Form 10-K for SciClone Pharmaceuticals, Inc.
("SciClone" or the "Company") contains forward-looking statements concerning,
among other things, the Company's expected future revenues, operations and
expenditures, estimates of the potential markets for the Company's products,
assessments of competitors and potential competitors, projected timetables for
the preclinical and clinical development, regulatory approval and market
introduction of the Company's products and the Company's expectations regarding
future financing and corporate partnering arrangements. The Company has
attempted to identify such statements with an asterisk (*). These
forward-looking statements represent the expectations of SciClone's management
as of the filing date of this Form 10-K. The Company's actual results could
differ materially from those anticipated by the forward-looking statements due
to a number of factors, including (i) the Company's current reliance on a single
product, ZADAXIN(R) thymosin alpha 1, for its revenues; (ii) the absence of
regulatory approval for ZADAXIN in the U.S., Europe or Japan; (iii) risks
associated with the manufacture and supply of ZADAXIN; (iv) the unavailability
of immediate and adequate financing; (v) the Company's ability to complete
successfully preclinical and clinical development and obtain timely regulatory
approval and patent and other proprietary rights protection for its products;
(vi) decisions and timing of decisions made by the U.S. Food and Drug
Administration and comparable foreign agencies regarding the indications for
which the Company's products may be approved; (vii) market acceptance of the
Company's products; (viii) the Company's ability to obtain reimbursement for its
products from third-party payers, where appropriate; (ix) the accuracy of the
Company's information concerning the products and resources of competitors and
potential competitors; and the risks and uncertainties described in Part II
under the captions "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
INTRODUCTION
SciClone is a global biopharmaceutical company that acquires, develops, and
commercializes specialist-oriented drugs for treating chronic and
life-threatening diseases, such as hepatitis B, hepatitis C, cancer, immune
system disorders and cystic fibrosis. SciClone has two drugs in clinical
development, ZADAXIN and CPX, and has other drug candidates in preclinical
development.
ZADAXIN, SciClone's lead drug, boosts the immune system. The Company's
therapeutic targets for ZADAXIN include hepatitis B, hepatitis C, cancer, viral
vaccine enhancement and certain immune system disorders. ZADAXIN is approved for
marketing in 13 countries: Argentina, Cambodia, Italy, Kuwait, Mexico, Myanmar,
Pakistan, the People's Republic of China, Peru, the Philippines, Singapore,
Venezuela and Vietnam. SciClone has filed for approval to market ZADAXIN in 19
additional countries outside the U.S., Europe and Japan. In 1998, ZADAXIN
generated over $3.6 million in sales, primarily in the People's Republic of
China, the Philippines and Singapore for treatment of hepatitis B, one of the
most common chronic infectious diseases in the world. As a result of
transactions completed during 1998, the Company now has worldwide rights to
ZADAXIN. In Japan, SciClone has sublicensed its ZADAXIN development and
marketing rights to Schering-Plough K.K., the Japanese subsidiary of
Schering-Plough Corporation, the leading marketer of viral hepatitis therapies
worldwide.
The Company is pursuing corporate partnering arrangements for development
in the U.S. and Europe of a combination therapy of ZADAXIN plus interferon for
treatment of hepatitis C.* Hepatitis C is a worldwide epidemic. Over 170 million
people worldwide are infected with hepatitis C, including a total of more than
10 million people in the U.S., Europe and Japan, the world's largest
pharmaceutical markets. Clinical data demonstrate that the combination of
ZADAXIN plus interferon could be a significant therapeutic advance in the fight
against the hepatitis C epidemic. Interferon, the only established therapy
worldwide to treat hepatitis C, leads to a sustained response in only 5% to 20%
of patients and causes unpleasant side effects.
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Interferon plus ribavirin, a nucleoside analogue, was approved for treatment of
hepatitis C in the U.S. and certain other countries in 1998. This combination is
beneficial to certain patients. However, ribavirin, by adding its own side
effects and toxicities to those of interferon, increases the risk of side
effects and toxicities when combined with interferon. Importantly, ZADAXIN
combined with interferon has demonstrated clinical importance for treatment of
hepatitis C without increasing the risk of additive side effects or toxicities.
In Japan, the world's leading market for viral hepatitis therapies,
SciClone has licensed exclusive development and marketing rights to ZADAXIN to
Schering-Plough K.K. In the second quarter of 1998, Schering-Plough K.K. started
a 300-patient pivotal phase 3 study of ZADAXIN monotherapy for treatment of
hepatitis B in Japan. Interferon monotherapy, including Schering-Plough K.K.'s
interferon, is the established first-line therapy for hepatitis B in Japan.
Schering-Plough K.K. also is developing ZADAXIN in a phase 2 program for
treatment of hepatitis C.
CPX is SciClone's second drug in clinical development. CPX is an orally
administered protein-repair therapy initially developed by the U.S. National
Institutes of Health ("NIH") as a potential treatment for cystic fibrosis
("CF"), the most common fatal genetic disease in the U.S. and Europe. CF is
caused by mutations in the gene that encodes the cystic fibrosis transmembrane
conductance regulator ("CFTR") protein. More than 70% of the CF patients have
the delta F508 mutation of the gene that encodes the CFTR. In October 1997,
Harvey Pollard, M.D., Ph.D., of the Uniformed Services University of the Health
Sciences and formerly of the NIH, presented breakthrough preclinical data
demonstrating that CPX corrects the two key protein-associated defects causing
CF in patients with the delta F508 mutation -- impaired chloride ion transport
and abnormal CFTR trafficking. CPX is the only drug in clinical development with
the potential to correct these two key protein-associated defects in most CF
patients. The Company has obtained orphan drug designation for CPX from the
United States Food and Drug Administration ("FDA"). In 1997, the FDA awarded
SciClone a $100,000 Orphan Drug Grant for phase 1 development of CPX as a
treatment for CF. The Company completed phase 1 development of CPX in CF
patients in April 1998. In October 1998, the FDA awarded SciClone a prestigious
$200,000 Orphan Drug Grant for phase 2 development of CPX as a treatment for CF.
The Company started phase 2 development of CPX in the U.S. in September 1998.
The Cystic Fibrosis Foundation ("CF Foundation") provided substantial financial
support for early research on CPX at the NIH. The CF Foundation also supported
SciClone in its application for an Investigational New Drug ("IND") exemption to
gain approval from the FDA to begin the testing of CPX directly in CF patients
rather than the standard process of testing first in healthy volunteers. The CF
Foundation continues to support SciClone with protocol review, patient
recruitment and investigator and study center selection.
SciClone has other drug candidates in early preclinical development. The
Company plans to continue to evaluate the pharmaceutical potential of its
preclinical drug candidates in 1999.
Internationally, SciClone has entered into 41 ZADAXIN distribution
arrangements covering 46 countries outside the U.S., Europe and Japan. The
Company intends to out-license its products where a collaborative arrangement
will materially enhance the prospects for a drug's commercial success in
licensed markets, such as the Company's license with Schering-Plough K.K. for
exclusive rights to develop and market ZADAXIN in Japan and its arrangements
with its ZADAXIN distributors. The Company is currently pursuing corporate
partnering arrangements in the U.S. and Europe for development of ZADAXIN,
particulary the combination of ZADAXIN plus interferon for hepatitis C.* The
Company intends to produce ZADAXIN, CPX and any future products through contract
manufacturing and supply agreements. The Company has entered into separate
supply agreements in the U.S. and Europe for the supply of bulk and finished
product thymosin alpha 1. The Company currently contracts with a major U.S.
pharmaceutical company for the supply of bulk CPX and another U.S.
pharmaceutical manufacturer for finished product CPX.
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STRATEGY
SciClone's corporate objective is to become a leader in the acquisition,
development and commercialization of specialist-oriented drugs for treating
chronic and life threatening diseases, such as hepatitis B, hepatitis C, cancer,
immune system disorders and cystic fibrosis. The Company's strategy to achieve
this objective is to apply its domestic and international drug development,
regulatory affairs and sales and marketing expertise as follows:
INCREASE ZADAXIN SALES. In 1998, SciClone's lead product, ZADAXIN, achieved
over $3.6 million in sales, primarily as a monotherapy for treatment of
hepatitis B. In 1999, the Company intends to expand its international sales and
marketing capabilities and increase sales of ZADAXIN.* During 1998 and early
1999, SciClone received ZADAXIN marketing approvals in 10 new countries. ZADAXIN
is now approved for certain uses in one or more countries in Asia, Latin
America, the Middle East and Southern Europe. ZADAXIN marketing applications are
pending in 19 additional countries. Management forecasts solid growth potential
for ZADAXIN in the Company's existing and anticipated markets.*
In addition to its global sales and marketing capabilities, SciClone is
equipped to manage clinical development and regulatory submissions worldwide.
The Company plans to continue to expand these capabilities aggressively to
commercialize ZADAXIN and new products in markets around the world. Management
believes that this strategy will enable the Company to penetrate and perform in
markets worldwide in an accelerated and profitable manner.
LEVERAGE STRONG DISTRIBUTION NETWORK IN ASIA, LATIN AMERICA AND THE MIDDLE
EAST. Unlike nearly all public biopharmaceutical companies, SciClone has
established a unique business asset -- a growing international network,
currently 41 strong, of leading local importers/distributors covering 46
countries in Asia, Latin America and the Middle East. Originally established to
enable SciClone to market directly its lead compound, ZADAXIN, outside of the
U.S. and Europe without paying a substantial margin to a major pharmaceutical
company, management believes that this network now represents a growing business
opportunity for Company.* The Company's distribution network, which is designed
to manage specialist-oriented, high priced medical products such as ZADAXIN, is
an attractive distribution alternative for biopharmaceutical companies that are
close to having a registered product and want to participate directly in its
international marketing. In 1999, the Company intends to consider product
licensing opportunities designed to enable it to leverage its strong
distribution network.*
EXPAND PRODUCT PIPELINE. SciClone concentrates its resources on drug
development and commercialization, not early drug discovery. The Company
evaluates new compounds for acquisition or in-licensing from various sources,
including government agencies, universities, and pharmaceutical and
biotechnology companies. SciClone seeks early stage compounds that are
specialist-oriented, novel, patented or patentable and possess excellent safety
profiles. Management believes that this will enable the Company to lower its
expected time-to-market and development risk profile relative to comparable
companies engaged in both drug discovery and drug development.*
LEVERAGE KEY THIRD-PARTY RESOURCES. Through collaborative arrangements,
SciClone seeks to leverage key third-party resources on a flexible, as-needed
basis rather than establish and maintain such resources during periods when they
are not necessary. For example, the Company does not own or maintain any
manufacturing facilities for finished products or raw materials. Instead,
SciClone's manufacturing and quality assurance teams out-source these functions
to third parties that supply bulk product and finished goods according to
current Good Manufacturing Practices ("cGMP"). Management believes that this
strategy will lower the Company's capital requirements and enable the Company to
concentrate its resources on drug development and commercialization activities.*
ENHANCE PRODUCT PORTFOLIO PATENT PROTECTION. SciClone pursues a policy of
obtaining patent protection both in the U.S. and in selected foreign countries
for subject matter considered patentable and important to its business. SciClone
regularly reviews and seeks to broaden the protection of its intellectual
property and trade secrets by actively developing and expanding its patent
filings for composition of matter, method of use and
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process patents. Management believes this strategy will enable the Company to
further protect the increased use and value of its product portfolio.*
PRODUCT DEVELOPMENT ACTIVITIES
The following table summarizes the Company's current significant product
development activities:
INDICATION/
PRODUCT LOCATION APPLICATION STATUS
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ZADAXIN People's Republic of China Hepatitis B Marketed
thymosin alpha 1 Philippines, Singapore
Cambodia, Kuwait, Myanmar Hepatitis B Approved in 1998
Peru, Pakistan
Venezuela, Vietnam Approved in 1999
Cambodia, Myanmar, Philippines Hepatitis C Approved in 1998
Singapore, Venezuela Approved in 1999
Argentina, Mexico Influenza vaccine adjuvant Approved in 1998
Italy Approved; Acquired in 1998
People's Republic of China Approved
Argentina, Bangladesh, Brazil, Hepatitis B Application File Pending
Brunei, Chile, Colombia,
Cyprus, Egypt, Hong Kong,
India, Indonesia, Laos,
Lebanon, Malaysia, Mexico,
Nepal, New Zealand, Sri Lanka,
Taiwan, Turkey
Argentina, Egypt, Mexico, Peru, Hepatitis C Application File Pending
Turkey
Thailand Influenza vaccine adjuvant Application File Pending
Japan Hepatitis B Started Phase 3(2)
U.S./Europe Hepatitis C Phase 3(1)
Japan Hepatitis C Started Phase 2(2)
CPX U.S. Cystic Fibrosis Completed Phase 1(3)
U.S. Cystic Fibrosis Started Phase 2(3)
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(1) A successful, non-pivotal U.S. phase 3 study of the combination of ZADAXIN
plus interferon for the treatment of hepatitis C has been completed.
Subsequently, the Company met with the FDA, the United Kingdom Medicines
Control Agency, the Netherlands Medicines Evaluation Board and the Denmark
Medicines Agency. From these meetings, a protocol for additional phase 3
development has been proposed and refined in a workshop with numerous
leading international hepatologists. The Company is pursuing corporate
partnering arrangements for further development in the U.S. and Europe of
ZADAXIN plus interferon for treatment of hepatitis C.*
(2) Clinical trial being conducted by Schering-Plough K.K.
(3) In the second quarter of 1998, the Company completed dosing 37 patients in a
multi-center, single ascending oral dose phase 1 clinical study of CPX in
the U.S. In the third quarter of 1998, the Company started its 50 patient,
multi-center, multiple-ascending oral dose phase 2 clinical study of CPX for
cystic fibrosis in the U.S.
ZADAXIN FOR HEPATITIS B AND HEPATITIS C
ZADAXIN for injection is a naturally occurring 28 amino acid peptide that
is produced by chemical synthesis for therapeutic use. ZADAXIN's common chemical
name is thymosin alpha 1. Thymosin alpha 1's generic name in the U.S. is
thymalfasin. The Company believes that ZADAXIN has demonstrated significant
immunomodulatory properties. Data show that ZADAXIN boosts the immune system in
many ways in a substantial number of patients. ZADAXIN appears to act on cells
of the immune system that have been
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suppressed by infection or other causes. Additionally, ZADAXIN does not produce
the side effects, particularly fever, chills, fatigue, nausea and depression,
associated with other immunomodulatory agents, such as interferon. No
significant ZADAXIN related side effects or toxicities have been reported. Based
on more than 70 clinical trials conducted to date, the Company believes that
ZADAXIN, either alone or in combination with other drugs, especially interferon
or nucleoside analogues such as famciclovir and lamivudine, may have application
across a broad spectrum of diseases, including hepatitis B, hepatitis C, cancer
and immune system disorders.
HEPATITIS B
Hepatitis B is one of the most common infectious diseases in the world. It
can be transmitted whenever blood to blood contact occurs, including blood
transfusions, contaminated needles, sexual contact and from mother-to-child. In
addition, a large number of people are infected by unknown means. The World
Health Organization estimates that approximately 350 million individuals
worldwide or 5% of the world's population are carriers of the hepatitis B virus.
Among carriers of the hepatitis B virus, most are unaware that they are infected
or have minimal disease with no clinically evident symptoms. However, carriers
of the hepatitis B virus have a 200-fold increased chance of developing primary
liver cancer, the most common cancer in the world, and a significant number
develop cirrhosis of the liver.
ZADAXIN has been approved in 10 countries as a safe and effective treatment
for hepatitis B. Used alone or in combination with other immunomodulatory agents
such as interferon or antiviral agents such as the nucleoside analogues
famciclovir and lamivudine, ZADAXIN has not caused any significant drug related
side effects.
CONTROLLED ZADAXIN HEPATITIS B TRIALS
The Company commissioned a meta analysis of randomized and controlled
trials of ZADAXIN in hepatitis B. Meta analysis is the statistical pooling of
data derived from two or more clinical trials. By using data from two or more
studies, random effects are reduced and precision of estimates will increase as
sample size increases. A valuable use of meta analysis is to assess the efficacy
of a drug in the treatment of a particular disease across many studies. The
Company's meta analysis of ZADAXIN was performed by MetaWorks, Inc. of Boston,
Massachusetts, and included two U.S. hepatitis B trials sponsored by Alpha 1
Biomedicals and the Company's Taiwan hepatitis B trial. A statistically
significant benefit (p = 0.04) was demonstrated in the meta analysis with an
overall response rate of 36% compared to 19% for the control group. The results
also showed no indications of drug toxicity and no significant drug related side
effects in any of the trials.
COMPETITIVE PRODUCTS
Interferon is an immunomodulatory protein that is produced commercially
using recombinant DNA technology and other techniques. Interferon is approved
for treatment of hepatitis B in the U.S., Europe, and Japan as well as in
numerous countries in Asia, Latin America and the Middle East. A meta analysis
by Wong et al., published in the Annals of Internal Medicine, of interferon as a
treatment for hepatitus B demonstrated a 33% response compared to 12% for
controls. A significant number of interferon treated patients had interferon
related side effects.
Other agents under development, and approved in certain countries,
including the U.S., for the treatment of hepatitis B, include nucleoside analogs
such as lamivudine. Efficacy (i.e., sustained elimination of the hepatitus B
virus after cessation of therapy) for lamivudine is 16%. Nucleoside analogs may
suppress viral replication in the blood but seldom eradicate the virus from the
infected liver cells. In most cases, viral replication resumes when nucleoside
analogs are discontinued. Data reported in the October 1997 supplement to
Hepatology show that lamivudine may be associated with fatal rebound viral
hepatitis B.
Importantly, there is evidence that ZADAXIN can be additive or synergistic
with the products mentioned above, complementing their approved uses without
increasing the risk of additive side effects or toxicities.
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Set forth below is more detailed information regarding the commercial and
clinical development status of ZADAXIN as a therapy for hepatitis B in certain
key markets.
THE PEOPLE'S REPUBLIC OF CHINA. In January 1997, the Company launched
ZADAXIN for the treatment of hepatitis B in the People's Republic of China. This
product launch marked the first introduction of ZADAXIN by the Company anywhere
in the world. ZADAXIN is still the only imported finished pharmaceutical
approved for treatment of hepatitis B in The People's Republic of China since
the introduction of interferon. Although, lamivudine recently received approval
in this market as a product to be manufactured locally, the Chinese Ministry of
Public Health (MOPH) approval of ZADAXIN was for an imported product -- the most
difficult drug approval to obtain in the People's Republic of China. ZADAXIN's
approval was based on a regulatory package assembled from U.S. and European data
in addition to a locally required controlled clinical trial to evaluate the
efficacy of ZADAXIN for patients suffering from hepatitis B.
Sales and distribution of ZADAXIN in the People's Republic of China are
managed by the Company's Hong Kong branch of its wholly-owned international
subsidiary, SciClone Pharmaceuticals International Ltd. (SPIL). SPIL focused its
1998 sales efforts on the major population centers in the Chinese market,
including, among others, the southern province of Guangdong, the capital city of
Beijing, and Shanghai. In each region, local distribution teams are used to sell
and place ZADAXIN on hospital formularies of Chinese city and provincial
hospitals. The Company expects to increase ZADAXIN sales in the Chinese market
in 1999. The Company is in the process of establishing Representative Offices in
Shanghai and Beijing.
JAPAN. In Japan, the world's largest market for viral hepatitis therapies,
the Company has licensed exclusive ZADAXIN development and marketing rights to
Schering-Plough K.K. Schering-Plough K.K. is in the final stages of a ZADAXIN
Development Plan for the purpose of submitting a Japanese New Drug Application.
Schering-Plough K.K. has completed the phase 1 single and multiple dose safety
and pharmacokinetics trial, has successfully completed the dose ranging phase 2
safety and efficacy trial involving approximately 60 patients, and currently is
managing a 300 patient, pivotal phase 3 study of ZADAXIN monotherapy for the
treatment of hepatitis B, the largest ZADAXIN clinical trial to date.
TAIWAN. The Company sponsored a multicenter, randomized and controlled
phase 3 ZADAXIN monotherapy hepatitis B trial in Taiwan. The results of this
trial showed 37% of the patients treated with ZADAXIN monotherapy for 6 months
responded, compared to a 25% response in the control patients. The Company
believes this trial produced the best results of any randomized and controlled
hepatitis B trial for any therapy in Taiwan. The results also showed no
significant ZADAXIN related side effects, consistent with all prior ZADAXIN
studies. The trial had three study sites. The principal site, which had
two-thirds of the total patient population, demonstrated statistically
significant results. At this site, 41% of the patients treated for 6 months
responded to ZADAXIN therapy versus 9% of the control group (p = 0.004). These
results were reported in May 1998 in the peer-reviewed journal Hepatology. The
Company filed for marketing registration in Taiwan in the third quarter of 1998.
ASIA, LATIN AMERICA AND THE MIDDLE EAST. ZADAXIN is approved for the
treatment of Hepatitis B in 10 countries in Asia, Latin America and the Middle
East: Cambodia, Kuwait, Myanmar, the People's Republic of China, Pakistan, Peru,
the Philippines, Singapore, Venezuela and Vietnam. SciClone has 19 ZADAXIN
marketing applications pending in Asia, Latin America and the Middle East and
expects to receive approvals in these territories as well as to file additional
ZADAXIN marketing applications in 1999.
SOUTHERN EUROPE. In April 1998, SciClone acquired ZADAXIN development and
marketing rights in Italy, Spain and Portugal, completing the Company's
acquisition of worldwide rights of the drug. The Company believes these three
Southern European territories, particularly Italy, represent over 50% of the
potential European market for viral hepatitis therapies. In connection with this
acquisition, the Company acquired a ZADAXIN marketing approval in Italy as an
influenza vaccine adjuvant and a ZADAXIN marketing application. In 1998, the
Company established SciClone Italy Srl to pursue aggressively ZADAXIN business
opportunities in Southern Europe.
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HEPATITIS C
Hepatitis C is a worldwide epidemic, infecting over 170 million people,
including approximately 10 million in the world's leading pharmaceutical
markets, the U.S., Europe and Japan. According to the Centers for Disease
Control and Prevention ("CDC"), approximately 4 million Americans are infected
with the hepatitis C virus. The CDC estimates that up to 230,000 new hepatitis C
cases are reported each year in the U.S. The American Liver Foundation ("ALF")
estimates that up to 12,000 people in the U.S. die as a result of complications
of hepatitis C each year. Without improved prevention and treatment, the ALF
estimates that the death rate associated with hepatitis C will triple in the
next 20 years. The prevalence of hepatitis C in Europe, approximately 4 million
people infected, is similar to that in the U.S. In Japan there are more than l
million cases of hepatitis C. Hepatitis C can be transmitted wherever blood to
blood contact occurs, especially by blood transfusions and contaminated needles.
The mode of transmission in many cases is unknown. Approximately 20% of
hepatitis C carriers may develop cirrhosis, and 5% of these individuals may
develop liver cancer within five years of developing cirrhosis. Hepatitis C,
accompanied by cirrhosis and liver failure, is the leading cause of liver
transplantation in the U.S. Currently, alpha interferon monotherapy and alpha
interferon in combination with ribavirin, are the only therapies approved in the
U.S. for hepatitis C. Unfortunately, the combination of interferon plus
ribavirin is associated with significant side effects and toxicities. A
combination therapy which does not increase the risk of side effects and
toxicities compared to interferon alone, but has improved efficacy, would be a
therapeutic advance over existing therapies. There is no approved vaccine to
prevent hepatitis C.
POOLED AND META ANALYSES OF HEPATITIS C TRIALS
Although interferon has been shown to be safe and effective in the
treatment of hepatitis C, dissatisfaction with the low sustained response rate
(5% to 20%) to interferon monotherapy has led to the study of interferon
combination therapies. Clinical data demonstrate that the combination of ZADAXIN
plus interferon could represent a significant therapeutic advance in the fight
against hepatitis C.
Three studies, published as full articles or abstracts, describe the
response in patients with hepatitis C to the combination of ZADAXIN plus
interferon. The strength of pooled analysis and meta analysis techniques was
applied to the three studies. Patients were treated for 6 to 12 months with the
combination of ZADAXIN plus interferon and followed for 6 to 12 months after
treatment. Interferon-treated patients from the randomized controlled trials and
historical controls from an open label trial were used as controls. A total of
121 patients (67 ZADAXIN plus interferon combination therapy and 54 interferon
monotherapy) were compared.
END OF TREATMENT BIOCHEMICAL AND VIROLOGICAL RESPONSE
Pooled intent-to-treat analysis revealed an end of treatment biochemical
(ALT, a liver enzyme) response of 44.7% in the combination of ZADAXIN plus
interferon group compared to 22.2% in the interferon monotherapy group (p =
0.0096). Meta analysis demonstrated an end of treatment biochemical response
odds ratio and 95% confidence interval of greater than 1, indicating that the
combination of ZADAXIN plus interferon was significantly superior to interferon
monotherapy. Meta analysis also showed an end of treatment virological response
odds ratio and 95% confidence interval indicating that the combination of
ZADAXIN plus interferon was significantly superior to interferon monotherapy.
SUSTAINED BIOCHEMICAL AND VIROLOGICAL RESPONSE
Pooled intent-to-treat analysis revealed a trend showing sustained
biochemical (ALT) response of 22.3% in the combination of ZADAXIN plus
interferon group compared to 9.26% in the interferon monotherapy group (p =
0.1). Meta analysis demonstrated a sustained response odds ratio of greater than
1 and a 95% confidence interval slightly overlapping 1, indicating that the
combination of ZADAXIN plus interferon was superior to interferon monotherapy.
This sustained biochemical response analysis demonstrates a statistical trend in
favor of the combination of ZADAXIN plus interferon group and suggests that
there is only a small chance that this difference occurred by chance alone. Meta
analysis of sustained virological response also
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showed an odds ratio and 95% confidence interval of greater than 1, indicating
that the combination of ZADAXIN plus interferon was significantly superior to
interferon monotherapy.
The three studies also showed there were no increased or new side effects
or toxicities in the combination of ZADAXIN plus interferon group compared to
patients treated with interferon monotherapy.
Set forth below is more detailed information regarding the development
status of the combination of ZADAXIN plus interferon for treatment of hepatitis
C.
U.S. AND EUROPE. The Company is currently pursuing corporate partnering
arrangements for phase 3 development of the combination of ZADAXIN plus
interferon for hepatitis C in the U.S. and Europe.* Adrian Di Bisceglie, M.D.,
Associate Chairman of Medicine, Professor of Internal Medicine at Saint Louis
University and Medical Director of the American Liver Foundation, has agreed to
be the principal investigator for the Company's phase 3 hepatitis C program.
Fifteen additional leading hepatologists have agreed to be co-investigators in
this program.
JAPAN. In Japan, SciClone has licensed exclusive development and marketing
rights to ZADAXIN to Schering-Plough K.K. In November 1997, Schering-Plough K.K.
commenced a phase 2 study of ZADAXIN as a monotherapy for hepatitis C, as
required for Japanese approval of ZADAXIN for the treatment of hepatitis C.
Schering-Plough K.K. also is working to satisfy requirements to begin a clinical
program to study the use of its interferon plus ZADAXIN as a combination therapy
for hepatitis C.
ASIA, LATIN AMERICA, AND THE MIDDLE EAST. The Company has marketing
approval for use of ZADAXIN as a treatment for hepatitis C in Cambodia, Myanmar,
the Philippines, Singapore and Venezuela. The Company is working to expand its
current approvals and pending marketing applications throughout Asia, Latin
America and the Middle East to include use of the combination of ZADAXIN plus
interferon to treat hepatitis C.
SOUTHERN EUROPE. In April 1998, SciClone acquired ZADAXIN development and
marketing rights in Italy, Spain and Portugal, completing the Company's
acquisition of worldwide rights of the drug. The Company believes these three
Southern European territories, particularly Italy, represent over 50% of the
potential European market for viral hepatitis therapies, especially hepatitis C.
In connection with this acquisition, the Company acquired a ZADAXIN marketing
approval in Italy as an influenza vaccine adjuvant and a ZADAXIN marketing
application. In 1998, the Company established SciClone Italy Srl to pursue
aggressively ZADAXIN business opportunities in Southern Europe.
CPX FOR CYSTIC FIBROSIS
CYSTIC FIBROSIS.
Cystic fibrosis is the most common fatal genetic disease in the U.S. and
Europe today. Currently, there is no cure for the disease. CF affects
approximately 70,000 children and young adults worldwide, including
approximately 30,000 in the U.S. and approximately 30,000 in Europe. In the
U.S., approximately 1,000 new cases of CF are diagnosed each year. Currently,
the median age of survival for a person with CF is 31 years. CF is caused by a
mutated gene that produces an abnormal CFTR protein. This basic
protein-associated defect in CF cells results in the faulty transport of
chloride and sodium within epithelial cells (which line organs such as the lungs
and pancreas) to the cells' outer surfaces. This faulty transport causes the
body to produce abnormally thick, sticky mucus which clogs the lungs and leads
to fatal infections. This mucus also obstructs the pancreas, preventing enzymes
from reaching the intestines to digest food. Most CF patients die from lung
disease. More than 10 million people, one in 29 Americans, are unknowing,
symptomless carriers of the defective gene. A child must inherit two defective
copies of the CF gene, one from each parent, to have CF. Each time two carriers
conceive a child, there is a 25% chance that the child will have CF, a 50%
chance that the child will be a carrier, and a 25% chance that the child will be
a non-carrier.
Currently, approved CF treatments only address the symptoms of the disease
and not the two underlying protein-associated defects causing CF in most
patients -- impaired chloride ion transport and abnormal CFTR trafficking. The
treatment of CF depends upon the stage of the disease and which organs are
involved.
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One means of treatment, postural drainage (also called chest physical therapy),
requires vigorous percussion (by using cupped hands) on the back and chest to
dislodge the thick, sticky mucus from the lungs. Antibiotics are also used to
treat lung infections and are administered intravenously, orally and/or in
aerosolized formulations. In addition, mucolytic (mucus-thinning) drugs are used
to thin the viscosity of the mucus. Since CF also affects the digestive system,
the body does not absorb enough nutrients. Therefore, people with CF may need to
eat an enriched diet and take both replacement vitamins and enzymes. The annual
average cost of care of a CF patient has been estimated by the CF Foundation to
be approximately $50,000 per patient. This cost includes hospitalizations, drug
therapy and physical therapy.
CPX
CPX is an orally available xanthine derivative that is produced for
therapeutic use through chemical synthesis. CPX targets the underlying
biochemical abnormality at the root cause of CF, the malfunctioning CFTR protein
that results in the buildup of thick, sticky mucus. CPX use in CF was discovered
by Harvey Pollard, M.D., Ph.D., and Kenneth Jacobson, Ph.D., while at the
National Institute of Diabetes and Digestive and Kidney Disorders (NIDDK) of the
NIH. In October 1997, Dr. Pollard presented preclinical data demonstrating that
CPX corrects the two key protein-associated defects causing CF in most
patients -- impaired chloride ion transport and abnormal CFTR trafficking.
Trafficking refers to the ability of the CFTR protein to traverse the cell
cytoplasm and reach the proper location on the cell membrane. CPX is the only
drug in clinical development with the potential to correct the two
protein-associated defects in most CF patients.
Consistent with the Company's strategy to expand its product portfolio,
SciClone licensed CPX from the NIH in April 1996. In January 1997, the Company's
IND was approved by the FDA to begin clinical studies of CPX in the U.S.
directly in CF patients rather than in healthy volunteers. The CF Foundation
provided substantial financial support in the NIH's early CPX research and
supported SciClone in its IND filing with the FDA to gain approval to begin
testing of CPX directly in patients. In April 1997, the Company obtained orphan
drug designation for CPX from the FDA. In 1997, the FDA awarded SciClone a
$100,000 Orphan Drug Grant for phase 1 development of CPX as a treatment for CF.
In October 1998, the FDA awarded SciClone a prestigious $200,000 Orphan Drug
Grant for phase 2 development of CPX as a treatment for CF. The CF Foundation
continues to support SciClone with protocol review, patient recruitment and
investigator and study center selection.
U.S. DEVELOPMENT OF CPX FOR CYSTIC FIBROSIS
In the second quarter of 1998 the Company successfully completed dosing 37
CF patients in its multicenter phase 1 clinical study of CPX. The primary
objectives of the study were to evaluate the safety and pharmacokinetic profile
of CPX. Single oral dose CPX was found to be safe and well absorbed. In the
third quarter of 1998, SciClone started a multicenter, multiple-ascending oral
dose phase 2 CPX clinical trial involving 50 CF patients in the U.S. The primary
objectives of the phase 2 trial are to evaluate safety, pharmacokinetics and
surrogate markers for efficacy. The four participating CF centers in the
Company's phase 2 trial are: University of Washington and Children's Hospital CF
Center in Seattle, Washington; University of Iowa Hospitals and Clinics CF
Center in Iowa City, Iowa; The LeRoy Matthews CF Center, Rainbow Babies and
Children's Hospital in Cleveland, Ohio; and The Emory University CF Center,
Egleston Children's Hospital in Atlanta, Georgia. Additional centers have
indicated interest in joining the study and are being evaluated by the Company.
MARKETING AND SALES
The Company plans to market and sell ZADAXIN in the U.S., Europe and Japan
in collaboration with corporate partners. Outside these territories, the Company
currently is and plans to market and sell ZADAXIN on its own.
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In the U.S. and Europe, SciClone is currently pursuing corporate partnering
arrangements for the phase 3 development and commercialization of the
combination of ZADAXIN plus interferon for the treatment of hepatitis C* in
these territories.
In Japan, SciClone has licensed exclusive ZADAXIN development and marketing
rights to Schering-Plough K.K.
SciClone's marketing and sales strategy for ZADAXIN in Asia (excluding
Japan), Latin America and the Middle East is to establish and expand its own
regional sales and marketing capabilities to commercialize ZADAXIN. Consistent
with this strategy, SciClone conducts medical education and clinical trial
programs targeting the leading specialists (e.g. hepatologists) at the leading
local hospitals in each of its approved markets as well as markets in which the
Company anticipates ZADAXIN approval on a near term or medium term basis. Local
importers/distributors assist SciClone with regulatory submissions to the
ministries of health and are responsible for the importation, inventory,
physical distribution and invoicing of ZADAXIN. SPIL is based in Hong Kong, has
international offices in Japan, the Philippines, Singapore and Taiwan and is
opening representative offices in Shanghai and Beijing. SPIL also manages a
distribution center in Hong Kong which is the source for all ZADAXIN exported to
the Company's non-U.S. markets, except Japan. SciClone has established
distribution arrangements with local pharmaceutical wholesale/distribution
companies covering 46 countries outside of the U.S., Europe and Japan. In those
markets where ZADAXIN is approved in Asia, Latin America and the Middle East,
SciClone has established or plans to establish in the near term ZADAXIN
marketing programs.* Local ZADAXIN sales in the Company's approved markets are
or will be managed by SciClone employees utilizing dedicated
wholesale/distribution distributor employees nominated and supported by
SciClone.
In the U.S., CPX is in phase 2 clinical development. Currently, the Company
plans to create its own marketing and sales organization to market and sell CPX
in the U.S. In other markets, the Company is evaluating plans for marketing and
selling CPX.
MANUFACTURING
The Company has entered into contract manufacturing and supply agreements
to produce ZADAXIN and CPX.
To supply markets in Asia (except Japan), Europe, Latin America and the
Middle East, SciClone has a collaborative arrangement with a European cGMP
third-party source for bulk thymosin alpha 1. This bulk supply is turned into
finished sterile injectable product by a separate European cGMP manufacturer.
This finished product is shipped to Hong Kong for labeling and redistribution to
all markets outside the U.S. and Japan. To supply the U.S. and Japanese markets,
the Company has contracted with two cGMP bulk manufacturers and a separate cGMP
finishing plant, all in the U.S. SciClone has established an inventory of
ZADAXIN sufficient to fulfill its expected near term commercial requirements.
CPX is manufactured for SciClone in the U.S. by a major U.S. pharmaceutical
company and turned into finished form by a separate U.S. pharmaceutical
manufacturer.
The Company directly monitors production runs of its products and maintains
its own quality assurance audit program.
PATENTS AND PROPRIETARY RIGHTS
The Company is either a patentee or exclusive licensee of composition of
matter, process and use patents and pending applications related to thymosin
alpha 1, in the U.S. and abroad.
The Company is the exclusive licensee of foreign patents directed to the
thymosin alpha 1 composition of matter which are owned by F. Hoffmann-La Roche
AG and the Board of Regents of the University of Texas System. The Company is a
co-patentee of thymosin alpha 1 composition of matter patents in New Zealand and
South Africa. Most of these foreign composition of matter patents have expired.
However, the Company is a patentee of a number of composition of matter patents
and applications directed to analogs and derivatives
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of thymosin alpha 1 and is seeking numerous other proprietary rights for
thymosin alpha 1. The Company is either a patentee or exclusive licensee and is
directing prosecution of use and process patents related to the method of making
and therapeutic uses of thymosin alpha 1.
Process patents owned by SciClone are directed to methods of making
thymosin alpha 1 and have issued in the U.S., a majority of European countries,
Hong Kong, Canada, Japan, Korea and Taiwan.
SciClone is also a co-patentee of patents and pending applications covering
numerous uses of thymosin alpha 1. Patents covering use of thymosin alpha 1 for
treatment of hepatitis C have issued in the U.S. and a majority of European
countries, Taiwan, Australia, Indonesia, Malaysia and South Africa. Patents for
which SciClone is a co-patentee have additionally issued in the U.S., South
Africa and Taiwan covering the use of thymosin alpha 1 to treat autoimmune
hepatitis; in Australia and South Africa for the use of thymosin alpha 1 in
treating hepatitis C in non-responders to interferon treatment; and in the U.S.
and New Zealand covering the use of thymosin alpha 1 to treat decompensated
liver disease. Patents which SciClone owns have issued in the U.S., Japan,
Taiwan, Malaysia and South Africa covering the use of thymosin alpha 1 to treat
hepatitis B carriers with minimal disease. SciClone is the exclusive licensee of
patents which have issued in the U.S. and Australia which cover the use of
thymosin alpha 1 to treat small cell and non-small cell lung cancer; in Japan
covering the treatment of hepatitis B using thymosin alpha 1; in the U.S.,
Taiwan and South Africa covering the use of thymosin alpha 1 to treat septic
shock; and in the U.S., Australia, the Philippines, Taiwan and South Africa
covering the treatment of infertility in mammalian males using thymosin alpha 1.
Numerous corresponding additional patent applications in other countries are
pending for each of the above named indications.
The Company is the exclusive licensee of an issued U.S. patent covering the
use of CPX to treat CF, as well as other pending domestic and foreign patent
applications covering CPX analogs and their use in treating CF.
In addition to patent protection, the Company intends to use other means to
protect its proprietary rights. Certain marketing exclusivity periods may be
available under regulatory provisions in certain countries including the U.S.,
European Union countries, Japan and Taiwan, which benefits the holder of the
first marketing approval for new chemical entities or their equivalents for a
given indication and the Company is pursuing such rights. Orphan drug protection
has been or will be sought where available, granting additional market
exclusivity. The Company is the holder of an orphan drug product designation for
thymosin alpha 1 for hepatitis B and DiGeorge Anomaly in the U.S. Recognition
and protection of trademarks for thymosin alpha 1 is being accomplished through
worldwide filing of trademark applications for ZADAXIN and other trademarks
which appear on the commercial packaging of the product and are used in
promotional literature. Copyrights for the commercial packaging may provide
SciClone with means to take advantage of procedures available in certain
countries to exclude counterfeit products or genuine but unauthorized products
from entering a particular country by parallel importation. The Company has also
implemented anti-counterfeiting measures on commercial packaging and plans to
register the packaging with customs departments in countries where such
procedures exist.
The Company is pursuing similar types of protection for CPX, where
applicable. The Company is the holder of an orphan drug product designation for
CPX to treat CF in the U.S.
The Company also relies upon trade secrets, which it seeks to protect, in
part, by entering into confidentiality agreements with employees, consultants,
suppliers and licenses. There can be no assurance that these agreements will not
be breached, that SciClone would have adequate remedies for any breach or that
SciClone's trade secrets will not otherwise become known or independently
developed by competitors.
SPONSORED RESEARCH AND DEVELOPMENT
For the years ended December 31, 1998, 1997 and 1996, the Company expended
$9,293,000, $8,642,000 and $9,904,000, respectively, in Company sponsored
research and development activities.
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COMPETITION
Competition in the pharmaceutical field is intense and the Company expects
that competition will increase. The Company's competitors include major
pharmaceutical companies, biotechnology firms and universities and other
research institutions, both in the U.S. and abroad, that are actively engaged in
research and development of products in the therapeutic areas being pursued by
the Company. Many of these companies and institutions have substantially greater
financial, technical, manufacturing, marketing and human resource capabilities
than the Company and extensive experience in undertaking clinical testing and
obtaining regulatory approvals necessary to market drugs. Principal competitive
factors in the pharmaceutical field include efficacy, safety, and therapeutic
regimen. Where comparable products are marketed by other companies price is also
a competitive factor. The Company intends to use alpha interferon as a reference
drug in establishing pricing for ZADAXIN, although this may change over time.*
GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. and foreign countries is
a significant factor in the manufacturing of products for the Company and the
marketing of products by the Company, as well as in ongoing research and
development activities and in preclinical and clinical trials and testing
related to the Company's products. If the Company's products are manufactured,
tested or sold in the U.S., they will be regulated in accordance with the
Federal Food, Drug and Cosmetic Act ("FD&C Act"). The standard process required
by the FDA before a pharmaceutical agent may be marketed in the U.S. includes
(i) preclinical laboratory and animal tests, (ii) submission to the FDA of an
IND, which must become effective before human clinical trials may commence,
(iii) adequate well-controlled human clinical trials to establish the safety and
efficacy of the product for its intended indication, (iv) submission to the FDA
of a New Drug Application ("NDA") with respect to drugs, and (v) FDA approval of
the NDA prior to any commercial marketing, sale or shipment of the drug. In
addition to obtaining FDA approval for each product, each domestic manufacturing
establishment must be registered with the FDA. Domestic manufacturing
establishments are subject to inspections by the FDA and by other federal, state
and local agencies and must comply with current U.S. Good Manufacturing
Practices ("cGMP").
In the U.S., clinical trial programs generally involve a three-phase
process. Typically, phase 1 pharmacology trials are conducted in a small number
of healthy volunteers to determine the toxicity, pharmacological effects,
metabolism and dose range requirements for the drug. Phase 2 trials are
conducted with groups of patients afflicted with the target disease to make a
preliminary determination of efficacy and optimal dosages and to provide
additional evidence of safety. In phase 3, large-scale, multi-center comparative
trials are conducted in patients afflicted with the target disease to provide
sufficient data for the statistical proof of efficacy and safety required by the
FDA and other regulatory agencies. The results of the preclinical and clinical
testing are submitted to the FDA in the form of an NDA or Product Licensing
Application for approval to commence commercial sales. In responding to an NDA,
the FDA may grant marketing approval or deny the application if the FDA
determines that the application does not satisfy its regulatory approval
criteria. In approving an NDA, the FDA may require further post-marketing
studies, referred to as phase 4 studies. When used in this Report in connection
with trials and filings in other countries, terms such as "phase 1," "phase 2,"
"phase 3," "phase 4," "new drug application" and "marketing application" refer
to what the Company believes are comparable trials and filings in such other
countries.
Congress recently amended the FD&C Act to facilitate and expedite the
development and review of drugs intended for treatment of serious or
life-threatening conditions that demonstrate the potential to address unmet
medical needs for such conditions. These provisions, which combine existing FDA
expedited approval and accelerated approval procedures, set forth a new
procedure for designation of a drug as a "fast track product." Concurrent with
or after an IND is filed, the sponsor may request designation as a fast track
product, which must be responded to by the FDA within 60 calendar days.
If designated fast track, the FDA must take such actions as are appropriate
to expedite the development and review of applications for these products.
Another advantage of fast track designation is that sponsors may submit, and the
FDA may commence review of, portions of an application before the complete
application is
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submitted, provided that a schedule for submission of the completed application
is provided. Sponsors of fast track products also may seek and obtain FDA
approval based upon a determination that the product has an effect on a clinical
endpoint or on a surrogate endpoint that is reasonably likely to predict
clinical benefit. Products approved on such basis are subject to rigorous
postmarket compliance requirements. For example, the sponsor may be required to
conduct post-approval studies to validate or confirm the endpoint and/or may be
required to submit copies of all promotional materials 30 days prior to their
dissemination. The FDA may withdraw approval of fast track products if, for
example, the sponsor fails to conduct required post-approval studies or
disseminates false or misleading promotional materials.
Even after initial FDA approval has been obtained, further studies,
including post-marketing studies, may be required to provide additional data on
safety and will be required to gain approval for the use of a product as a
treatment for clinical indications other than those for which the product was
initially tested. Also, the FDA will require post-marketing reporting to monitor
the side effects of the drug. Results of post-marketing programs may limit or
expand the further marketing of the products. Further, if there are any
modifications to the drug, including changes in indication, labeling, or a
change in manufacturing facility, an NDA supplement may be required to be
submitted to the FDA. Pursuant to recent amendments to the FD&C Act, once
regulations are implemented, certain manufacturing changes will not require
submission of a supplement.
The orphan drug provisions of the FD&C Act provide incentives to drug
manufacturers to develop and manufacture drugs for the treatment of rare
diseases, currently defined as diseases that affect fewer than 200,000
individuals in the U.S. or, for a disease that affects more than 200,000
individuals in the U.S., where the sponsor does not realistically anticipate its
product becoming profitable. Under these provisions, a manufacturer of a
designated orphan product can seek tax benefits, and the holder of the first FDA
approval of a designated orphan product will be granted a seven year period of
marketing exclusivity for that product for the orphan indication. While the
marketing exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same compound for the same indication, it would not
prevent other types of drugs from being approved for the same use. SciClone has
been granted orphan designation by the FDA for CPX for cystic fibrosis and for
thymosin alpha 1 for chronic active hepatitis B and DiGeorge Anomaly. In prior
years, legislation was introduced in the U.S. Congress that would restrict the
duration of the market exclusivity of an orphan drug. There can be no assurances
that this type of legislation will not be reintroduced and passed into law, or
that the benefits of the existing statute will remain in effect.
Under the Drug Price Competition and Patent Term Restoration Act of 1984
("DPCPTRA"), a sponsor may be granted marketing exclusivity for a period of time
following FDA approval of certain drug applications, regardless of patent
status, if the drug is a new chemical entity or new clinical studies were used
to support the marketing application. This marketing exclusivity would prevent a
third party from obtaining FDA approval for a similar or identical drug through
an Abbreviated New Drug Application ("ANDA"), which is the application form
typically used by manufacturers seeking approval of a generic drug. The statute
also allows a patent owner to extend the term of the patent for a period equal
to one-half the period of time elapsed between the filing of an IND and the
filing of the corresponding NDA plus the period of time between the filing of
the NDA and FDA approval with the maximum patent extension term being five
years. Once a drug is granted some form of marketing exclusivity, the recently
enacted FDA Modernization Act provides an additional six months of marketing
exclusivity for certain pediatric research conducted at the written request of
FDA.
The Company may seek the benefits of orphan, DPCPTRA, or fast track
provisions, but there can be no assurance that the Company will be able to
obtain any such benefits.
The Company is subject to foreign regulations governing human clinical
trials and pharmaceutical sales. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country. Whether or not FDA approval has been obtained, approval of a
product by the comparable regulatory authorities of foreign countries is
required prior to the commencement of marketing of the Company's products in
those countries. The approval process varies from country to country and the
time required for approval may be longer or shorter than that required for FDA
approval. In general, foreign countries use one of three forms of regulatory
approval process. In one form, local clinical trials must be undertaken and the
data must be compiled and submitted for review and approval. In Japan, for
example, the
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process is time-consuming and costly because clinical trials and preclinical
studies must be conducted in Japan. A second form of approval process requires
clinical trial submissions, but permits use of foreign clinical trials and
typically also requires some form of local trial as well. A third form of
approval process does not require local clinical trials, but rather contemplates
submission of an application including proof of approval by countries that have
clinical trial review procedures. Thus, a prior approval in one or more of the
U.S., Japan, most European Union countries or Australia, among others, is often
sufficient for approval in countries using this third form of approval process.
In addition to required foreign approvals, the FDA regulates the export of
drugs or bulk pharmaceuticals from the U.S. In general, a drug that has been
approved for commercial sale in the U.S. may be exported for commercial sale. In
1996, export reform legislation was passed in the U.S. that provides that an
unapproved drug may be exported to a "listed country" for investigational
purposes without FDA authorization. The listed countries are Australia, Canada,
Israel, Japan, New Zealand, Switzerland, South Africa, and countries in the
European Union and the European Economic Area. Export of drugs to an unlisted
country for clinical trial purposes continues to require FDA approval. The
Company has obtained, where necessary, FDA approval for all exports of ZADAXIN
from the U.S. to date for clinical trial purposes, and will seek to obtain FDA
approval, where necessary, for any future shipments from the U.S. to any
unlisted country. The export reform legislation further provides that an
unapproved drug can be exported to any country for commercial purposes without
prior FDA approval, provided that the drug: (i) complies with the laws of that
country; and (ii) has valid marketing authorization or the equivalent from the
appropriate authority in a "listed country." Export of drugs not approved in the
U.S. that do not have marketing authorization in a listed country continue to
require FDA export approval.
Pursuant to the Prescription Drug User Fee Act of 1992, drug manufacturers
generally are required to pay three types of user fees: (1) a one-time
application fee for approval of an NDA; (2) an annual product fee imposed on
prescription drugs after FDA approval; and (3) an annual establishment fee
imposed on facilities used to manufacture prescription drugs. The fee rates for
1999 are: (1) $272,282 one-time fee for an application requiring clinical data,
or $136,141 fee for an application not requiring clinical data; (2) $128,435
annual establishment fee; and (3) $18,364 annual product fee. These fee amounts
are likely to increase in the future. Fee waivers or reductions are available in
certain instances, including a waiver of the application fee for the first
application filed by a small business. Additionally, no user fees are assessed
on NDAs for products designated as orphan drugs, unless such drug also includes
a non-orphan indication.
Among the conditions for NDA approval in the U.S. is the requirement that
the prospective manufacturer's quality control and manufacturing procedures
conform to cGMP. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of
production and quality control to ensure full technical compliance.
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with research work
and preclinical and clinical trials and testing. The extent of government
regulation which might result from future legislation or administrative action
in these areas cannot be accurately predicted.
As the preceding discussion indicates, the research, preclinical
development, clinical development, manufacturing, marketing and sales of
pharmaceuticals, including ZADAXIN and CPX, are subject to extensive regulation
by governmental authorities. Products developed by the Company cannot be
marketed commercially in any jurisdiction in which they have not been approved.
The process of obtaining regulatory approvals is lengthy, uncertain and requires
the expenditure of substantial resources. For example, in some countries where
the Company contemplates marketing ZADAXIN, the regulatory approval process for
drugs not previously approved in countries that have established clinical trial
review procedures is uncertain and this uncertainty may result in delays in
granting regulatory approvals. In addition, in certain countries such as Japan,
the process for obtaining regulatory approval is time consuming and costly. The
Company is currently pursuing regulatory approvals of ZADAXIN in a number of
countries, and of CPX in the U.S., but there can
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be no assurance that the Company will ultimately obtain approvals in such
countries in a timely and cost-effective manner or at all. Failure to comply
with applicable U.S. or foreign regulatory requirements can, among other things,
result in Warning Letters, fines, suspensions of regulatory approvals, product
recalls or seizures, operating restrictions, injunctions and criminal
prosecutions. Further, additional government regulation may be established or
imposed by legislation or otherwise which could prevent or delay regulatory
approval of ZADAXIN, CPX or any future products of the Company. Adverse events
related to the Company's products in any of the Company's existing or future
markets could cause regulatory authorities to withdraw market approval for such
products, if any, or prevent the Company from receiving market approval in the
future.
THIRD PARTY REIMBURSEMENT
The Company's ability to successfully commercialize its products may depend
in part on the extent to which coverage and reimbursement for such products will
be available from government health care programs, private health insurers and
other third party payors or organizations. Significant uncertainty exists as to
the reimbursement status of new therapeutic products and there can be no
assurance that third party insurance coverage and reimbursement will be
available for therapeutic products the Company might develop. In many of the
foreign countries in which the Company intends to market ZADAXIN, reimbursement
of ZADAXIN under government or private health insurance programs will not be
available. In the U.S., health care reform is an area of increasing national
attention and a priority of many governmental officials. Recent legislation, for
example, imposes limitations on the amount of reimbursement available for
specific drug products under some governmental health care programs. There can
be no assurance that future additional limitations will not be imposed in the
future on drug coverage and reimbursement.
EMPLOYEES
As of December 31, 1998, the Company had 39 employees, 28 in the U.S., and
11 abroad. Additionally, the Company has direct access to and control of 77
employees of its overseas distributors. The Company considers its relations with
its employees to be satisfactory.
RECENT DEVELOPMENTS
On July 23, 1997, the Company loaned to Thomas E. Moore, its former
Chairman/CEO, $5,944,000 in exchange for a promise to repay the loan on demand
and the pledge of 1,882,500 shares of SciClone Common Stock owned by Mr. Moore
as collateral for such loan.
During 1998 it was determined that the value of the collateral underlying
the loan made to Mr. Moore was more than temporarily impaired and that a
writedown of the book value of the note would be required. Upon further
investigation relative to the collectibility of the demand note, it was
determined that the entire $5.944 million, plus accumulated interest of
approximately $689,000, was in substantial doubt. As a result of this
determination the Company elected to write off the entire remaining book value
in a non-cash charge to earnings in the fourth quarter of 1998 and cancel the
1,882,500 shares held as collateral. Under a new agreement, Mr. Moore received
credit against his total indebtedness of approximately $6.633 million. This
credit is calculated as the value of Mr. Moore's 1,882,500 shares of SciClone
Common Stock cancelled by the Company based on the greater of two stock prices.
The first stock price is calculated as the average 5-day closing stock price at
closing of this agreement. The second stock price is calculated as the average
5-day closing stock price at September 30, 1999. After calculating and applying
the appropriate credit, the balance of the remaining debt, if any, will be paid
in five installments according to a schedule beginning on October 1, 1999 at
$20,000 and increasing by a factor of 4 each six month anniversary thereafter
with final payment due no later than October 1, 2001. In the event that the
higher 5-day average stock price exceeds the amount of the indebtedness such
excess will be remitted to Mr. Moore in cash or stock, at the Company's sole
discretion. If in stock, the number of shares will not exceed 1,882,500 shares.
See "Note 8 -- Shareholder's Equity of Notes to Consolidated Financials."
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ITEM 2. PROPERTIES
The Company has leased approximately 12,000 square feet of office space at
its headquarters in San Mateo, California and limited office space for marketing
purposes in Singapore, Hong Kong, Shanghai and Taiwan. The Company believes that
its existing facilities are adequate for its current needs and that additional
space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
As of the filing date of this Form 10-K, there are no material pending
legal proceedings to which SciClone or any of its subsidiaries is a party or to
which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock trades on The Nasdaq National Market under the
symbol "SCLN."
The following table sets forth the high and low sale prices per share for
the periods indicated, as reported by The Nasdaq National Market. The quotations
shown represent inter-dealer prices without adjustment for retail markups,
markdowns, or commissions, and may not necessarily reflect actual transactions.
PRICE RANGE
COMMON STOCK
---------------------
HIGH LOW
------ -----
1998
4th quarter....................................... $ 2 $ 15/16
3rd quarter....................................... 3 15/16 1 11/16
2nd quarter....................................... 5 1/8 3 1/8
1st quarter....................................... 4 11/16 1 25/32
1997
4th quarter....................................... $ 7 11/32 $2 15/16
3rd quarter....................................... 6 1/2 3 7/16
2nd quarter....................................... 7 15/32 4 3/8
1st quarter....................................... 16 1/8 4 3/4
On April 1, 1998, the Company issued and sold 661,157 shares of Series C
preferred stock ("Preferred Stock") at $6.05 per share to three institutional
investors, and received $3,931,000 in net proceeds from the offering. During the
fourth quarter ended December 31, 1998, 354,867 shares of Series C preferred
stock were converted into 1,894,086 shares of common stock.
Through December 31, 1998, all but 58,356 shares of Series C preferred
stock were converted into a total of 3,168,404 shares of Common Stock. In
January 1999, 46,922 of the remaining 58,356 shares of Series C preferred stock
were converted into 299,483 shares of common stock and 11,434 of such remaining
shares of Series C preferred stock were redeemed at a conversion price of
approximately $0.95 per common share. As a result, there are no outstanding
shares of Series C preferred stock.
As of March 12, 1999, there were approximately 282 holders of record and
more than 5,000 beneficial holders of the Company's Common Stock.
The Company has not paid any dividends on its Common Stock and currently
intends to retain any future earnings for use in its business.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K.
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
STATEMENTS OF OPERATIONS DATA:
Product sales............................ $ 3,625,000 $ 2,223,000 $ 703,000 $ 273,000 $ --
Contract revenue......................... 100,000 -- -- -- --
Cost of product sales.................... 1,036,000 990,000 740,000 737,000 --
------------ ------------ ------------ ------------ ------------
Gross margin............................. 2,689,000 1,233,000 (37,000) (464,000) --
Operating expenses:
Research and development............... 9,293,000 8,642,000 9,904,000 10,386,000 9,282,000
Special research and development
charges.............................. -- -- -- -- 3,470,000
Marketing.............................. 5,391,000 4,145,000 4,240,000 4,323,000 4,375,000
General and administrative............. 3,714,000 3,662,000 3,183,000 2,904,000 3,811,000
------------ ------------ ------------ ------------ ------------
Total operating expenses................. 18,398,000 16,449,000 17,327,000 17,613,000 20,938,000
------------ ------------ ------------ ------------ ------------
Loss from operations..................... (15,709,000) (15,216,000) (17,364,000) (18,077,000) (20,938,000)
Writedown of note receivable from former
officer................................ (5,944,000) -- -- -- --
Interest and investment income, net...... 582,000 1,219,000 2,618,000 3,302,000 3,057,000
------------ ------------ ------------ ------------ ------------
Net loss................................. $(21,071,000) $(13,997,000) $(14,746,000) $(14,775,000) $(17,881,000)
Deemed dividend on issuance of preferred
stock.................................. (3,143,000) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss attributable to common
stockholders........................... $(24,214,000) $(13,997,000) $(14,746,000) $(14,775,000) $(17,881,000)
============ ============ ============ ============ ============
Basic net loss per share................. $ (1.48) $ (0.85) $ (0.85) $ (0.88) $ (1.02)
============ ============ ============ ============ ============
Weighted average shares used in computing
basic net loss per share amounts....... 16,335,096 16,472,765 17,421,312 16,882,000 17,507,564
BALANCE SHEET DATA:
Cash, cash equivalents and investments... $ 5,410,000 $ 12,901,000 $ 35,106,000 $ 47,390,000 $ 63,670,000
Working capital.......................... 3,845,000 7,416,000 9,224,000 19,283,000 44,797,000
Total assets............................. 11,727,000 19,196,000 42,728,000 54,151,000 67,013,000
Total shareholders' equity............... 6,428,000 15,724,000 37,466,000 49,555,000 62,754,000
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a global biopharmaceutical company that acquires, develops
and commercializes specialist-oriented proprietary drugs for treating chronic
and life-threatening diseases, such as hepatitis B, hepatitis C, cancer, immune
system disorders and cystic fibrosis. Currently, the Company has two drugs in
clinical development, ZADAXIN for hepatitis B, hepatitis C, cancer and immune
system disorders, and CPX for cystic fibrosis. The Company also has other drug
candidates in preclinical development. To date, the Company's principal focus
has been the development and commercialization of ZADAXIN and the development of
CPX.
From commencement of operations through December 31, 1998, the Company
incurred a cumulative net loss of approximately $109.6 million. The Company
expects its sales, gross margin and operating expenses to increase over the next
several years as it expands its sales, research and development, clinical
testing and marketing capabilities.* The Company's ability to achieve profitable
operations is primarily dependent on obtaining additional financing to support
its operations and long-term product development and commercialization programs,
increasing ZADAXIN sales in approved markets, securing regulatory approvals for
ZADAXIN in additional countries and successfully launching ZADAXIN, if approved,
in such countries. In addition, other factors may also impact the Company's
ability to achieve a profitable level of operations such as spending associated
with successful development of CPX, acquiring rights to additional drugs, and
entering into and extending agreements for product development and
commercialization, where appropriate.
The Company's operating results may fluctuate from period to period as a
result of, among other things, market acceptance of ZADAXIN, the timing and
costs associated with preclinical and clinical development of
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the Company's products, the regulatory approval process, and the acquisition of
additional product rights. Setbacks in the launch, sale or distribution of
ZADAXIN, preclinical and clinical development of the Company's products,
particularly CPX, the regulatory approval process or relationships with
collaborative partners, and any shortfalls in revenue or earnings from levels
expected by securities analysts, among other developments, have in the past had,
and could in the future have, an immediate and significant adverse effect on the
trading price of the Company's common stock in any given period.
RESULTS OF OPERATIONS
Product sales were $3,625,000, $2,223,000 and $703,000 for the years ended
December 31, 1998, 1997 and 1996, respectively. Sales in 1996 were largely
fourth quarter sales into the People's Republic of China to establish
importation duty rates and internal distribution patterns. In 1997, sales were
relatively flat through the quarters as the four geographic regions of the
People's Republic of China, northern, central, southern and Guangzhou area, were
established. In 1998, both unit and U.S. dollar sales grew at an average of 25%
quarter to quarter as the awareness and use of ZADAXIN expanded. Currently, the
Company has received approval to market ZADAXIN in Argentina, Cambodia, Italy,
Kuwait, Mexico, Myanmar, the People's Republic of China, Pakistan, Peru, the
Philippines, Singapore, Venezuela, and Vietnam. The People's Republic of China,
like Japan and certain other Asian markets, uses a tiered method to import and
distribute products. The distributors make the sales in the country, but the
product is imported for them by licensed importers. In 1997, the Company sold to
one principal importer/agent who then resold to four distributors inside the
People's Republic of China. Reflecting the expansion and stability of the
Company's sales to the People's Republic of China in 1998, the Company began
working extensively with a second importing agent in addition to the agent used
in 1997. This enabled the expansion of sales to the four distributors. For the
year ended December 31, 1998, four distributors in China accounted for 84% of
the Company's product sales. In addition, the Company has filed for approval to
market ZADAXIN in 19 additional countries and anticipates additional filings in
other countries. The Company expects product sales to increase in its existing
approved markets in 1999 and beyond, upon the commencement of the commercial
launch of ZADAXIN in additional markets once regulatory approvals are secured.
The level of such product sales increase is dependent upon increased ZADAXIN
market penetration in the Company's existing approved markets, additional
ZADAXIN marketing approvals and the successful launch of ZADAXIN in new markets.
Although the Company remains optimistic regarding the prospects of ZADAXIN,
there can be no assurance that the Company will ever achieve significant levels
of product sales or that the Company will receive additional ZADAXIN market
approvals.
Cost of product sales was $1,036,000, $990,000 and $740,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. The increase is
attributable to increased product sales. The Company expects cost of product
sales to vary from quarter to quarter, depending upon the level of product
sales, the absorption of fixed product-related costs, and any charges associated
with excess or expiring finished product.
Research and development expenses were $9,293,000, $8,642,000, and
$9,904,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
For the year ended December 31, 1998, the increase in research and development
expenses as compared to 1997 was due to increased clinical trial expenses.
Additional pilot clinical studies to expand the use of ZADAXIN in overseas
markets were started in 1998. Clinical trial expenses in 1998 also increased due
to clinical trial expenses in Japan, and additional clinical trial expenses for
the clinical development of CPX. The initiation and continuation of these
programs by the Company had and will continue to have a significant effect on
the Company's research and development expenses in the future and will require
the Company to seek additional capital resources in the immediate future. For
the year ended December 31, 1997, the decrease in research and development
expenses as compared to 1996 was primarily attributable to decreases in
regulatory expenses and in costs associated with decreased ZADAXIN clinical
trials, essentially due to the completion of the Company's ZADAXIN phase 3
hepatitis B in Taiwan during the first half of 1996, offset by increased
preclinical development expenses associated with CPX. In general, the Company
expects product research and development expenses to increase over the next
several years and to vary quarter to quarter as the Company pursues its strategy
of
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initiating additional clinical trials and testing, entering into one or more
corporate partnering arrangements, acquiring product rights, and expanding
regulatory activities.
Marketing expenses were $5,391,000, $4,145,000, and $4,240,000 for the
years ended December 31, 1998, 1997, and 1996, respectively. The increase in
1998 over 1997 reflected the increases in activities related to expanding
distribution and marketing efforts around the world in addition to increased
professional services related to the 1998 sales increase. The slight reduction
in expenses in 1997 compared to 1996 was largely related to the preparatory
marketing expenses in 1996, which were beneficial throughout 1997. The Company
expects marketing expenses to increase significantly in the next several
quarters and years as it anticipates expanding its commercialization and
marketing efforts and pursuing other strategic relationships.
General and administrative expenses were $3,714,000, $3,662,000, and
$3,183,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
The increase in 1997 as compared to 1996 was primarily due to increased general
office expenses associated with increased rent and office relocation expenses,
investment banking fees and fees for professional services, primarily legal and
accounting fees, associated with the Company's adoption of a shareholder rights
plan and proposed public offering. In the near term, the Company expects general
and administrative expenses to vary quarter to quarter as the Company augments
its general and administrative activities and resources to support increased
expenditures on clinical trials and testing, and regulatory,
pre-commercialization and marketing activities.
On July 23, 1997, the Company loaned to Thomas E. Moore, its former
Chairman/CEO, $5,944,000 in exchange for a promise to repay the loan on demand
and the pledge of 1,882,500 shares of SciClone Common Stock owned by Mr. Moore
as collateral for such loan.
During 1998 it was determined that the value of the collateral underlying
the loan made to Mr. Moore was more than temporarily impaired and that a
writedown of the book value of the note would be required. Upon further
investigation relative to the collectibility of the demand note, it was
determined that the entire $5.944 million, plus accumulated interest of
approximately $689,000, was in substantial doubt. As a result of this
determination the Company elected to write off the entire remaining book value
in a non-cash charge to earnings in the fourth quarter of 1988 and cancel the
1,882,500 shares held as collateral. Under a new agreement, Mr. Moore received
credit against his total indebtedness of approximately $6.633 million. This
credit is calculated as the value of Mr. Moore's 1,882,500 shares of SciClone
Common Stock cancelled by the Company based on the greater of two stock prices.
The first stock price is calculated as the average 5-day closing stock price at
closing of this agreement. The second stock price is calculated as the average
5-day closing stock price at September 30, 1999. After calculating and applying
the appropriate credit, the balance of the remaining debt, if any, will be paid
in five installments according to a schedule beginning on October 1, 1999 at
$20,000 and increasing by a factor of 4 each six month anniversary thereafter
with final payment due no later than October 1, 2001. In the event that the
higher 5-day average stock price exceeds the amount of the indebtedness such
excess will be remitted to Mr. Moore in cash or stock, at the Company's sole
discretion. If in stock, the number of shares will not exceed 1,882,500 shares.
See "Note 8 -- Shareholder's Equity of Notes to Consolidated Financials."
A non-cash charge to earnings was recorded in April 1998 for $3,143,000
representing a deemed dividend associated with the issuance of the Series C
preferred stock.
Net interest and investment income was approximately $582,000, $1,219,000,
and $2,618,000 for the years ended December 31, 1998, 1997, and 1996,
respectively. The decrease in 1998 as compared to 1997 and in 1997 as compared
to 1996 resulted from lower average invested cash balances.
LIQUIDITY AND CAPITAL RESOURCES
In April 1998, the Company received approximately $4,000,000 (before
deducting expenses) from the sale of 661,157 shares of Series C preferred stock
in a private placement. As of December 31, 1998, all but 58,356 shares of Series
C preferred stock were converted into 3,168,404 shares of common stock. In
January 1999, 46,922 of the remaining 58,356 shares of Series C preferred stock
were converted into 299,483 shares of common stock and 11,434 of such remaining
shares of Series C preferred stock were redeemed at a conversion price of
approximately $0.95 per common share. As a result, there are no outstanding
shares of Series C
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preferred stock. In March 1998, the Company also received approximately $754,000
from one of its executive officers as a partial payment of an outstanding loan.
(See "Note 1" -- "Notes Receivable from Officers"). In November 1998 the Company
settled a note with a former executive officer by accepting payment of
approximately $950,000 in cash and offsetting approximately $181,000 in retained
salary and housing allowance accruals against the debt.
At December 31, 1998, 1997, and 1996, the Company had $5,410,000,
$12,901,000, and $35,106,000, respectively, in cash, cash equivalents and
marketable securities. The marketable securities consist primarily of highly
liquid short-term and long-term investments.
Net cash used by the Company in operating activities amounted to
$13,353,000, $14,056,000, and $14,641,000, for the years ended December 31,
1998, 1997, and 1996, respectively. Net cash used in operating activities for
the year ended December 31, 1998 was less than the net loss primarily due to
increases in clinical trial expense accruals primarily for Japan, inventory
decreases, a deemed dividend in connection with the issuance of the Company's
Series C preferred stock and impairment of a note receivable from a former
officer. These amounts were partially offset by increases in prepaid expense
primarily for product marketing rights acquired for the U.S. and Europe. Net
cash used in operating activities for the year ended December 31, 1997 was
greater than the Company's net loss for such period primarily due to increases
in accounts receivable associated with sales from the Company's launch of
ZADAXIN in its approved markets and increases in payments to third parties for
goods and services and to employees for compensation and benefits. These amounts
were partially offset by non-cash charges associated with depreciation and
amortization, decreases in prepayments of certain future expenses, and increases
in amounts owed to third parties for clinical trials. Net cash used in operating
activities for the year ended December 31, 1996 is less than the Company's net
loss for such period primarily due to non-cash charges associated with
depreciation of furniture and equipment and amortization of deferred
compensation in addition to increases in amounts owed to third parties for goods
and services. These amounts were partially offset by cash used for inventory
purchases, increases in and prepayments of certain future period expenses and
payments of amounts owed to third parties related to clinical trial expenses and
compensation and benefits.
Net cash provided by investing activities for the year ended December 31,
1998 primarily related to the net sale of $7,388,000 in marketable securities
offset by the purchase of approximately $99,000 in equipment and furniture. Net
cash provided by investing activities for the year ended December 31, 1997
primarily related to the net sale of $21,335,000 in marketable securities offset
by the purchase of approximately $404,000 in equipment and furniture. Net cash
provided by investing activities for the year ended December 31, 1996 primarily
related to the net sale of $12,319,000 in marketable securities offset by the
purchase of approximately $94,000 in equipment and furniture.
Net cash provided by financing activities for the year ended December 31,
1998 consisted of $6,342,000 in proceeds, approximately $3,931,000 of which
related to the Company's sale and issuance of 661,157 shares of Series C
preferred stock, approximately $529,000 of which related to the issuance of
common stock and approximately $1,882,000 of which related to the payment on
notes receivable from former and current officers. Net cash used in financing
activities for the year ended December 31, 1997 consisted of $4,267,000 related
to Company's repurchase of its common stock under the Company's approved stock
repurchase plan and the amounts loaned to Mr. Moore referred to above of
$5,944,000 offset by $2,313,000 in proceeds received from the issuance of common
stock by the exercise of outstanding warrants and from the issuance of common
stock under the Company's stock option plan and employee stock purchase plan.
Net cash provided by financing activities for the year ended December 31, 1996
related to $3,731,000 in proceeds received from the issuance of common stock
under the Company's stock option plan offset by approximately $659,000 related
to Company's repurchase of its common stock.
The report of the independent auditors on the Company's financial
statements contains an explanatory paragraph indicating that the Company's
historical operating losses and lack of sufficient significant revenues from
product sales raises substantial doubt about the Company's ability to continue
as a going concern. Without additional financing, significant reduction in
operation expenses or sales growth beyond management's expectations, or a
combination thereof, management believes its existing capital resources and
interest
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on funds available are adequate to maintain its current and planned operations
only through June 1999. To support such operations beyond June 1999, the Company
will need to raise additional financing in the near term. The Company is
pursuing additional financings including a private placement of common stock and
common stock warrants, use of its Equity Line (see Note 8 to Consolidated
Financial Statements), bank debt financing and corporate partnering to develop
ZADAXIN in the U.S. and Europe.* The Company plans to conclude one or more of
such additional financings over the next two to six months, although no
assurance can be given that such financing will occur in the time frame expected
by the Company, on terms favorable to the Company, or at all. The Company's
capital requirements may change depending upon numerous factors, including the
level of ZADAXIN product sales, the availability of complementary products,
technologies and businesses, the initiation of preclinical and clinical trials
and testing, the timing of regulatory approvals, developments in relationships
with existing or future collaborative partners and the status of competitive
products.
IMPACT OF THE YEAR 2000
As is true for most companies, the Year 2000 computer issue could create a
risk for the Company. If systems do not correctly recognize date information
when the year changes to 2000, there could be an adverse impact on the Company's
operations. The risk for the Company exists in the following areas: systems used
by the Company to run its business and systems used by the Company's vendors.
The Company is currently evaluating its exposure in both of these areas.
The Company has reviewed its current systems and has been evaluating
whether it is appropriate to replace or upgrade systems that are known to be
Year 2000 non-compliant. For those areas which have been identified as Year 2000
non-compliant, the cost to upgrade or replace is not expected to be material to
the Company's operating results.
The Company is in the process of contacting its critical vendors to
determine that the vendors' operations and the products and services they
provide are Year 2000 compliant. To varying degrees, the Company is dependent
upon a large number of third parties that provide information, goods and
services to the Company. These include financial institutions, suppliers,
vendors, research partners and governmental entities. If significant numbers of
these third parties experience failures in their computer systems or equipment
due to Year 2000 non-compliance, it could affect the Company's ability to
process transactions, manufacture products or engage in similar normal business
activities. While some of these risks are outside the control of the Company,
the Company has instituted programs, including internal records review and use
of external questionnaires to identify key third parties, assess their level of
Year 2000 compliance, update contracts and address any non-compliance issues.
The total costs related to Year 2000 compliance cannot be known precisely
at this time but it is not expected to be material to the Company's financial
position, results of operations or cash flows.
RISK FACTORS
Dependence on ZADAXIN(R) and CPX. The Company's principal drug development
efforts are currently focused primarily on ZADAXIN and CPX. Clinical trials of
ZADAXIN sponsored by the Company and/or other parties are currently in progress
or planned and favorable results from such trials will be necessary to gain
regulatory approval in major pharmaceutical markets. Sales of ZADAXIN commenced
in 1997. While ZADAXIN has been approved for commercial sale in 13 countries, no
assurance can be given that ZADAXIN approvals will be obtained in additional
countries or for the treatment of additional indications, such as cancer, in a
timely fashion or at all. The Company's launch of ZADAXIN in the People's
Republic of China, the Philippines and Singapore was the first commercial
introduction of ZADAXIN by the Company, and no assurance can be given that
continued commercialization of ZADAXIN will prove successful. The Company has
not yet launched ZADAXIN in Argentina, Cambodia, Italy, Kuwait, Mexico, Myanmar,
Pakistan, Peru or Vietnam and no assurance can be given that future launches of
ZADAXIN will prove successful in these countries or in any additional countries.
Future sales of ZADAXIN will depend on market acceptance and successful
distribution. In particular, although the People's Republic of China has the
highest
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hepatitis B prevalence in the world, the low average income and poorly developed
distribution infrastructure present ongoing challenges to successful
commercialization of ZADAXIN in that market. Because the Company currently
relies on ZADAXIN as its sole source of revenue, the failure to demonstrate the
drug's efficacy in future clinical trials, obtain additional marketing approvals
or commercialize the drug successfully would have a material adverse effect on
the Company.
The Company may experience delays and encounter difficulties in clinical
trials of CPX, its drug in phase 2 clinical development for treatment of cystic
fibrosis ("CF"). In addition, there can be no assurance that any clinical trial
will provide statistically significant evidence of the efficacy of CPX in
treating CF. A failure to demonstrate the safety and efficacy of CPX in a CF
clinical trial, obtain regulatory approval of CPX for CF or successfully
commercialize CPX could have a material adverse effect on the Company.
No History of Significant Revenues; Continuing Operating Losses. The
Company has only recently generated revenues from the commercialization of its
lead product, ZADAXIN, and there is substantial uncertainty regarding the timing
and amount of any future revenues and whether such future revenues will be
material. The Company cannot predict when or if marketing approvals for CPX will
be obtained or additional marketing approvals for ZADAXIN will be obtained. Even
if such approvals are obtained, there can be no assurance that ZADAXIN and CPX
will be commercialized successfully. The Company has experienced significant
operating losses since its inception and has a substantial accumulated deficit.
If sales increase over the next several years, the Company expects its operating
expenses also to increase over the next several years as it expands its
development, clinical testing and marketing capabilities.* The Company's ability
to achieve a profitable level of operations is dependent in large part on
obtaining additional financing to support its operations and its long-term
product development and commercialization efforts, successful expansion of the
market for ZADAXIN in Asia, Latin America and the Middle East, obtaining
additional regulatory approvals for ZADAXIN and/or future products, entering
into a corporate partnering arrangement for development in the U.S. and Europe
of a combination therapy for hepatitis C including ZADAXIN plus interferon,
entering into other agreements for product development and commercialization,
where appropriate, and continuing to expand from development into successful
marketing. There can be no assurance that the Company will ever achieve a
profitable level of operations.
Future Capital Needs; Uncertainty of Additional Financing. Since inception,
the Company has financed its operations primarily through sales of equity
securities. However, the Company will need to obtain substantial additional
financing before June 1999 to support its operations and its long-term product
development and commercialization programs. Without additional financing,
management believes its existing capital resources and interest on funds
available are adequate to maintain its current and planned operations only
through June 1999. The Company is exploring corporate partnering, a private
placement of equity securities, the sale of equity securities under its Equity
Line and other opportunities, including debt instruments, to increase its
capital resources. However, the Company's future capital requirements will
depend on many factors, including the level of ZADAXIN product sales, the
availability of complementary products, technologies and businesses, the
initiation of preclinical and clinical development expenses and opportunities,
the timing and cost of regulatory approvals, patent costs, competing
technological and market developments, the nature of existing and future
collaborative relationships, the ability to use the Equity Line and the
Company's ability to establish development, sales, manufacturing and marketing
arrangements. There can be no assurance that such financing will be available on
acceptable terms or a timely basis, if at all. Other than the Equity Line the
Company has no commitments or arrangements for additional funding and may not be
able to obtain needed financing. Draws under the equity line are subject to the
satisfaction of certain conditions, including registration of the investor's
resale of the shares, a minimum trading price per share, volume limitations,
limitations on the number of shares that can be issued without shareholder
approval and limitations on the number of shares of the Company's common stock
the investor may hold at any point in time. Unless the Company and the investor
agree otherwise, the facility is not available when the Company's stock is
trading at less than $1.50 per share, which price has been decreased to $1.00
pursuant to an oral agreement between the parties. The unavailability or timing
of financing could prevent or delay the Company's long-term product development
and commercialization programs and would require the Company to curtail or cease
operations.
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Compliance With Nasdaq Listing Requirements: Disclosure Relating to
Low-Priced Stock. The Company's common stock is quoted on the Nasdaq National
Market (the "National Market"). However, in order to continue to be included in
the National Market, a company must meet certain maintenance criteria. The
maintenance criteria require a minimum bid price of $1.00 per share, $4,000,000
in net tangible assets (total assets less total liabilities and goodwill) and
$5,000,000 market value of the public float (excluding shares held directly or
indirectly by any officer or director of the Company and by any person holding
beneficially more than 10% of the Company's outstanding shares). As of March 12,
1999 the closing bid price of the Company's Common Stock was $1.969 and as of
December 31, 1998 the Company had net tangible assets of $6,992,000.
Failure to meet these maintenance criteria may result in the delisting of
the Company's common stock from the National Market. Trading, if any, in the
Company's common stock would thereafter be conducted in the non-Nasdaq
over-the-counter market. If the Company's common stock were delisted from
trading on Nasdaq, an investor may find it more difficult to dispose of, or to
obtain accurate quotation as to the market value of, the Company's common stock,
which could severely limit the market liquidity of the common stock and limit
the ability of the Company's stockholders to sell the common stock in the
secondary market.
Dependence on Third Parties. The Company's strategy contemplates that it
will enter into various collaborative arrangements with other entities. To date,
the Company has acquired rights to ZADAXIN, CPX and certain other drugs but is
only actively pursuing clinical development of ZADAXIN and CPX. Failure to
license or otherwise acquire rights to additional drugs would result in a
shortage of products for development. In addition, the Company has licensed
exclusive rights to develop and market ZADAXIN in Japan to Schering-Plough K.K.
Schering-Plough K.K. has a substantial commitment to alpha interferon, which is
an approved therapy for hepatitis B and hepatitis C in Japan. There can be no
assurance that the relationship will prove successful or that the Company will
be able to negotiate additional arrangements in the future, including a
corporate partnering arrangement for development in the U.S. and Europe of a
combination therapy for hepatitis C including ZADAXIN plus interferon. The
amount and timing of resources that collaborators devote to their activities
with the Company will not be within the control of the Company and may be
affected by financial difficulties or other factors affecting these third
parties. There can be no assurance that such parties will perform their
obligations as expected. Moreover, the Company's ability to obtain regulatory
approval in one country may be delayed or adversely affected by the timing of
regulatory activities and approvals in one or more other countries, particularly
if the Company does not participate in the regulatory approval process in such
other countries.
Foreign Sales and Operations. The Company's financial condition in the near
term will be highly dependent on ZADAXIN sales in foreign jurisdictions, where
sales and operations are subject to inherent risks, including difficulties and
delays in obtaining pricing approvals and reimbursement, difficulties and delays
in obtaining product health registration and importation permits, unexpected
changes in regulatory requirements, tariffs and other barriers, political
instability, difficulties in staffing and managing foreign operations, longer
payment cycles, greater difficulty in accounts receivable collection, currency
fluctuations and potential adverse tax consequences. Certain foreign countries
regulate pricing of pharmaceuticals and such regulation may result in prices
significantly below those that would prevail in a free market. The majority of
the Company's current sales are to customers in the People's Republic of China.
Patents and Proprietary Rights. The U.S. and most European composition of
matter patents for thymosin alpha 1 have expired. The Company will in the future
have only limited composition of matter patents for thymosin alpha 1 and this
could adversely affect the Company's proprietary rights. However, the Company
owns or has exclusive licenses for use and/or process patents or patent
applications in the U.S., Europe, Japan and other jurisdictions for thymosin
alpha 1, and for CPX in the U.S. and will seek to protect such products from
competition through such patent protection and through other means. The
Company's success is significantly dependent on its ability to obtain patent
protection for its products and technologies and to preserve its trade secrets
and operate without infringing on the proprietary rights of third parties. No
assurance can be given that the Company's pending patent applications will
result in the issuance of patents or that any patents will provide competitive
advantages or will not be invalidated or circumvented by its competitors.
Moreover, no assurance can be given that patents are not issued to, or patent
applications have not been filed by, other companies which would have an adverse
effect on the Company's ability to use,
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manufacture or market its products or maintain its competitive position with
respect to its products. Numerous patents and patent applications relating to
thymosin alpha 1 are held under exclusive license and the breach by the Company
of the terms of such license could result in the loss of the Company's rights to
such patents and patent applications. Other companies obtaining patents claiming
products or processes useful to the Company may bring infringement actions
against the Company and such litigation is typically costly and time-consuming.
As a result, the Company may be required to obtain licenses from others or not
be able to use, manufacture or market its products. Such licenses may not be
available on commercially reasonable terms, if at all.
The patent positions of biotechnology firms generally are highly uncertain
and involve complex legal and factual questions. No consistent policy has
emerged regarding the validity and scope of claims in biotechnology patents, and
courts have issued varying interpretations in the recent past, and legal
standards concerning validity, scope and interpretations of claims in
biotechnology patents may continue to evolve. Even issued patents may later be
modified or revoked by the U.S. Patent and Trademark Office, the European Patent
Office or the courts in proceedings instituted by third parties. Moreover, the
issuance of a patent in one country does not assure the issuance of a patent
with similar claims in another country and claim interpretation and infringement
laws vary among countries, so the extent of any patent protection is uncertain
and may vary in different countries.
Pharmaceuticals are not patentable in certain countries in SciClone's
ZADAXIN territory, or have only recently become patentable, and enforcement of
intellectual property rights in many countries in such territory has been
limited or non-existent. Future enforcement of patents and proprietary rights in
many countries in SciClone's ZADAXIN territory can be expected to be problematic
or unpredictable. There can be no assurance that any patents issued or licensed
to the Company will provide it with competitive advantages or will not be
challenged by others. No assurance can be given that holders of patents licensed
to the Company will file, prosecute, extend or maintain their patents in
countries where the Company has rights. Furthermore, there can be no assurance
that others will not independently develop similar products or will not design
around patents issued or licensed to the Company. See "Business -- Patents and
Proprietary Rights."
Government Regulation and Product Approvals. The research, preclinical and
clinical development, manufacturing, marketing and sales of pharmaceuticals,
including ZADAXIN, CPX and the Company's other drug candidates, are subject to
extensive regulation by governmental authorities. Products developed by the
Company cannot be marketed commercially in any jurisdiction in which they have
not been approved. The process of obtaining regulatory approvals is lengthy and
requires the expenditure of substantial resources. In some countries where the
Company contemplates marketing ZADAXIN, the regulatory approval process for
drugs not previously approved in countries that have established clinical trial
review procedures is uncertain and this uncertainty may result in delays in
granting regulatory approvals. The Company is currently sponsoring clinical
trials and pursuing regulatory approvals of ZADAXIN in a number of countries and
is currently sponsoring clinical trials of CPX in the U.S., but there can be no
assurance that the Company will be able to complete such trials, that such
trials, if completed, will fulfill regulatory approval criteria or that the
Company will ultimately obtain approvals in such countries. Adverse results in
the Company's development programs also could result in the placement of
restrictions on the use of ZADAXIN and, if approved, CPX. Failure to comply with
the applicable U.S. or foreign regulatory requirements can, among other things,
result in Warning Letters, fines, suspensions of regulatory approvals, product
recalls or seizures, operating restrictions, injunctions and criminal
prosecutions. Further, additional government regulation may be established or
imposed which could prevent or delay regulatory approval of ZADAXIN, CPX or any
future products of the Company. See "Business -- Government Regulation."
Manufacturing. The Company has entered into contract manufacturing and
supply agreements to source ZADAXIN and CPX. To be successful, the Company's
products must be manufactured in commercial quantities in compliance with
regulatory requirements and at an acceptable cost. While the Company believes it
has and will be able in the future to establish and maintain manufacturing
relationships with experienced suppliers capable of meeting the Company's needs,
there can be no assurance that the Company will establish and maintain long term
manufacturing relationships with suppliers or that these suppliers will prove
satisfactory. The Company currently has vialing and packaging supply agreements
in effect and has a sufficient
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supply of finished ZADAXIN for the near term. The Company has recently changed
and upgraded its manufacturing source of finished ZADAXIN for its international
markets, excluding Japan. In certain countries, this change may require
additional regulatory approvals. If regulatory approvals of such manufacturing
change, if required, are not obtained in a timely fashion, new ZADAXIN marketing
approvals may be delayed or sales may be interrupted until the manufacturing
change is approved. Production interruptions, if they occur, could significantly
delay clinical development of potential products, reduce third party or clinical
researcher interest and support of proposed clinical trials. Such interruptions
could also impede commercialization of the Company's products, including sales
of ZADAXIN in approved markets, and impair their competitive position, which
would have a material adverse effect on the business and financial condition of
the Company. See "Business -- Manufacturing."
Marketing and Sales. The Company has established distribution arrangements
with local pharmaceutical importers and distribution companies covering
countries in Asia, Latin America and the Middle East. However, no assurance can
be given that any such distribution arrangements will remain in place or prove
successful. See "Business -- Marketing and Sales."
Technological Change and Competition. Rapid technological development may
result in the Company's products becoming obsolete before they are marketed or
before the Company recovers a significant portion of the related development and
commercialization expenses. Competition in the pharmaceutical field is intense
and the Company expects that competition will increase. The Company's
competitors include major pharmaceutical companies, biotechnology firms and
universities and other research institutions, both in the U.S. and abroad, that
are actively engaged in research and development of products in the therapeutic
areas being pursued by the Company. Many of these companies and institutions
have substantially greater financial, technical, manufacturing, marketing and
human resource capabilities than the Company and extensive experience in
undertaking clinical testing and obtaining regulatory approvals necessary to
market drugs. Principal competitive factors in the pharmaceutical field include
efficacy, safety, price and therapeutic regimen. Where comparable products are
marketed by other companies price is also a competitive factor.
Uncertainty of Third Party Reimbursement; R