-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LS3HIRQ7DD9OULjCnkprIvpkyTBMsQUbpM+jMAwj0YwZtQi6oOZ1SbqaUoWiqq8X MCniXBLC6+VAW/cCVvGoNQ== 0000950005-97-000381.txt : 19970402 0000950005-97-000381.hdr.sgml : 19970402 ACCESSION NUMBER: 0000950005-97-000381 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCICLONE PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000880771 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 943116852 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-19825 FILM NUMBER: 97572066 BUSINESS ADDRESS: STREET 1: 901 MARINERS ISLAND BLVD STREET 2: SUITE 315 CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4153583456 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996, 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 Mariners Island Boulevard, San Mateo, California 94404 (Address of principal executive offices) (Zip Code) (415) 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. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $94,275,529 as of February 28, 1997, 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 and by each person known to the Company to own 5% of more of the outstanding Common Stock have been excluded from the calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 28, 1997, there were 17,537,764 shares of the Registrant's Common Stock outstanding. Part III incorporates by reference from the definitive proxy statement for the registrant's 1997 annual meeting of stockholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form. -2- The following material contains certain forward-looking statements including statements regarding the application of ZADAXIN(R) thymosin alpha 1 in disease areas beyond hepatitis B, the potential for regulatory approvals of ZADAXIN and the launching of ZADAXIN in additional markets, and the Company's expectations regarding increases in revenues from ZADAXIN and increases in marketing and research and development expense levels. These statements are subject to certain risks and uncertainties. These risks and uncertainties include the Company's current reliance on a single product, ZADAXIN thymosin alpha 1, for its revenues, the absence of regulatory approval for ZADAXIN in significant markets, the expensive, time consuming and uncertain regulatory approval process, risks associated with the manufacture and supply of ZADAXIN, and competition from competing therapies, uncertainties regarding the outcome of the Company's efforts to commercialize additional products, as well as other risks and uncertainties described herein and in the Company's other reports filed with the Securities and Exchange Commission. PART I Item 1. Business SciClone Pharmaceuticals, Inc. ("SciClone" or the "Company") is an international biopharmaceutical company involved in the acquisition, development and commercialization of pharmaceuticals worldwide. The Company focuses on specialist oriented products for chronic and life-threatening diseases, including hepatitis B and C, cancer, immune system disorders and cystic fibrosis. The Company's strategy is to acquire readily commercializable drugs and to focus its resources on their commercialization. The Company's lead product is ZADAXIN thymosin alpha 1, a synthetic immunomodulator. The Company has received approval to market and has recently begun marketing ZADAXIN for chronic hepatitis B in China, the Philippines and Singapore. In addition, the Company has filed for approval to market ZADAXIN for this indication in eleven countries, primarily in Asia, the Middle East, and Latin America. Based on the clinical trials conducted to date, the Company believes that ZADAXIN, either alone or in combination with other therapies, may also have application in other disease areas, including hepatitis C, cancer and acquired immune deficiency syndrome ("AIDS"). SciClone's other product, CPX, is a synthetic compound developed by the United States National Institutes of Health ("NIH") as a potential treatment for cystic fibrosis ("CF"). CF is caused by a mutation in the cystic fibrosis transmembrane conductance regulation ("CFTR") gene. In vitro studies from the NIH have shown that CPX binds to CFTR and permits the CFTR to properly perform its chloride secretion function. The Company has recently received approval to begin clinical trials of CPX in the United States. Internationally, SciClone has partnered with numerous local pharmaceutical distributors to register and market its products. The Company out-licenses its products where a collaboration will materially enhance the prospects for commercial success. For example, SciClone has licensed to Schering-Plough K.K. exclusive rights to develop and market ZADAXIN in Japan. The Company is currently seeking a corporate partnership arrangement for ZADAXIN in Europe. The Company was incorporated in California in May 1990. Strategy SciClone's primary business objective is to strengthen its virtually integrated international biopharmaceutical business. The Company's strategy to achieve this objective is as follows: -3- o Aggressively Commercialize ZADAXIN Worldwide The Company's principal development and commercialization efforts are currently focused on ZADAXIN. The Company is aggressively pursuing the commercialization of ZADAXIN worldwide. The Company has filed for approval to market ZADAXIN for hepatitis B in international markets and has distribution agreements in place in more than twenty-five markets and is prepared to launch commercialization programs if regulatory approvals are secured. In all of its current and proposed future markets, the Company seeks to optimize the balance of time (and cost) to market and long-term benefit to the Company. o In-License and Develop Readily Commercializable Proprietary Drugs The Company does not engage in drug discovery programs. Instead, SciClone seeks to in-license pharmaceutical compounds and to focus its resources on the development and commercialization of such compounds. The Company's principal in-licensing targets are specialist oriented, highly differentiated, intellectual property-protected, readily commercializable pharmaceutical products, particularly products which may be eligible for accelerated approval as potential therapies for life-threatening or severely debilitating diseases with limited or no therapeutic alternatives. In targeting such products, the Company seeks to reduce the risk, time and cost traditionally associated with the commercialization of pharmaceuticals. o Capitalize on Global Sales and Marketing Capabilities The Company has sales and marketing capabilities in targeted markets in the Asia-Pacific region, the Middle East and Latin America. The Company has also established foreign advisory boards and professional relationships to facilitate sales in such markets. The Company has expanded its sales and marketing capabilities in such markets by entering into arrangements with established local companies capable of keeping pace with changing local customs and regulatory requirements. ZADAXIN(R) Thymosin Alpha 1 ZADAXIN thymosin alpha 1 is a naturally occurring 28 amino acid peptide that is produced for therapeutic use through chemical synthesis. Thymosin alpha 1 appears to have significant immunostimulatory properties, having raised lymphocyte (white blood cell) counts and enhanced immune responses in a substantial number of patients. Neither the drug's exact mechanism of action nor the receptor for its stimulatory properties has been identified. The drug appears to act on immune cells that have been stimulated by infection or other agents and does not appear to produce the side effects associated with other immunostimulatory molecules, which can include fever, headache, chills, fatigue, nausea and inflammation. To date, over 1,500 patients have received thymosin alpha 1 with few or no significant drug-related side effects. Based on more than seventy (70) clinical trials conducted to date, the Company believes that thymosin alpha 1, either alone or in combination with other therapies, may have application across a broad spectrum of diseases, including hepatitis B and C, cancer, AIDS and other immune system diseases. Under an agreement the Company entered into in 1994 with Alpha 1 Biomedicals, Inc. ("Alpha 1"), the Company obtained marketing, development and manufacturing rights to thymosin alpha 1 that are now worldwide, with the exception of Italy, Spain and Portugal. Under the Alpha 1 agreement, the Company also acquired control over Alpha 1's patent portfolio for the drug. The Company is using the trade name ZADAXIN for thymosin alpha 1. -4- The Company has received approval to market and has recently begun marketing ZADAXIN for the treatment of chronic hepatitis B in China, the Philippines and Singapore and has filed for approval to market ZADAXIN for this indication in eleven other countries, primarily in Asia, the Middle East and Latin America and intends to make filings in additional countries. Sales of ZADAXIN are not significant at this time. No assurance can be given that ZADAXIN approvals will be obtained in additional countries in a timely fashion or at all. The Company's launch of ZADAXIN in China, the Philippines and Singapore is the first commercial introduction of ZADAXIN by the Company, and no assurance can be given that commercialization of ZADAXIN will prove successful. Future sales of the product will be dependent on market acceptance and successful distribution. 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, to obtain additional marketing approvals or to successfully commercialize the drug would have a material adverse effect on the Company. Hepatitis B Hepatitis B is the second most common chronic infectious disease worldwide. It is transmitted through blood transfusions, contaminated needles, sexual contact and perinatally. 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 virus. Among carriers of the hepatitis B virus, many have asymptomatic or minimal disease, with no clinically evident symptoms. According to a study published in Hepatology, a significant percentage of carriers have chronic persistent hepatitis, with or without clinically evident symptoms and with evidence of mild liver inflammation, or chronic active hepatitis, with evidence of liver damage. Carriers of the hepatitis B virus have a 200-fold increased chance of developing primary liver cancer, the single largest cause of cancer mortality globally, and a significant number develop cirrhosis of the liver. The primary existing therapy for hepatitis B is alpha interferon. Alpha interferon is a protein that is produced commercially using recombinant DNA techniques. Alpha interferon is approved for treatment of hepatitis B in the United States and Europe, as well as in Hong Kong, Taiwan, China, Japan and other countries. Set forth below is more detailed information regarding the status of development of ZADAXIN as a therapy for hepatitis B in specified countries. China. The Company launched ZADAXIN in China in January 1997 after receiving a license to market ZADAXIN in China as a monotherapy (and for use in combination with alpha interferon) for the treatment of chronic hepatitis B from the People's Republic of China Ministry of Public Health (MOPH) in September 1996. This product launch marked the first introduction of ZADAXIN by the Company anywhere in the world. The MOPH approval was based on a regulatory package assembled from U.S. and European data in addition to a locally required randomized and controlled clinical trial to evaluate the efficacy of ZADAXIN for patients suffering from hepatitis B. Patient response rates were prospectively defined in the study protocol as those patients whose hepatitis B virus DNA ("HBV DNA") and hepatitis B e-antigen ("HBeAg") levels were undetectable after six months of treatment. HBV DNA is a measure of hepatitis B viral load while HBeAg, a protein synthesized by the hepatitis B virus, is a sign of viral replication. The study report submitted to the MOPH identified a statistically significant response rate among patients treated with the combination thereby compared with patients treated with alpha interferon or ZADAXIN alone. There were no significant drug-related side effects or toxicity reported with ZADAXIN in connection with this trial. -5- The MOPH estimates that there are more than 120 million carriers of the hepatitis B virus in China of whom 12 million are currently active carriers. Philippines. The Company launched ZADAXIN in the Philippines as a monotherapy for the treatment of chronic hepatitis B in January 1997 after receiving approval by the Philippines Department of Health Bureau of Food and Drug (BFAD). BFAD's approval was based on clinical data from studies conducted in the U.S. and Europe indicating ZADAXIN to be safe and effective for patients suffering from chronic hepatitis B. BFAD estimates that there are more than 6.5 million carriers of the hepatitis B virus in the Philippines, of whom an estimated 10 to 15 percent are chronic carriers. Singapore. The Company received approval to market ZADAXIN in Singapore for commercial sale for treatment of chronic hepatitis B in September 1993. The Company's approval requires a patient surveillance program which will continue for such period as the Ministry of Health deems necessary. Sales of ZADAXIN in Singapore are not significant at this time. Japan. A phase I single and multiple dose ranging and pharmacokinetic trial and an open-label, dose ranging phase II trial involving approximately 60 patients have been completed by Schering Plough K.K. ("SPKK") in Japan. In October 1996, the Company expanded and amended its license agreement with SPKK. The Company agreed to transfer exclusive Japanese rights for thymosin alpha 1 to SPKK and SPKK agreed to pay the Company certain fees upon achievement of milestones and committed to invest additional funds to develop and commercialize ZADAXIN in Japan. SPKK will continue the development of thymosin alpha 1 as a monotherapy for hepatitis B, and study the compound in combination with its Intron(R) A (interferon alpha 2b) for the treatment of hepatitis C. Clinical studies for these two indications are planned to commence during the second quarter of 1997 and certain costs will be shared by the Company and SPKK. If ZADAXIN is approved in Japan, SPKK has committed to purchase the drug from the Company at a price based on SPKK's sales price. SPKK has a substantial commitment to alpha interferon, which is an approved therapy for hepatitis B and C in Japan. There can be no assurance that SPKK will continue its clinical trials or that it will seek to commercialize ZADAXIN in Japan. In any event, a full complement of Japanese clinical data will be required before any approvals for ZADAXIN may be sought in Japan. Even if SPKK completes its clinincal trials, there can be no assurance that clinical results will be favorable or sufficient to obtain product approval in Japan. There are estimated to be 2.6 million carriers of hepatitis B in Japan. United States. Alpha 1 sponsored a randomized, double-blinded trial of thymosin alpha 1 for chronic active and chronic persistent hepatitis B in the United States. The trial was conducted at three centers and produced data for 99 patients. A formal analysis of the full data from the trial has now been completed and was presented in May 1995 at the spring meeting of the American Gastroenterology Association. The data showed a long-term HBV DNA and HBeAg negative status in 25% of patients with chronic hepatitis B compared with such a response in 13% of those who received placebo. Taiwan. The Company will file for regulatory approval to market ZADAXIN in Taiwan after receiving results from a multicenter open-label phase III chronic hepatitis B trial of ZADAXIN it sponsored in Taiwan. The audited results of this trial showed 37 percent of patients responded to ZADAXIN, compared to 25 percent for patients taking a placebo. Although the results of the Taiwan trial did not achieve statistical significance, the Company believes this trial has produced the best results of any randomized and controlled Hepatitis B trial in Taiwan. The Company knows of no randomized and -6- controlled hepatis B clinical trial conducted in Taiwan using medically accepted end points of HBV DNA and HBeAg negativity that has produced statistically significant results including clinical trials of the approved hepatitis B therapy in Taiwan, alpha interferon. In a meta analysis -- the combining and analyzing of related data -- of two U. S. trials and the Taiwanese trial, ZADAXIN's overall response rate was 36 percent compared to 19 percent for the placebo, a satistically significant result (p = 0.04). The results also showed no indications of drug toxicity and no drug-related adverse experiences in the trials. Over 3 million Taiwanese, or 17% of the population, are carriers of the hepatitis B virus. Due to the seriousness of the health threat posed by hepatitis B, Taiwan's Department of Health has for over a decade conducted an intensive program designed to control and prevent the disease. Additional Trials. In October 1996, thymosin alpha 1 achieved statistically significant results in the treatment of chronic hepatitis B in a multicenter, randomized and controlled study conducted at the University of Bologna, Italy. A total of 33 patients were enrolled and randomly assigned to receive either thymosin alpha 1 twice weekly for six months or alpha interferon three times weekly for six months. In addition, 15 clinically similar patients who had never been treated with alpha interferon were used as historical controls. All patients were hepatitis B surface antigen (HBsAg) positive, HBV DNA positive, hepatitis B e-antibody (HBeAb) positive and had elevated alanine transaminase (ALT) levels. After six months of observation following treatment, the investigator reported that complete response was observed in seven of the 17 patients in the thymosin alpha 1 treatment group, four of 16 patients in the alpha interferon treatment group, and 1 of 15 patients in the historical control group. Complete response was defined as ALT normalization and HBV DNA loss. At the completion of the 12 month study, the response rate of the thymosin alpha 1 treated group, but not of the alpha interferon treated group, was statistically significantly higher than the response rate of the control group. The researchers concluded that thymosin alpha 1 appeared to be a safe and effective alternative treatment for HBeAb positive chronic hepatitis. A second team of researchers in Italy reported the results of an open label trial to study the efficacy of combination therapy using thymosin alpha 1 and low dose natural alpha interferon in 15 patients with chronic hepatitis B, including 11 patients who had previously failed standard alpha interferon therapy. All 15 enrolled patients were HBsAg and HBV DNA positive and had elevated ALT levels. Patients were treated for six months and followed for an additional 12 months. Sustained response at 18 months was defined as the absence of HBV DNA and normal or near normal ALT levels. At the conclusion of the 18 month study, nine of the 15 patients showed sustained response, including six of 11 patients who had previously not responded to standard alpha interferon treatment. Of the nine responders, five patients seroconverted to HBeAg negative status and two patients were HBeAg negative at entry. In addition, six of the nine patients responding achieved HBsAg negative status, a long-term marker of clearance in hepatitis B and one of the final markers to clear in achieving long-term sustained remission. There can be no assurance, however, that final audited results from these trials will be favorable or statistically significant. Further, even if the final results from these trials are favorable and statistically significant, there can be no assurance that significant additional trials will not be required in those and other countries before thymosin alpha 1 is approved in any such country for the treatment of hepatitis B or that the results of such additional trials will be favorable. -7- Hepatitis C Hepatitis C can be transmitted by blood transfusions and contaminated needles. The mode of transmission in many cases is unknown. Approximately 10% to 20% of hepatitis C carriers may develop cirrhosis, and up to 40% of these individuals may develop liver cancer. The incidence of hepatitis C is not yet fully known, but an article in the Annals of Internal Medicine indicates that in Japan alone there are more than l million cases of chronic hepatitis C. The Centers for Disease Control estimate that 3.9 million Americans are infected with the hepatitis C virus, and the American Liver Foundation estimates that an additional 170,000 new cases are reported each year. A randomized, double-blinded controlled phase III study of chronic hepatitis C patients receiving combination therapy consisting of thymosin alpha 1 and alpha interferon was completed during 1996 at Fitzsimmons Army Medical Center, Walter Reed Medical Center and the University of Cincinnati. Patient enrollment for the trial was completed in January 1996, with final enrollment of approximately 110 patients. In this study, patients are receiving thymosin alpha 1 and alpha interferon, alpha interferon alone or placebo for 6 months followed by 6 months of observation. The combination of ZADAXIN and alpha interferon demonstrated statistically significant higher efficacy at the end of treatment than single agent alpha interferon, the only currently FDA-approved therapy for chronic hepatitis C. Among evaluable patients, biochemical response was observed in 41.9 percent of patients treated with the combination therapy of ZADAXIN plus alpha interferon, 16.6 percent among patients treated with alpha interferon only and 2.7 percent among the patients who received placebo. Among patients with hepatitis C genotype 1a or 1b, which are the most resistant to current forms of treatment, 31 percent of patients treated with combination therapy achieved a biochemical response compared to 12 percent of those treated with alpha interferon only. An additional study of fifteen patients with chronic hepatitis C conducted by the Institute of Experimental Medicine in Rome achieved significant results. All patients enrolled had biopsy confirmed chronic hepatitis, raised ALT values equal to or greater than 1.5 times the upper normal limit, positive serum hepatitis C virus ("HCV RNA") by polymerase chain reaction ("PCR") testing, and compensated liver disease. Thirteen patients had HCV RNA genotype 1b which in published reports on the treatment of hepatitis C is often associated with cirrhosis, liver cancer and a poor response to treatment with single agent alpha interferon, currently the only FDA approved therapy for chronic hepatits C. The patients in this trial received a combination of lymphoblastoid alpha interferon and thymosin alpha 1 therapy for one year and were followed for an additional six months. A response to treatment was defined at 12 months as a negative serum HCV RNA by PCR. A sustained response was defined as a negative serum HCV RNA by PCR six months after completion of treatment. After six months of treatment, 47 percent of the patients were found to be HCV RNA negative. After one year of treatment, 73 percent of the patients were HCV RNA negative. After the six month follow-up period, 40 percent of the patients showed a sustained response to treatment and continued to be HCV RNA negative. Among the hepatitis C genotype 1b patients, 69 percent were HCV RNA negative after one year of treatment with 39 percent exhibiting sustained response after the six-month follow-up. There can be no assurance that significant additional trials will not be required in the United States or other countries before thymosin alpha 1 is approved in such countries for the treatment of hepatitis C or that the results of additional trials will be favorable. In fact, additional trials will be necessary in the U.S., and approval is not assured in the U.S. or for that matter, in other countries. -8- AIDS A large multicenter trial of the AZT, alpha interferon and thymosin alpha 1 combination therapy in human immunodeficiency virus (HIV)-infected patients sponsored and funded by the Italian Ministry of Health was completed in January 1996 after a pilot study at the University of Rome found the combination of thymosin alpha 1 with alpha interferon and AZT was well tolerated and resulted in a statistically significant increase (paired t-test) in CD4 counts compared to groups receiving AZT alone or AZT plus alpha interferon. This multicenter study was a randomized, open-label trial enrolling HIV-positive individuals with CD4+ T cell lymphocyte counts between 500 and 200, asymptomatic or with AIDS-related complex, who had received AZT for no more than one month. 91 patients were randomized into three treatment arms: AZT, AZT plus alpha interferon, and AZT plus alpha interferon and thymosin alpha 1. The results of this trial found that thymosin alpha 1 administered in combination with the anti-viral drug AZT and alpha interferon boosted the t-cell count in HIV - infected patients by a median of 64 points over the 12-month period with the other patient groups achieving no clinically relevant increase. There can be no assurance, however, that the drug will be approved to treat HIV-infected patients. Further, even if approval for thymosin alpha 1 to treat HIV-infected patients is obtained in Italy, there can be no assurance that significant additional trials will not be required in the United States, Europe or other countries before similar approvals may be granted in such countries or that the results of additional trials will be favorable. CPX Cystic Fibrosis The Company was cleared by the United States Food and Drug Administration (the "FDA") in January 1997 to begin clinical studies of its CF drug, CPX, in the United States. Under an Investigational New Drug Application filed with the FDA in December 1996, the Company will conduct Phase I clinical studies of CPX directly in cystic fibrosis patients rather than healthy volunteers. Under the trial protocol, developed in conjunction with the Cystic Fibrosis Foundation, patients will be enrolled at five cystic fibrosis centers in the United States. In this Phase I study of CPX, physicians are seeking to establish the safety and pharmacokinetic parameters of CPX for determining optimal dose for administration of the drug. In addition, the physicians also are seeking to measure the effect of CPX's ability to normalize chloride secretion by defective CF cells via repairing the basic molecular defect at the root cause of CF. There can be no assurance that the final results from this trial will be favorable or statistically significant or that, even if the results of this or subsequent trials are favorable, the drug will be approved to treat CF patients. CF is an inherited disorder that affects about 30,000 people in the U.S. and 55,000 worldwide. It is the most common fatal genetic defect in the United States today. CF is caused by a faulty gene that produces a defective protein, the function of which is to transport sodium and chloride (salt) within epithelial cells (which line organs such as the lungs and pancreas) to the cells' outer surfaces. CF causes the body to produce an abnormally thick, sticky mucus. This abnormal mucus clogs the lungs and leads to fatal infections. The thick CF mucus also obstructs the pancreas, preventing enzymes from reaching the intestines to digest food. Currently, there are no known cures for CF, and the median life expectancy of a CF patient is 30 years of age. -9- The Company may experience delays and encounter difficulties in clinical trials of CPX. In addition, there can be no assurance that any clinical trials, including those currently underway, will provide statistically significant evidence of the efficacy of CPX in treating any of the target diseases. A failure to demonstrate the efficacy of CPX in ongoing clinical trials, to obtain additional approvals or to successfully commercialize such product would have a material adverse effect on the Company. Marketing and Sales SciClone's international marketing and sales strategy is to establish regional sales and marketing capabilities and strategic alliances to commercialize and assist in marketing its pharmaceuticals. The Company currently has international offices in Singapore, Hong Kong, Taiwan and Japan. If marketing approval is received for ZADAXIN, the Company plans to establish a marketing program for the drug, including the positioning and pricing of the drug, and expects that local pharmaceutical distributors will import, warehouse and distribute the drug. In Japan, the Company has licensed SPKK to develop and market ZADAXIN. The Company has established distribution arrangements with local pharmaceutical distribution companies in over 25 countries, primarily in the Asia-Pacific Region, the Middle East and South America. However, no assurance can be given that any such distribution arrangement will remain in place or prove successful. The Company's profitability and financial condition will be highly dependent on sales in foreign jurisdictions, where sales and operations are subject to inherent risks, including difficulties and delays in obtaining pricing approvals and reimbursement, 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. In addition, in many countries where the Company has marketing rights for ZADAXIN, government resources and per capita income levels may be so low that the Company's products will be prohibitively expensive for a large percentage of the population. In such countries, there can be no assurance that the Company will be successful in marketing its products on economically favorable terms, or at all. Manufacturing The Company does not intend to construct or operate its own manufacturing facilities. Rather, it intends to source ZADAXIN, CPX and any future products through contract manufacturing and supply agreements. The Company has entered into supply agreements with experienced peptide manufacturers in the U.S. and Europe for the supply of bulk thymosin alpha 1 and has established an inventory sufficient to fulfill its expected requirements in the near term. The Company is in the process of negotiating an arrangement with another manufacturer for the final manufacture and packaging of ZADAXIN upon supply of bulk drug. The Company currently contracts with a major pharmaceutical Company for the supply of bulk CPX and another manufacturer for the packaging of CPX upon supply of bulk drug. The Company has experienced delays of supply of thymosin alpha l bulk drug in the past and could do so again in the future. To be successful, the Company's products must be manufactured in commercial quantities in compliance with regulatory requirements and at acceptable cost. While the Company believes it has and will be able in the future to establish manufacturing relationships with suppliers experienced in -10- their businesses, there can be no assurance that the Company will establish long term manufacturing relationships with suppliers or that these suppliers will prove satisfactory. 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, and possibly delay commercialization of such products and impair their competitive position, which would have a material adverse effect on the business and financial condition of the Company. Sponsored Research and Development For the years ended December 31, 1996, 1995 and 1994, the Company expended $9,904,000, $10,386,000 and $9,282,000, respectively, in Company sponsored research and development activities (excluding any special charges). 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 United States 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 United States and foreign countries is a significant factor in the manufacturing of products for the Company and the marketing of products by the Company, 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 United States, they will be regulated in accordance with the Federal Food, Drug and Cosmetic Act. If the Company were to market biologics, such products would be regulated under both the Federal Food, Drug and Cosmetic Act and the Public Health Service Act. The standard process required by the FDA before a pharmaceutical agent may be marketed in the United States includes (i) preclinical laboratory and animal tests, (ii) submission to the FDA of an application for an investigational new drug exemption ("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 a Product License Application ("PLA") with respect to biologics, and (v) FDA approval of the NDA or PLA prior to any commercial sale or shipment of the drug or biologic. In addition to obtaining FDA approval for each product, each domestic manufacturing establishment must be registered with the FDA. For biologic products, the manufacturer must also submit and obtain FDA approval of an Establishment License Application ("ELA"). It is the FDA's practice in cases of approval to approve the PLA for a product and the ELA for the facility that will manufacture the product at the same time. Until approval of both the PLA and ELA, commercial marketing of a biologic may not begin. For certain biologic products, FDA requires approval of only a single license application, referred to as a Biologic License Application (BLA). For drugs subject to the NDA approval process, commercial marketing may not begin until the NDA is approved. Domestic -11- manufacturing establishments are subject to inspections by the FDA and by other federal, state and local agencies and must comply with current United States Good Manufacturing Practices ("GMP"). In the United States, clinical trial programs generally involve a three-phase process. Typically, phase I 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 II 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 III, 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 PLA for approval to commence commercial sales. In responding to an NDA or PLA, 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 or PLA, the FDA may require further post-marketing studies, referred to as phase IV studies. When used in this Report in connection with trials and filings in other countries, terms such as "phase I," "phase II," "phase III," "phase IV" and "new drug application" refer to what the Company believes are comparable trials and filings in such other countries. The FDA has issued regulations intended to accelerate the approval process for the development, evaluation and marketing of new therapeutic products intended to treat life-threatening or severely debilitating illness, especially where no satisfactory alternative therapies exist. These regulations provide for early consultation between the sponsor and the FDA in the design of both preclinical and clinical testing procedures. These regulations allow for phase I clinical studies to be carried out in patients rather than in healthy volunteers, as is customary, followed by studies to establish efficacy in phase II trials. If the results of the phase I and phase II trials support the safety and efficacy of the therapeutic agent and their design and execution are deemed satisfactory upon review by the FDA, marketing approval can be sought at the end of the phase II trials. If applicable, this procedure may shorten the traditional drug development process in the United States by an estimated 2-3 years. Notwithstanding the foregoing, approval may be denied by the FDA or phase III trials may be required. The FDA may also seek an applicant's agreement to perform post-approval phase IV studies. 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 or biologic. Results of post-marketing programs may limit or expand the further marketing of the products. Further, if there are any modifications to the drug or biologic, including changes in indication, manufacturing process, labeling, or a change in manufacturing facility, an NDA or PLA supplement may be required to be submitted to the FDA. The Orphan Drug Act of 1983, as amended (the "Orphan Drug Act"), provides 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 United States or, for a disease that affects more than 200,000 individuals in the United States, where the sponsor does not realistically anticipate its product becoming profitable. Under the Orphan Drug Act, 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. -12- Legislation may be introduced in the United States Congress that would restrict the duration of the market exclusivity of an orphan drug, and there can be no assurances that the benefits of the existing statute will remain in effect. Under the Drug Price Competition and Patent Term Restoration Act of 1984, 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. The Company may seek the benefits of this statute, 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 product in those countries. The approval process varies from country to country and the time required for approval may be longer or shorter than that required for FDA approval. In general, foreign countries use one of three forms of regulatory approval process. In one form, local clinical trials must be undertaken and the data must be compiled and submitted for review and approval. In Japan, for example, the process is time-consuming and costly because all clinical trials and most 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 United States, Japan, most European 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 United States. In general, a drug or biologic that has been approved for commercial sale in the United States may be exported for commercial sale. In 1996, export reform legislation was passed in the United States that provides that an unapproved drug or biologic may be exported to a "listed country" for investigational puposes 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 or biologics to an unlisted country for clinical trial purposes continues to require FDA approval, either under an IND or pursuant to a written request from either the person seeking to export the product or from the foreign country to which the product is to be exported. The Company has obtained, where necessary, FDA approval for all exports of ZADAXIN from the United States to date for clinical trial purposes, and will seek to obtain FDA approval, where necessary, for any future shipments from the United States. The export reform legislation further provides that an unapproved drug or biologic can be exported to any country for commercial purposes without prior FDA approval, provided that the drug or biologic: (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 or biologies that do not have marketing authorization in a listed country continue to require FDA export approval. -13- Pursuant to the Prescription Drug User Fee Act of 1992, drug and biologic manufacturers are required to pay three types of user fees: (1) a one-time application fee for approval of an NDA or PLA; (2) an annual product fee imposed on prescription drug and biologic products after FDA approval; and (3) an annual establishment fee imposed on facilities used to manufacture prescription drugs or biologics. The fee rates for 1997 are: (1) $205,000 one-time fee for an application requiring clinical data, or $102,500 fee for an application not requiring clinical data; (2) $115,700 annual establishment fee; and (3) $13,200 annual product fee. These fee amounts are likely to increase in the future. Among the conditions for NDA or PLA approval in the United States is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform to GMP. 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 trials, 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 because all clinical trials and most preclinical studies must be conducted there. The Company is currently pursuing regulatory approvals of ZADAXIN in a number of countries, but there can be no assurance that the Company will ultimately obtain approvals in such countries in a timely and cost-effective manner or at all. The marketing approval for ZADAXIN in Singapore requires a patient surveillance program to continue study of the drug's safety and efficacy. Adverse results in such program could result in the placement of restrictions on the use of ZADAXIN or revocation of the approval in Singapore. Failure to comply with applicable United States or foreign regulatory requirements can, among other things, result in 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 or any future products of the Company. Third Party Reimbursement The Company's ability to successfully commercialize its products may depend in part on the extent to which reimbursement for the cost of such products will be available from government health administration authorities, private health insurers and other organizations. Significant uncertainty exists as to the reimbursement status of new therapeutic products and there can be no assurance that third party reimbursement will be available for therapeutic products the Company might develop. In many of the foreign countries in which the Company intends to operate, reimbursement of ZADAXIN under government or private health insurance programs will not be available. In the United States, health care reform is an area of increasing national attention and a -14- priority of many governmental officials. Certain reform proposals, if adopted, could impose limitations on the prices the Company will be able to charge in the United States for its products or the amount of reimbursment for the Company's products from governmental agencies or third party payors. Patents and Proprietary Rights 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 intellectual property rights in many countries in SciClone's ZADAXIN territory can be expected to be problematic or unpredictable. The Company is the exclusive licensee (with limited exceptions) of a number of foreign patents directed to the thymosin alpha 1 composition of matter which is owned by Hoffman-La Roche AG and the Board of Regents of the University of Texas System. The majority of these foreign patents are due to expire in the late 1990's. SciClone's rights to these patents emanate from license agreements from Hoffman-La Roche AG to Alpha 1, and the August 1994 license agreement between Alpha 1 and SciClone. Within the Company's territory, composition of matter protection for thymosin alpha 1 exists in Canada, a majority of European countries, Japan, Australia, New Zealand, Singapore, the Philippines and South Africa. The Company is currently seeking a patent term extension in Australia and is exploring the feasibility of extending patent terms in Europe. Process patents owned by Alpha 1 and exclusively licensed to SciClone are directed to methods of making thymosin alpha 1 and have issued in a majority of European countries and Taiwan. Other composition, process and use patent applications are pending in countries in SciClone's territory. In addition, patents for which Alpha 1 is a co-patentee covering the use of thymosin alpha 1 to treat hepatitis C have issued in Taiwan, Australia, South Africa and have recently been allowed in many European countries. Patents under which SciClone is licensed have issued: in the United States and Australia covering the use of thymosin alpha 1 to treat small cell and non-small cell lung cancer; in the United States, South Africa and Taiwan covering the use of thymosin alpha 1 to treat autoimmune hepatitis; in Japan covering the treatment of chronic hepatitis B using thymosin alpha 1; in Taiwan covering the use of thymosin alpha 1 to treat septic shock; and in Taiwan and South Africa covering the treatment of infertility in mammalian males using thymosin alpha 1. Patents which SciClone owns have issued in the United States, Taiwan and South Africa covering the use of thymosin alpha 1 to treat hepatitis B carriers with minimal disease. The Company is the exclusive licensee of an issued, U.S. patent coverning the use of CPX to treat cystic fibrosis, as well as other pending domestic and foreign patent applications covering CPX analogues and their use in treating cystic fibrosis. 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, manufacture or market its products or maintain its competitive position with respect to its products. Other companies obtaining patents claiming products or processes useful to the Company may bring infringement actions against the Company. 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. -15- 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. In addition to patent protection, the Company intends to use other means to protect its proprietary rights. A type of marketing exclusivity period may be available under regulatory provisions in certain countries including the United States, 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. Orphan drug protection 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 chronic hepatitis B in the United States. Recognition and protection of trademarks for the product is being accomplished through a world-wide filing of trademark applications for ZADAXIN and other trademarks which will appear on the commercial packaging of the product and will be 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 also expects to implement anti-counterfeiting measures on commercial packaging as well as registration of packaging with customs departments in countries where such procedures exist. The Company intends to pursue similar types of protection for CPX. The Company also relies upon trade secrets, which it seeks to protect, in part, by 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. Employees As of December 31, 1996, the Company had 36 employees, 25 in the United States and 11 abroad. The Company considers its relations with its employees to be satisfactory. Item 2. Properties The Company has leased approximately 14,000 square feet of office space at its headquarters in San Mateo, California and limited office space for marketing purposes in Singapore, Hong Kong, Taiwan and Japan. 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 None. -16- Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. -17- 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 tier of The Nasdaq National Stock 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 1996 High Low 4th quarter $ 13 $ 7 3/4 3rd quarter 14 3/4 6 7/8 2nd quarter 15 1/8 11 1/4 1st quarter 16 1/8 4 3/4 1995 High Low 4th quarter $ 8 7/8 $ 3 3/4 3rd quarter 9 3/4 5 3/4 2nd quarter 7 3/4 4 3/8 1st quarter 8 5/8 5 1/2 As of March 15, 1997, there were approximately 235 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. -18- 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.
Statements of Operations data: 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Product sales $ 703,082 $ 273,353 $ -- $ -- $ -- Cost of product sales 740,494 737,460 -- -- -- ------------ ------------ ------------ ----------- ------------ Gross profit (37,412) (464,107) -- -- -- Operating expenses: Research and development 9,903,536 10,386,312 9,282,051 8,122,716 2,707,220 Special research and development charges -- -- 3,470,000 -- 2,278,914 Marketing 4,240,208 4,323,327 4,375,447 1,771,985 768,731 General and administrative 3,182,972 2,903,991 3,810,696 2,895,513 2,251,670 ------------ ------------ ------------ ----------- ------------ Total operating expenses 17,326,716 17,613,630 20,938,194 12,790,214 8,006,535 ------------ ------------ ------------ ----------- ------------ Loss from operations (17,364,128) (18,077,737) (20,938,194) (12,790,214) (8,006,535) Interest expense and amortization of debt discount -- -- -- (3,993) (365,557) Interest and investment income, net 2,618,381 3,302,307 3,056,869 1,115,076 689,418 ------------ ------------ ------------ ----------- ------------ Net loss before taxes (14,745,747) (14,775,430) (17,881,325) (11,679,131) (7,682,674) Income and foreign withholding taxes -- -- -- -- 4,888 ------------ ------------ ------------ ----------- ------------ Net loss $(14,745,747) $(14,775,430) $(17,881,325) $(11,679,131) $ (7,687,562) ============ ============ ============ =========== ============ Net loss per share $ (0.85) $ (0.88) $ (1.02) $ (0.89) $ (0.73) ============ ============ ============ =========== ============ Weighted average shares used in computing per share amounts 17,421,312 16,881,652 17,507,564 13,098,462 10,544,207 Balance Sheet data: Cash, cash equivalents and investments $ 35,105,708 $ 47,389,827 $ 63,670,287 $ 284,254 $ 19,357,261 Working capital 9,223,793 19,283,278 44,796,629 4,995,598 17,748,185 Total assets 42,727,687 54,150,795 67,012,993 48,095,931 20,162,386 Total shareholders' equity 37,465,628 49,555,262 62,754,031 45,520,246 18,030,613
-19- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company is an international biopharmaceutical company involved in the acquisition, development and commercialization of pharmaceuticals worldwide. The Company focuses on specialist oriented products that address significantly unmet chronic or life-threatening diseases. The Company concentrates on infectious diseases, such as hepatitis B and C, cancer, immune system disorders, and cystic fibrosis. Currently, the Company has acquired two drugs for development and commercialization: ZADAXIN(R) thymosin alpha 1, for hepatitis B and C, cancer and immune system disorders; and CPX for cystic fibrosis. To date, the Company's principal focus has been the development and commercialization of ZADAXIN. From commencement of operations through December 31, 1996, the Company incurred a cumulative net loss of approximately $71.4 million. The Company expects its operating expenses to increase over the next several years as it expands its research and development, clinical testing and marketing capabilities. The Company's ability to achieve profitable operations is primarily dependent on securing regulatory approvals for ZADAXIN in additional countries, successfully launching ZADAXIN once approved and meeting increased demand for ZADAXIN, if it arises. In addition, other factors may also impact the Company's ability to achieve a profitable level of operations such as successful development of CPX, acquiring rights to additional drugs, and entering into and extending agreements for product development and commercialization, where appropriate. There can be no assurance that the Company will be able to attain these objectives or that the Company will ever achieve a profitable level of operations. The Company's operating results may fluctuate from period to period as a result of, among other things, the timing and costs associated with clinical trials and the regulatory approval process, and the acquisition of additional product rights. The Company participates in a highly dynamic industry, which often results in significant volatility of the Company's common stock price. Setbacks in clinical trials, in the regulatory approval process or in 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. -20- Results of Operations Product sales were approximately $703,000 and $273,000 for the years ended December 31, 1996 and 1995, respectively. There were no product sales for 1994. Currently, the Company has received approval to market ZADAXIN in China, the Philippines and Singapore. In addition, the Company has filed for approval to market ZADAXIN in several countries and anticipates additional filings in other countries. As a result, the Company expects product sales to increase in 1997 and beyond, upon the commencement of the commercial launch of ZADAXIN in its existing approved markets and additional markets once regulatory approvals are secured. The level of such product sales increase is dependent upon additional ZADAXIN marketing approvals and successfully launching ZADAXIN. Although the Company remains optimistic regarding the prospects of ZADAXIN, there can be no assurance that the Company will achieve significant levels of product sales. Cost of product sales was approximately $740,000 and $737,000 for the years ended December 31, 1996 and 1995, respectively. There was no cost of product sales for 1994. Cost of product sales in 1996 and 1995 primarily consists of the fixed costs associated with acquiring and warehousing inventory and, to a lesser extent, the direct product cost. The Company expects cost of product sales to vary from quarter to quarter, dependent upon the level of product sales and the absorption of fixed product-related costs. Research and development expenses were approximately $9,904,000, $10,386,000, and $12,752,000 for the years ended December 31, 1996, 1995, and 1994, respectively. For the year ended December 31, 1996, the decrease in research and development expenses as compared to 1995 was primarily attributable to decreases in regulatory expenses and in costs associated with decreased ZADAXIN clinical trials, essentially due to the completion of the ZADAXIN Taiwan Phase III Hepatitis B trial during the first half of 1996, offset by increased preclinical development expenses associated with CPX. In April 1996, the Company acquired an exclusive license to CPX, a synthetic compound developed by the National Institutes of Health as a potential treatment for cystic fibrosis. The Company has incurred additional preclinical development expenses to initiate the clinical development of this compound. For the year ended December 31, 1995, the decrease in research and development expenses as compared to 1994 was primarily attributable to a one-time special charge of $3,470,000 related to the Company's acquisition of U.S. and European thymosin alpha 1 rights under an agreement with Alpha 1 Biomedicals, Inc. ("Alpha 1") in 1994. This 1995 decrease was offset by increased professional service expenses, primarily consulting fees, associated with ZADAXIN development activities in the U.S. and Europe. The Company is currently finalizing its U.S. and European ZADAXIN clinical trial strategy and the results of this review will have a significant effect on the Company's research and development expenses in the future. In addition, the Company plans to initiate clinical trials for CPX in 1997, which will have an impact on research and development expenses. In general, the Company expects research and development expenses to increase over the next several years and to vary quarter to quarter as the Company pursues its strategy of initiating additional clinical trials and testing, acquiring product rights, and expanding regulatory activities. -21- Marketing expenses were approximately $4,240,000, $4,323,000, and $4,375,000 for the years ended December 31, 1996, 1995, and 1994, respectively. The decrease in 1996 as compared to 1995 is primarily attributable to decreased payroll costs related to an executive officer who left the Company in 1995, offset by increased professional services, primarily consulting services expenses, regarding preparations for the launch of ZADAXIN in its approved markets in early 1997. The decrease in 1995 as compared to 1994 was primarily attributable to decreased professional services related to ZADAXIN marketing activities and materials offset by increased personnel costs, primarily associated with severance costs related to an executive officer who left the Company in 1995. 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 approximately $3,183,000, $2,904,000, and $3,811,000 for the years ended December 31, 1996, 1995, and 1994, respectively. The increase in 1996 as compared to 1995 is primarily attributable to increased payroll costs offset by decreased expenses for professional services, primarily legal services and consulting fees. The decrease in 1995 from 1994 was primarily attributable to decreased professional service expenses, primarily legal services associated with a 1994 securities class action lawsuit and the Company's 1994 legal proceedings with Alpha 1. These legal proceedings were completed in early 1995 and late 1994, respectively. 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 to support increased expenditures on clinical trials and testing, and regulatory, pre-commercialization and marketing activities. Net interest and investment income was approximately $2,618,000, $3,302,000, and $3,057,000 for the years ended December 31, 1996, 1995, and 1994, respectively. The decrease in 1996 as compared to 1995 resulted from decreased interest and investment income due to lower average invested cash balances. The increase in 1995 as compared to 1994 resulted from overall increased interest rates during 1995 and gains from the sale of certain short-term investments offset by lower average invested cash balances as compared to 1994. Liquidity and Capital Resources Prior to the Company's initial public offering, the Company's principal sources of funds were equity and debt private placements, salary deferrals by officers and funds advanced by officers. In March 1992, the Company completed its initial public offering of 3,450,000 shares of common stock and 3,450,000 redeemable warrants to purchase common stock, receiving net proceeds of approximately $21,774,000. In August 1993, the Company received approximately $38,100,000 in net proceeds from the exercise of substantially all of the Company's 4,258,231 outstanding Redeemable Warrants, which the Company called for redemption in July 1993. In January 1994, the Company completed a public offering of 2,000,000 shares of common stock, receiving net proceeds of approximately $43,600,000. At December 31, 1996, and 1995, the Company had approximately $35,106,000 and $47,390,000, 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 approximately $14,641,000, $17,098,000, and $12,909,000, for the years ended December 31, 1996, 1995, and 1994 respectively. 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 noncash charges associated with depreciation of furniture and equipment and amortization of deferred compensation in addition to increases in amounts owed to third parties for -22- 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 used in operating activities for the year ended December 31, 1995 was greater than the Company's net loss for such period primarily due to cash used for inventory purchases, the prepayment of certain future period expenses and increases in accounts receivable. These cash uses were partially offset by increases in amounts owed to third parties for goods and services related to clinical trial expenses in addition to noncash charges associated with depreciation and amortization. Net cash used in operating activities for the year ended December 31, 1994 is less than the Company's net loss for such period primarily due to noncash charges associated with depreciation of furniture and equipment, amortization of deferred compensation, and acquisition of in-process technology in addition to increases in amounts owed to third parties for clinical trials, compensation and benefits and goods and services. These amounts were partially offset by increases in payments for accrued professional fees. Net cash provided by investing activities for the year ended December 31, 1996 primarily related to the net sale of approximately $12,319,000 in marketable securities offset by the purchase of approximately $94,000 in equipment and furniture. Net cash provided by investing activities for the year ended December 31, 1995 primarily related to the net sale of approximately $14,729,000 in marketable securities offset by the purchase of approximately $204,000 in equipment and furniture. Net cash used in investing activities for the year ended December 31, 1994 primarily related to the net purchase of approximately $18,957,000 in marketable securities and the purchase of approximately $113,000 in equipment and furniture. Net cash provided by financing activities for the year ended December 31, 1996 related to approximately $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. Net cash used in financing activities for the year ended December 31, 1995 related to the Company's repurchase of approximately $1,925,000 of its common stock offset by approximately $192,000 in proceeds received from the issuance of common stock under the Company's stock option plan. Net cash provided by financing activities for the year ended December 31, 1994 related to approximately $44,731,000 in net proceeds received from the sale of common stock in a public offering and proceeds received from the issuance of common stock under the Company's stock option plan offset by the Company's repurchase of approximately $7,798,000 of its common stock. Management believes its existing capital resources and interest on funds available are adequate to maintain its current and planned operations at least through 1998. However, 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 results of clinical trials and testing, the timing of regulatory approvals, developments in relationships with collaborative partners and the status of competitive products. If the Company cannot eventually generate sufficient funds from operations, it will need to raise additional financing. There can be no assurance that such financing will be available on acceptable terms, or at all. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." As permitted by SFAS 123, the Company accounts for its stock option and employee stock purchase plans under the provisions of Accounting Principles Board Opinion 25 ("APB 25") and related Interpretations. Accordingly, the Company does not recognize compensation expense in accounting for its stock option and stock purchase plans for awards which have an exercise price equal to the fair value of the Company's common stock on the date of the grant. -23- Factors That May Affect Future Results The material contained herein contains certain forward-looking statements, including statements regarding the application of ZADAXIN in disease areas beyond hepatitis B, the potential for regulatory approvals of ZADAXIN and the launching of ZADAXIN in additional markets, and the Company's expectations regarding increases in revenues from ZADAXIN and increases in marketing and research and development expense levels. These statements are subject to certain risks and uncertainties. These risks and uncertainties include the Company's reliance on a single product, ZADAXIN(R) thymosin alpha 1, for its revenues, the absence of regulatory approval for ZADAXIN in significant markets, the expensive, time consuming and uncertain regulatory approval process, risks associated with the manufacture and supply of ZADAXIN, and competition from competing therapies, uncertainties regarding the outcome of the Company's efforts to commercialize additional products, as well as other risks and uncertainties described herein and in the Company's other reports filed with the Securities and Exchange Commission. -24- Item 8. Financial Statements and Supplementary Data SCICLONE PHARMACEUTICALS, INC. FINANCIAL STATEMENTS AT DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994. INDEPENDENT AUDITORS REPORT -25- SciClone Pharmaceuticals, Inc. Consolidated Balance Sheets
Assets December 31, 1996 December 31, 1995 ------------------- ------------------- Current assets: Cash and cash equivalents $ 4,642,590 $ 3,986,307 Short-term investments 5,205,529 15,467,685 Accounts receivable 245,078 108,410 Inventory 2,608,877 2,360,479 Prepaid expenses and other current assets 1,783,778 1,955,930 ------------- ------------ Total current assets 14,485,852 23,878,811 Property and equipment, net 299,405 313,703 Long-term investments 25,257,589 27,935,835 Notes receivable from officers 2,648,292 1,964,065 Other assets 36,549 58,381 ------------- ------------ Total assets $ 42,727,687 $ 54,150,795 ============= ============ Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 639,392 $ 472,477 Accrued compensation and employee benefits 817,774 1,086,904 Accrued clinical trials expense 964,331 2,054,741 Accrued professional fees 1,989,000 765,000 Other accrued expenses 851,562 216,411 ------------- ------------ Total current liabilities 5,262,059 4,595,533 Commitments and cotingencies (Note 7) Shareholderrs' equity: Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding -- -- Common stock, no par value; 75,000,000 shares authorized; 17,532,195 and 16,807,257 shares issued and outstanding 108,988,019 105,915,548 Net unrealized (loss) gain on available-for-sale securities (171,125) 450,086 Accumulated deficit (71,351,266) (56,605,519) Deferred compensation -- (204,853) ------------- ------------ Total shareholders' equity 37,465,628 49,555,262 ------------- ------------ Total liabilities and shareholders' equity $ 42,727,687 $ 54,150,795 ============= ============ See notes to consolidated financial statements.
-26- SciClone Pharmaceuticals, Inc. Consolidated Statements of Operations
Year ended December 31, --------------------------------------------------------- 1996 1995 1994 ----------------- ------------------ ----------------- Product sales $ 703,082 $ 273,353 $ -- Cost of product sales 740,494 737,460 -- ------------ ------------ ------------ Gross profit (37,412) (464,107) -- Operating expenses: Research and development 9,903,536 10,386,312 9,282,051 Special research and development charges -- -- 3,470,000 Marketing 4,240,208 4,323,327 4,375,447 General and administrative 3,182,972 2,903,991 3,810,696 ------------ ------------ ------------ Total operating expenses 17,326,716 17,613,630 20,938,194 ------------ ------------ ------------ Loss from operations (17,364,128) (18,077,737) (20,938,194) Interest and investment income, net 2,618,381 3,302,307 3,056,869 ------------ ------------ ------------ Net loss $(14,745,747) $(14,775,430) $(17,881,325) ============ ============ ============ Net loss per share $ (0.85) $ (0.88) $ (1.02) ============ ============ ============ Weighted average shares used in computing per share amounts 17,421,312 16,881,652 17,507,564 See notes to consolidated financial statements.
-27- SciClone Pharmaceuticals, Inc. Consolidated Statements of Shareholders' Equity
Net unrealized Common stock gain (loss) on ------------------------------- available-for-sale Accumulated Shares Amount securities deficit ------------- ------------- ------------------ -------------- Balance at December 31, 1993 15,817,990 70,715,866 -- (23,948,764) Issuance of common stock from public offering, net 2,000,000 43,085,811 -- -- Issuance of common stock from exercise of stock options and warrants 417,090 1,645,071 -- -- Repurchase of common stock (1,148,300) (7,797,990) -- -- Amortization of deferred compensation -- -- -- -- Net unrealized loss on available-for-sale securities -- -- (2,304,989) -- Net loss -- -- -- (17,881,325) ---------- ------------ ------------ ------------ Balance at December 31, 1994 17,086,780 107,648,758 (2,304,989) (41,830,089) Issuance of common stock from exercise of stock options 66,477 191,686 -- -- Repurchase of common stock (346,000) (1,924,896) -- -- Amortization of deferred compensation -- -- -- -- Net unrealized gain on available-for-sale securities -- -- 2,755,075 -- Net loss -- -- -- (14,775,430) ---------- ------------ ------------ ------------ Balance at December 31, 1995 16,807,257 105,915,548 450,086 (56,605,519) Issuance of common stock from exercise of stock options and employee stock purchase plan 802,938 3,731,284 -- -- Repurchase of common stock (78,000) (658,813) -- -- Amortization of deferred compensation -- -- -- -- Net unrealized loss on available-for-sale securities -- -- (621,211) -- Net loss -- -- -- (14,745,747) ---------- ------------ ------------ ------------ Balance at December 31, 1996 17,532,195 $108,988,019 $ (171,125) $(71,351,266) ========== ============ ============ ============
Deferred Total shareholders' compensation equity -------------- -------------------- Balance at December 31, 1993 (1,246,856) 45,520,246 Issuance of common stock from public offering, net -- 43,085,811 Issuance of common stock from exercise of stock options and warrants -- 1,645,071 Repurchase of common stock (7,797,990) Amortization of deferred compensation 487,207 487,207 Net unrealized loss on available-for-sale securities -- (2,304,989) Net loss -- (17,881,325) ------------ ------------ Balance at December 31, 1994 (759,649) 62,754,031 Issuance of common stock from exercise of stock options -- 191,686 Repurchase of common stock -- (1,924,896) Amortization of deferred compensation 554,796 554,796 Net unrealized gain on available-for-sale securities -- 2,755,075 Net loss -- (14,775,430) ------------ ------------ Balance at December 31, 1995 (204,853) 49,555,262 Issuance of common stock from exercise of stock options and employee stock purchase plan -- 3,731,284 Repurchase of common stock -- (658,813) Amortization of deferred compensation 204,853 204,853 Net unrealized loss on available-for-sale securities -- (621,211) Net loss -- (14,745,747) ------------ ------------ Balance at December 31, 1996 $ -- $ 37,465,628 ============ ============ See notes to consolidated financial statements.
-28- SciClone Pharmaceuticals, Inc. Consolidated Statements of Cash Flows
Year ended December 31, ------------------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ Operating activities Net loss $(14,745,747) $(14,775,430) $(17,881,325) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 313,560 713,343 633,250 Acquisition of in-process technology -- -- 3,470,000 Changes in operating assets and liabilities: Prepaid expenses and other assets (490,243) (1,924,132) (564,343) Accounts receivable (136,668) (108,410) -- Inventory (248,398) (1,340,190) -- Accounts payable and other accrued expenses 802,066 64,276 29,479 Accrued clinical trials expense (1,090,410) 238,437 681,897 Accrued professional fees 1,224,000 (10,000) (215,000) Accrued compensation and benefits (269,130) 43,858 936,901 ------------ ------------ ------------ Net cash used in operating activities (14,640,970) (17,098,248) (12,909,141) ------------ ------------ ------------ Investing activities: Purchase of property and equipment (94,409) (204,077) (112,729) Sale (purchase) of marketable securities, net 12,319,191 14,728,955 (18,957,343) ------------ ------------ ------------ Net cash provided by (used in) investing activities 12,224,782 14,524,878 (19,070,072) ------------ ------------ ------------ Financing activities: Proceeds from issuance of common stock, net 3,731,284 191,686 44,730,882 Repurchase of common stock (658,813) (1,924,897) (7,797,990) ------------ ------------ ------------ Net cash provided by (used in) financing activities 3,072,471 (1,733,210) 36,932,892 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 656,283 (4,306,581) 4,953,679 Cash and cash equivalents, beginning of period 3,986,307 8,292,888 3,339,209 ------------ ------------ ------------ Cash and cash equivalents, end of period $4,642,590 $ 3,986,307 $ 8,292,888 ============ ============ ============ See notes to consolidated financial statements.
-29- SCICLONE PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements Note 1 - The Company and Summary of Significant Accounting Policies The Company SciClone Pharmaceuticals, Inc. ("SciClone" or the "Company") is an international biopharmaceutical company involved in the acquisition, development and commercialization of pharmaceuticals worldwide. The Company focuses on specialist oriented products that address significantly unmet chronic or life-threatening diseases. The Company concentrates on infectious diseases, such as hepatitis B and C, cancer, immune system disorders, and cystic fibrosis. Currently, the Company has acquired two drugs for development and commercialization: ZADAXIN(R) thymosin alpha 1, for hepatitis B and C, cancer and immune system disorders; and CPX for cystic fibrosis. To date, the Company's principal focus has been the development and commercialization of ZADAXIN. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents and Investments Cash equivalents consist of highly liquid investments with remaining maturities of three months or less. All cash equivalents are carried at cost plus accrued interest, which approximates market. The Company has classified its entire investments portfolio as available-for-sale and records these investments at fair value, as determined by available market information, on the balance sheet. The portfolio primarily consists of U.S. Government securities and short-term and long-debt instruments. Unrealized holding gains or losses are carried as a separate component of shareholders' equity. The amortized cost of debt securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income along with interest earned. Realized gains or losses, and declines in value judged to be other than temporary are also included in investment income. Management believes the credit risk associated with these investments is limited due to the nature of investments. -30- SCICLONE PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements--Continued For the year ended December 31, 1996, net unrealized losses of approximately $621,000 were charged to shareholders' equity, leaving a balance at December 31, 1996 of approximately $171,000 of net unrealized losses. For the year ended December 31, 1995, net unrealized gains of approximately $2,755,000 were charged to shareholders' equity, leaving a balance at December 31, 1995 of approximately $450,000 of net unrealized gains. Property and Equipment Property and equipment is stated at cost, less accumulated depreciation. Depreciation is provided over the estimated useful lives of the respective assets (three to five years) on the straight-line basis. Notes Receivable from Officers In August, 1996, the Company extended a loan to one of its executive officers with an aggregate principal amount of $1,000,000 to be used to finance the purchase of his primary residence. The loan was secured by a first deed of trust on the property, bears interest at 8% per annum and is payable in five years, subject to renewal if the executive officer remains employed by the Company. In June 1995, the Company extended a loan to one of its executive officers with an aggregate principal amount of $1,365,000 to be used to finance the purchase and renovation of his primary residence. The loan was secured by a first deed of trust on the property and 20,000 shares of SciClone Common Stock owned by the executive officer, bears interest at 7.5% per annum and is payable in five years, subject to renewal if the executive officer remains employed by the Company. In July 1995, the Company extended a loan to one of its board members and former executive officers in the principal amount of $95,000 which carries an interest rate of 7.375%. In December 1995, the Company extended an additional loan to this individual in the principal amount of $600,000, which carries an interest rate of 7.50%. The loans are due and payable in December 1997, are currently unsecured, and in the process of being secured by a second deed of trust on residential property owned by this individual. At December 31, 1996, the fair value of the notes receivable from officers is $2,710,000. The fair value was estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms of borrowers of similar credit quality. Foreign Currency Translation The Company has determined the U.S. dollar to be the functional currency for its wholly owned subsidiaries. Adjustments resulting from translation are included in results of operations and have not been significant. Research and Development Research and development expenditures are charged to operations as incurred. -31- SCICLONE PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements--Continued Income Taxes Income tax expense is based on reported results of operations before extraordinary items and income taxes. Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. These deferred taxes are measured by applying current tax laws. Based on the Company's lack of earnings history, deferred tax assets have been fully offset by a valuation allowance. Retirement Benefits The Company has a pre-tax savings plan covering substantially all U.S. employees, which qualifies under Section 401(k) of the Internal Revenue Code. Under the plan, eligible employees may contribute a portion of their pre-tax salary, subject to certain limitations. The Company contributes and matches 20% of the employee contributions, up to 6% of the employee's salary. Company contributions, which can be terminated at the Company's discretion, were $25,000, $24,000, and $24,000 for the years ended December 31, 1996, 1995, and 1994, respectively. The plan commenced on January 1, 1991. Net Loss Per Share Net loss per share has been computed using the weighted average number of common and common equivalent shares outstanding during each period presented. Common equivalent shares for outstanding options and warrants were not included in the weighted average shares outstanding because the effect would be antidilutive. Accounting for Employee Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation." As permitted by SFAS 123, the Company accounts for its stock option and employee stock purchase plans under the provisions of Accounting Principles Board Opinion 25 ("APB 25") and related Interpretations. Accordingly, the Company does not recognize compensation expense in accounting for its stock option and employee stock purchase plans for awards which have an exercise price equal to the fair value of the Company's common stock on the date of the grant. Reclassifications Certain prior year amounts have been reclassified to conform to the current year's presentation. -32- SCICLONE PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements--Continued Note 2 - Investments The following is a summary of available-for-sale securities:
Available-for-sale Securities ----------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair December 31, 1996 Cost Gains Losses Value - --------------------------------- -------------- --------------- --------------- --------------- U.S. government & agency obligations $21,974,342 $37,048 $ (158,340) $21,853,050 Corporate obligations 8,459,901 10,882 (23,535) 8,447,248 Corporate equity securities 200,000 12,820 (50,000) 162,820 -------------- --------------- --------------- --------------- $30,634,243 $60,750 $ (231,875) $30,463,118 ============== =============== =============== =============== Available-for-sale Securities ----------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair December 31, 1995 Cost Gains Losses Value - --------------------------------- -------------- --------------- --------------- --------------- U.S. government & agency obligations $27,633,655 $ 174,319 $ (32,613) $27,775,361 Corporate obligations 14,150,800 48,972 (102,836) 14,096,936 Corporate equity securities 1,168,979 462,244 (100,000) 1,531,223 -------------- --------------- --------------- --------------- $42,953,434 $ 685,535 $ (235,449) $43,403,520 ============== =============== =============== ===============
The amortized cost and estimated fair value of debt and investments at December 31, 1996 by contractual maturity are shown below.
Estimated Amortized Fair Cost Value ----------------- ----------------- Due in one year or less $ 5,041,633 $ 5,042,709 Due after one year through three years 18,285,984 18,180,586 Due after three years 7,106,626 7,077,003 ----------------- ----------------- 30,434,243 30,300,298 Corporate equity securities 200,000 162,820 ----------------- ----------------- $30,634,243 $30,463,118 ================= =================
-33- SCICLONE PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements--Continued Note 3 - Inventories Inventories are stated at the lower of cost (first-in, first-out basis) or market. Inventories consisted of the following: December 31, --------------------------------------- 1996 1995 ----------------- ----------------- Raw materials $1,545,923 $2,301,650 Finished goods 1,062,954 58,829 ----------------- ----------------- $2,608,877 $2,360,479 ================= ================= Note 4 - Property and Equipment Property and equipment consisted of the following: December 31, --------------------------------------- 1996 1995 ----------------- ----------------- Office furniture and fixtures $279,369 $254,574 Office equipment 619,709 550,095 ----------------- ----------------- 899,078 804,669 Less accumulated depreciation 599,673 490,966 ----------------- ----------------- Net property and equipment $299,405 $313,703 ================= ================= Note 5 - License Agreements In October 1996, the Company entered into an expanded and amended license and supply agreement with Schering-Plough K.K. ("SPKK"), giving SPKK exclusive rights to ZADAXIN in Japan. Under the amended agreement, SPKK will continue development of thymosin alpha 1 as a monotherapy for the treatment of hepatitis B and will initiate investigation of the combination of its INTRON(R) A (interferon alfa-2b) with ZADAXIN for the treatment of hepatitis C, with the parties sharing certain development expenses. SPKK will undertake the development, registration and marketing of ZADAXIN in Japan. Contingent upon successful research and development results, SciClone will receive milestone payments. To date, there has been no license fee revenue recognized by the Company. -34- SCICLONE PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements--Continued In April 1996, the Company acquired an exclusive license for CPX, a synthetic compound developed by the National Institutes of Health ("NIH") as a potential treatment for cystic fibrosis. NIH will receive certain milestone payments upon successful research and development results in addition to royalties on net sales revenue. In December 1994, the Company acquired the rights to develop, manufacture, and commercialize thymosin alpha 1 in South Korea from a pharmaceutical company. In August 1994, SciClone entered into a 15-year license agreement with Alpha 1 Biomedicals, Inc., ("Alpha 1") for rights to thymosin alpha 1. This agreement grants the Company manufacturing and marketing rights and the right to conduct research and clinical development for existing and new indications worldwide except in Italy, Spain, Portugal and South Korea. In addition, the agreement transferred control of Alpha 1's thymosin alpha 1 patent portfolio to the Company. The agreement requires the Company to pay certain royalties based on net sales revenue of thymosin alpha 1 in the Company's territories (see Note 7). In connection with this license agreement, the Company incurred a special research and development charge of $3,470,000 consisting primarily of a write-down of the Company's equity interest in Alpha 1 to its estimated market value and expenses associated with the transaction. These costs have been expensed as in-process research and development. Note 6 - Income Taxes The domestic and foreign components of loss before income tax are as follows:
1996 1995 1994 ------------------ ----------------- ----------------- Domestic $ (6,125,896) $ (5,675,924) $ (4,530,407) Foreign (8,610,042) (9,099,506) (13,350,918) ------------------ ----------------- ----------------- Loss before income tax $(14,735,938) $(14,775,430) $ (17,881,325) ================== ================= =================
-35- SCICLONE PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements--Continued The significant components of the Company's deferred tax assets and liabilities at December 31, 1996, 1995 and 1994 are as follows:
Assets 1996 1995 1994 ------------ ------------ ------------ Net operating loss carryforwards $ 9,854,000 $ 6,231,000 $ 4,833,000 Other, net 1,795,000 277,000 170,000 ------------ ------------ ------------ Gross deferred tax assets 11,649,000 6,508,000 5,003,000 Valuation allowance (11,426,000) (6,308,000) (5,003,000) ------------ ------------ ------------ Total deferred tax asset $ 223,000 $ 200,000 $ -- ------------ ------------ ------------ Liabilities Net unrealized gains on available- for-sale securities $ -- $ 200,000 $ -- Other 223,000 -- -- ------------ ------------ ------------ Total deferred tax liability 223,000 200,000 -- ------------ ------------ ------------ Net deferred tax assets $ -- $ -- $ -- ============ ============ ============
Deferred tax assets relating to net operating loss carryforwards as of December 31, 1996 include $3,300,000 associated with stock option activity for which any subsequently recognized tax benefits will be credited directly to shareholders' equity. At December 31, 1996, the Company had net operating loss carryforwards for U.S. tax purposes totaling approximately $26,000,000, expiring in 2006-2011, and approximately $12,000,000 in state net operating losses expiring in 1997-2001. The difference between the current year's loss for financial reporting purposes and federal income tax purposes is primarily attributable to losses incurred by the Company's foreign subsidiaries. Due to the change in ownership provisions of the Tax Reform Act of 1986, utilization of net operating loss carryforwards are limited against taxable income in future periods. Note 7 - Commitments and Contingencies Leases The Company leases its main office facility under a non-cancelable lease agreement which expires in April 2000. The lease is for a period of five years and requires the Company to pay insurance and taxes and its pro-rata share of operating expenses. The Company also leases various office facilities abroad -36- SCICLONE PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements--Continued under non-cancelable lease agreements, expiring in 1997. Rental expense in 1996, 1995, and 1994 was $397,000, $391,000, and $333,000 respectively. Minimum future rental commitments amount to $448,000 in 1997, $436,000 in 1998, $450,000 in 1999, $162,000 in 2000 and $38,000 in 2001. Royalties Under the April 1996 CPX license agreement with the NIH, the Company is obligated to pay the NIH a royalty based on a percentage of CPX net sales revenue. To date, no royalty amounts have been paid or are due to the NIH. Under the August 1994 thymosin alpha 1 license agreement with Alpha 1 (see Note 5), the Company is obligated to pay Alpha 1 certain royalties in addition to assuming certain Alpha 1 royalties payable to third parties. The Company's royalty obligations to Alpha 1 are based on a percentage of thymosin alpha 1 net sales revenue and range from 3 to 3.5% or 6 to 7% dependent upon the territory in which revenue is recognized and whether or not certain intellectual property protection exists in that territory. Royalties are payable to Alpha 1 for eight years; provided, however that at such time if Alpha 1 has not been paid aggregate royalties of $35 million, the Company's royalty obligations to Alpha 1 will continue to the earlier of (i) the payment to Alpha 1 of royalties aggregating $35 million or (ii) September 30, 2009. In 1996, Alpha 1 agreed to accept $500,000 from the Company as prepayment for $2.5 million in future royalties which may become due to Alpha 1 from the Company. The prepaid royalties will take effect after payment by the Company to Alpha 1 of royalties totaling $1.75 million. In October 1992, the Company amended its services agreement with a Japanese trading company. Upon receipt by SciClone of any revenues in Japan for thymosin alpha 1, the Japanese trading company will receive a royalty as a percentage of such revenues for a specified period of time. To date, no royalty amounts have been paid or are due the Japanese trading company with respect to this agreement. Note 8 - Shareholders' Equity Common Stock In January 1994, the Company sold 2,000,000 shares of common stock in an underwritten public offering at $23.25 per share. The Company received approximately $43,600,000 in net proceeds from the offering. In conjunction with its initial public offering, the Company granted its investment banker warrants to purchase 300,000 shares of common stock and 300,000 non-redeemable warrants. The warrants are exercisable during the four year period ending March 16, 1997. The exercise price of the 300,000 shares of common stock is subject to certain adjustments as defined in the purchase agreement. At December 31, 1996, the shares of common stock may be purchased at $6.00 per share, and the non-redeemable warrants may be purchased at $0.33 per warrant. The non-redeemable warrants are exercisable into one share of common stock at $15.55 per share. During 1996 and 1995, no warrants were exercised. During 1994, 135,005 warrants to purchase common stock at $6.00 per share were exercised. At December 31, 1996, 464,995 common shares were reserved for exercise of the warrants. -37- SCICLONE PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements--Continued Repurchase of Common Stock In 1995 and 1994, the Company's Board of Directors authorized the repurchase of up to 1.5 million and 1.0 million shares of the Company's common stock, respectively. For the year ended December 31, 1996, 1995, and 1994, the Company repurchased 78,000, 346,000 and 1,148,000 shares of its common stock for an aggregate cost of $659,000, $1,925,000 and $7,798,000, respectively. There was no impact on the Company's results of operations. Stock Award Plans In August 1991, the Board of Directors and shareholders of the Company approved the 1991 Stock Plan (the "1991 Plan") and reserved 1,300,000 shares for issuance thereunder. In May 1993, the Board of Directors and shareholders of the Company approved a 2,150,000 share increase in the shares reserved under the 1991 plan. The 1991 Plan permits the award of incentive or nonqualified stock options and shares of common stock under restricted stock purchase agreements. In January 1992, the Board of Directors and shareholders of the Company approved the 1992 Stock Plan (the "1992 Plan") and reserved 240,000 shares for issuance thereunder. The 1992 Plan permits the award of incentive or nonqualified stock options which must be exercised in cash. In June 1995, the Board of Directors and the shareholders of the Company approved the 1995 Equity Incentive Plan (the "1995 Plan") and reserved 1,250,000 shares for issuance thereunder. The 1995 Plan permits the award of incentive or nonqualified stock options and shares of common stock under restricted stock awards. Under the 1991, 1992 and 1995 Plans, options are exercisable upon conditions determined by the Board of Directors and expire ten years from the date of grant. Options are generally granted at fair market value on the date of grant and vest over time, generally four years. In June 1995, the Board of Directors and the shareholders of the Company approved the Nonemployee Director Stock Option Plan (the "Nonemployee Director Plan") and reserved 250,000 shares for issuance thereunder. The Nonemployee Director Plan automatically grants nonqualified stock options to nonemployee directors upon their appointment or first election to the Company's Board of Directors ("Initial Grant") and annually upon their reelection to the Board of Directors at the Company's Annual Meeting of Shareholders ("Annual Grant"). The options are granted at fair market value on the date of grant. Initial Grants vest annually over a period of three years. Annual Grants vest monthly over a period of one year. In July 1996, the Board of Directors and shareholders of the Company approved the 1996 Employee Stock Purchase Plan (the "ESPP") and reserved 500,000 shares for issuance thereunder. All full-time employees are eligible to participate in the ESPP. Under the terms of the ESPP, employees can choose to have up to 15% of their salary withheld to purchase the Company's common stock. The purchase price of the stock is the lower of 85% of the fair market value as of the first trading day of each quarterly participation period, or as of the last trading day of each quarterly participation period. Under the ESPP, the Company sold 5,675 shares to employees in 1996. -38- SCICLONE PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements--Continued The following table summarizes the stock option activity under the 1991, 1992 and 1995 plans and the Nonemployee Director Plan:
Weighted Average Exercise Price Shares Available Shares Under of Shares Under for Grant Option Plan --------------------- ----------------- ----------------- Balance at December 31, 1993 1,513,978 1,794,656 $ 6.58 Options cancelled 396,269 (396,269) 12.04 Options granted (1,109,035) 1,109,035 6.05 Options exercised -- (282,085) 2.96 ------------------ ---------------- --------------- Balance at December 31, 1994 801,212 2,225,337 $ 5.81 1995 Plan shares reserved 1,250,000 -- -- Nonemployee Director Plan shares reserved 250,000 -- -- Options cancelled 63,963 (63,963) 5.93 Options granted (436,500) 436,500 5.68 Options exercised -- (66,477) 2.88 ------------------ ----------------- --------------- Balance at December 31, 1995 1,928,675 2,531,397 $ 5.86 Options cancelled 107,357 (107,357) 7.97 Options granted (901,850) 901,850 5.73 Options exercised -- (799,625) 4.66 ------------------ ----------------- --------------- Balance at December 31, 1996 1,134,182 2,526,265 $ 6.11 ================== ================= ===============
The following table summarizes information concerning outstanding and exercisable options as of December 31, 1996:
Options Outstanding Options Exercisable - ------------------------------------------------------------------------ -------------------------------- Weighted Average Weighted Weighted Average Range of Exercise Number Remaining Average Number Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Price - ------------------- ------------------ ------------------- ---------------- ---------------- --------------- $ 0.30 - $ 0.30 18,000 4.75 $0.30 18,000 $0.30 $ 3.00 - $ 4.38 370,578 5.98 3.50 308,078 3.38 $ 4.80 - $ 7.25 1,741,204 8.37 5.66 686,497 5.79 $ 7.59 - $12.50 396,483 7.32 10.78 272,339 11.08 ------------------ ------------------- ---------------- ---------------- --------------- 2,526,265 7.82 $ 6.11 1,284,914 $6.26 ================== =================== ================ ================ ===============
-39- SCICLONE PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements--Continued As permitted by SFAS 123, the Company applies APB 25 and related Interpretations in accounting for its stock award plans and accordingly, does not recognize compensation expense for awards which have an exercise price equal to the fair value of the Company's common stock on the date of the grant. Pro forma information regarding net loss and net loss per share is required by SFAS 123 and has been determined as if the Company had accounted for its stock awards under the fair value method of that Statement. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995: risk-free interest rates of 5.14% and 6.81%, respectively; dividend yields of 0%; volatility factors of the expected market price of the Company's stock of .84; and a weighted average expected life of the option of 4.37 years. The fair value for the employee stock purchases was also estimated using the Black-Scholes model with the following assumptions for 1996: risk-free interest rate of 5.3%; dividend yield of 0%; expected volatility of .84 and expected life of .25 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock awards have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, in the Company's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and stock purchases. The Company recorded deferred compensation of approximately $2.4 million related to 1992 stock option grants. The deferred compensation is being amortized over the vesting period, which ranges from two to five years. For the years ended December 31, 1996, 1995, and 1994, approximately $205,000, $555,000, and $487,000 of deferred compensation related to stock option grants was charged to compensation expense, respectively. Had compensation expense for the Company's option and employee purchase plans been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS 123, the Company's net loss and net loss per share would have been adjusted to the pro forma amounts indicated below: 1996 1995 ------ ---- Net loss - as reported $(14,746,000) $(14,775,000) ------------- ------------- Net loss - pro forma $(15,821,000) $(14,643,000) ============= ============= Net loss per share - as reported $(0.85) $(0.88) ======= ======= Net loss per share - pro forma $(0.91) $(0.87) ======= ======= The effects of applying SFAS 123 for pro forma disclosures are not likely to be representative of the effects on reported net loss for future years. Pro forma net loss for the year ended December 31, 1996 -40- SCICLONE PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements--Continued reflects compensation expense for two years' vesting while the year ended December 31, 1997 will reflect compensation expense for three years' vesting of outstanding stock awards. Note 9 - Significant Geographic Information Approximate foreign sources of revenues were as follows: 1996 1995 1994 ---- ---- ---- Asia $636,000 $239,000 $ - Other 67,000 34,000 - -41- SCICLONE PHARMACEUTICALS, INC. Notes to Consolidated Financial Statements--Continued Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Shareholders, SciClone Pharmaceuticals, Inc. We have audited the accompanying consolidated balance sheets of SciClone Pharmaceuticals, Inc. as of December 31, 1996 and 1995 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SciClone Pharmaceuticals, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Palo Alto, California January 23, 1997 -42- Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. PART III Item 10. Directors and Executive Officers of the Registrant The executive officers and directors of the Company, their ages as of February 28, 1997, and certain other information about them are set forth below:
Name Age Position --------------------------------------------- --------- ---------------------------------------- Donald R. Sellers......................... 52 President, Chief Executive Officer and Director Thomas E. Moore........................... 52 Chairman of the Board of Directors David Horwitz, M.D., Ph.D................. 54 Executive Vice President of Medical, Regulatory and Scientific Affairs Mark A. Culhane........................... 37 Vice President, Finance and Administration and Chief Financial Officer, Secretary John D. Baxter, M.D....................... 56 Director Edwin C. Cadman, M.D...................... 51 Director Jere E. Goyan, Ph.D....................... 66 Director
Donald R. Sellers has served as the Company's Chief Executive Officer since April 1996 and as President and Director since January 1996. From May 1993 to present, he has also served as Managing Director, SciClone Pharmaceuticals International Ltd., the international arm of the Company. From 1990 to 1993, Mr. Sellers was Corporate Vice President of Getz Bros., an Asian trading company, as well as President of their Japanese operations. From 1983 to 1990, Mr. Sellers was employed by Sterling Drug International, initially as Vice President of Marketing and Operations in Asia and beginning in 1985 as President of their Latin American Andina Group. Mr. Sellers began his pharmaceutical career in 1973 with Pfizer as Country Manager, Vietnam and Hong Kong, and he later worked with the Revlon Healthcare Group as Director of Worldwide Exports and Pacific Area Director. Thomas E. Moore, a founder of the Company, has served Chairman of the Board of Directors of the Company since its inception and as Chief Executive Officer from inception until April 1996. Since 1988, Mr. Moore has served as a principal in Sand Hill Management Group, a private investment and management firm specializing in the computer software, medical and biotechnology industries. From 1982 to 1988, Mr. Moore was the Chairman of the Board of Directors of Synercom Technology, Inc. ("Synercom"), a software company. Prior to Synercom, Mr. Moore was Vice President of Pacific Operations and Vice President of Strategic Planning at Honeywell, Inc., an electronics company. David L. Horwitz, M.D., Ph.D. has been the Company's Executive Vice President of Medical, Regulatory and Scientific Affairs since December 1994. From April 1992 through December 1994, he was Vice President of Medical and Regulatory Affairs at the Company. From 1982 through 1992, Dr. Horwitz was at Baxter Healthcare Corporation, a pharmaceutical company, where his last position was as Vice President for Medical and Professional Affairs. Previously he was Clinical Professor of Medicine at the University of Illinois at Chicago. Mark A. Culhane has been the Company's Vice President, Finance and Administration and Chief Financial Officer since May 1994 and its Secretary since November 1993. From June 1992 to May 1994, Mr. Culhane served in other financial positions with the Company. From July 1982 to June 1992, Mr. Culhane was employed by Price Waterhouse, an international public accounting firm, where his last position was Senior Manager. John D. Baxter, M.D. joined the Company as a director and Chairman of its Scientific Advisory Board in June 1991. Dr. Baxter has been associated with the University of California, San Francisco since 1970. He has been Professor of Medicine since 1979, Chief of the Endocrinology Section, Parnassus Campus since 1980 and Director of the Metabolic Research Unit since 1981. Dr. Baxter was a founder and served as a director of Scios Nova Inc., a biotechnology company, from its inception in 1982 to 1991. Edwin C. Cadman, M.D. has been a director and member of the Company's Scientific Advisory Board since November 1991. Since January 1994, Dr. Cadman has been Senior Vice President of Medical Affairs and Chief of Staff at Yale New Haven Hospital, where he was Chief of the Medical Service from 1987 through December 1993. Since 1987, Dr. Cadman has also been Professor of Medicine at Yale University, where he was Chairman of the Department of Medicine from 1987 through December 1993. Prior to these positions, he was Director of the Cancer Research Institute at the University of California, San Francisco. Dr. Cadman also currently serves as a director of CytoTherapeutics, Inc., a biotechnology company. Jere E. Goyan, Ph.D. has been a director of the Company since January 1992. Since July 1993, Dr. Goyan has been President and Chief Operating Officer and director of Alteon, Inc., a biotechnology company where he served as Senior Vice President for Research and Development from January 1993 through July 1993 and as Acting Chief Executive Officer from July 1993 through May 1994. Dr. Goyan was Dean of the School of Pharmacy and Professor of Pharmacy and Pharmaceutical Chemistry at the University of California, San Francisco from 1967 through 1992, and was a Professor there from 1965 through 1992. From 1979 to 1981, Dr. Goyan was the Commissioner of the United States Food and Drug Administration. Dr. Goyan also currently serves as a director of Emisphere Technologies, Inc. and Atrix Laboratories, both biotechnology companies, and Boehringer Mannheim (U.S.), a pharmaceutical company. Directors serve one year terms or until their successors are elected and qualified. Executive officers serve at the discretion of the Board of Directors. There are no family relationships among any of the directors or executive officers of the Company. Item 11. Executive Compensation The information required by this Item is incorporated by referenced from the definitive proxy statement for the Company's 1997 annual meeting of stockholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form (the "Proxy Statement") under the caption "EXECUTIVE COMPENSATION." Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated by reference from the Proxy Statement under the caption "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Item 13. Certain Relationships and Related Transactions The information required by this Item is incorporated by reference from the Proxy Statement under the captions "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "EXECUTIVE COMPENSATION AND OTHER MATTERS -- Compensation Committee Interlocks and Insider Participation." PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as part of this Report: (1) Financial Statements. The following financial statements of the Company are contained on pages [24-41] of this Report on Form 10-K: Consolidated Balance Sheets at December 31, 1996 and 1995. Consolidated Statements of Operations for each of the three years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 1996, 1995 and 1994. Consolidated Statements of Cash Flows for each of the three years ended December 31, 1996, 1995 and 1994. Notes to Consolidated Financial Statements. Report of Ernst & Young LLP, Independent Auditors. (2) Financial Statement Schedules Refer to Item 14(d) below. (3) Exhibits. Refer to Item 14(c) below. (b) Reports on Form 8-K. None filed during the quarter ended December 31, 1996. (c) Exhibits. Exhibits (numbered in accordance with Item 601 of Regulation S-K): Exhibit Number Description - ------- ----------- 3(i).1(1) Restated Articles of Incorporation 3(i).2(2) Certificate of Amendment of Restated Articles of Incorporation 3(ii).1(1) Bylaws 3(ii).2(2) Certificate of Amendment of Bylaws 4.1(1) Representative's Warrant Agreement, dated as of March 24, 1992, between the Registrant and Josephthal Lyon & Ross Incorporated 10.1(5) Thymosin License Agreement dated August 19, 1994 between Registrant and Alpha 1 Biomedicals, Inc. 10.2(3) License, Development and Supply Agreement, dated January 12, 1993, between the Registrant and Schering-Plough K.K. 10.3(6) Supply Agreement dated October 19, 1994 between Registrant and UCB Bioproducts S.A. 10.4(4) Manufacturing Services Agreement dated as of July 27, 1993 by and between SciClone Pharmaceuticals International Limited and Sclavo S.p.A. 10.5(1) Services Agreement, dated August 28, 1991, between the Registrant and Nichimen Corporation (the "Nichimen Services Agreement") 10.6(3) Restated Nichimen Services Agreement, dated October 5, 1992 10.7(2)`em Registrant's 1991 Stock Plan, together with forms of agreements thereunder 10.8(1)`em Registrant's 1992 Stock Plan, together with forms of agreements thereunder 10.9(3)`em Letter Agreement, dated January 6, 1992, between the Registrant and Philip H. Vander Werf as amended January 28, 1993 10.10(9)** Employment Agreement Addendum, dated December 5, 1994, between Registrant and Philip H. Vander Werf and related Memorandum dated January 30, 1995 from Thomas E. Moore to Philip H. Vander Werf 10.11(9)** Promissory Notes, dated April 8, 1994 and May 3, 1994, between Registrant and Philip H. Vander Werf 10.12(3)** Letter Agreement, dated April 1, 1992, between the Registrant and David L. Horwitz, M.D., Ph.D. 10.13(6)** Compensation Agreement dated November 11, 1994 between the Registrant and Marc L. Steuer 10.14(9)** Employment Agreement, dated January 3, 1995, between the Registrant and Mark A. Culhane 10.15(1) Lease, dated September 10, 1991, between the Registrant and Spieker-Singleton #68 concerning property, located at 901 Mariners Island Boulevard, San Mateo, California, as amended (the "Spieker Lease") 10.16(7) Amendment No. 4 to Spieker Lease, dated October 4, 1994 10.17(9) Amendment No. 7 to Spieker Lease, dated November 14, 1995 10.18(8)** Registrant's 1995 Equity Incentive Plan, together with forms of agreement thereunder 10.19(8)** Registrant's 1995 Nonemployee Director Stock Option Plan, together with forms of agreement thereunder 10.20(9)** Form of Promissory Note and Deed of Trust With Assignment of Rents between the Registrant and David L. Horwitz, M.D., Ph.D. 10.21(9)** Compensation Agreement dated January 19, 1996 between the Registrant and Philip H. Vander Werf 10.22(9) Employment Agreement dated February 1, 1996 between the Registrant and Donald R. Sellers 10.23(9) Sublease dated January 1, 1996, between the Registrant and Cord Blood Registry, Inc., concerning property located at 901 Mariner's Island Boulevard, San Mateo, California 10.24(10) License Agreement effective April 19, 1996 between the Registrant and the National Institute of Health Office of Technology Transfer 10.25(11) Form of Promissory Note secured by Deed of Trust between Registrant and Donald R. Sellers 10.26(11) Amendment No. 8 to Spieker Lease, dated August 26, 1996 10.27* Expanded and Amended License, Development and Supply Agreement dated October 28, 1996 by and between the Registrant and Schering-Plough K.K., a Japanese corporation 10.28 Promissory Note Secured by Deed of Trust between Registrant and Thomas E. and Diane G. Moore dated July 14, 1995 10.29 Promissory Note Secured by Deed of Trust between Registrant and Thomas E. and Diane G. Moore dated December 26, 1995 21.1 Subsidiaries of Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors 24.1 Powers of Attorney. See page [46]. 27 Financial Data Schedule - ------------------ (1) Incorporated by reference from the Company's Registration Statement on Form S-l (No. 33-45446), declared effective by the Commission on March 17, 1992. (2) Incorporated by reference from the Company's Registration Statement on Form S-8 (No. 33-66832) filed with the Commission on August 3, 1993. (3) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1992. (4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30. 1993. (5) Incorporated by reference from the Company's Report on Form 8-K dated August 19, 1994. (6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. (7) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (8) Incorporated by reference from the Company's Registration Statement on Form S-8 (No. 33-80911) filed with the Commission on December 28, 1995. (9) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (12) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. * Confidential treatment requested. ** Management compensatory plan or arrangement. (d) Financial Statement Schedules. Schedules have been omitted because they are either inapplicable or the required information has been given in the consolidated financial statements or the notes hereto. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. SCICLONE PHARMACEUTICALS, INC. Date: March __, 1997 By: --------------------------------- Donald R. Sellers, Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Donald R. Sellers and Mark A. Culhane, and each of them, his attorneys-in-fact and agents, each with the power of substitution and resubstitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary, to be done in connection therewith, as fully as to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, or their or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
Signature Title Date --------------- ------- -------- /s/ Donald R. Sellers Chief Executive Officer, Director March 31, 1997 - ----------------------------------------- (Principal Executive Officer) (Donald R. Sellers) /s/ Thomas E. Moore Director March 31, 1997 - ----------------------------------------- (Thomas E. Moore) /s/ Mark A. Culhane Chief Financial Officer March 31, 1997 - ----------------------------------------- (Principal Financial and Accounting (Mark A. Culhane) Officer) /s/ John D. Baxter, M.D. Director March 31, 1997 - ----------------------------------------- (John D. Baxter, M.D.) /s/ Edwin C. Cadman, M.D. Director March 31, 1997 - ----------------------------------------- (Edwin C. Cadman, M.D.) /s/ Jere E. Goyan, Ph.D. Director March 31, 1997 - ----------------------------------------- (Jere E. Goyan, Ph.D.)
EXHIBIT INDEX
Sequentially Exhibit Numbered Number Description Page - ------- ----------- ---- 3(i).1(1) Restated Articles of Incorporation.................................................... 3(i).2(2) Certificate of Amendment of Restated Articles of Incorporation........................ 3(ii).l(1) Bylaws................................................................................ 3(ii).2(2) Certificate of Amendment of Bylaws.................................................... 4.1(1) Representative's Warrant Agreement, dated as of March 24, 1992, between the Registrant and Josephthal Lyon & Ross Incorporated........................ 10.1(5) Thymosin License Agreement dated August 19, 1994 between Registrant and Alpha 1 Biomedicals, Inc............................................... 10.2(3) License, Development and Supply Agreement, dated January 12, 1993, between the Registrant and Schering-Plough K.K.................................. 10.3(6) Supply Agreement dated October 19, 1994 between Registrant and UCB Bioproducts S.A............................................................... 10.4(4) Manufacturing Services Agreement dated as of July 27, 1993 by and between SciClone Pharmaceuticals International Limited and Sclavo S.p.A...................................................................... 10.5(1) Services Agreement, dated August 28, 1991, between the Registrant and Nichimen Corporation (the "Nichimen Services Agreement").......................... 10.6(3) Restated Nichimen Services Agreement, dated October 5, 1992........................... 10.7(2)** Registrant's 1991 Stock Plan, together with forms of agreements thereunder............ 10.8(1)** Registrant's 1992 Stock Plan, together with forms of agreements thereunder............ 10.9(3)** Letter Agreement, dated January 6, 1992, between the Registrant and Philip H. Vander Werf as amended January 28, 1993................................. 10.10(9)** Employment Agreement Addendum, dated December 5, 1994, between Registrant and Philip H. Vander Werf and related Memorandum dated January 30, 1995 from Thomas E. Moore to Philip H. Vander Werf................................................................. 10.11(9)** Promissory Notes, dated April 8, 1994 and May 3, 1994, between Registrant and Philip H. Vander Werf.......................................... 10.12(3)** Letter Agreement, dated April 1, 1992, between the Registrant and David L. Horwitz, M.D., Ph.D...................................................... 10.13(6)** Compensation Agreement dated November 11, 1994 between the Registrant and Marc L. Steuer......................................................... 10.14(9)** Employment Agreement, dated January 3, 1995, between the Registrant and Mark A. Culhane........................................................ 10.15(1) Lease, dated September 10, 1991, between the Registrant and Spieker -Singleton #68 concerning property, located at 901 Mariners Island Boulevard, San Mateo, California, as amended (the "Spieker Lease").................... 10.16(7) Amendment No. 4 to Spieker Lease, dated October 4, 1994............................... 10.17(9) Amendment No. 7 to Spieker Lease, dated November 14, 1995............................. 10.18(8)** Registrant's 1995 Equity Incentive Plan, together with forms of agreement thereunder.. 10.19(8)** Registrant's 1995 Nonemployee Director Stock Option Plan, together with forms of agreement thereunder.................................................................. 10.20(9)** Form of Promissory Note and Deed of Trust With Assignment of Rents between the Registrant and David L. Horwitz, M.D., Ph.D..........................................
10.21(9)** Compensation Agreement dated January 19, 1996 between the Registrant and Philip H. Vander Werf.................................................. 10.22(9) Employment Agreement dated February 1, 1996 between the Registrant and Donald R. Sellers...................................................... 10.23(9) Sublease dated January 1, 1996, between the Registrant and Cord Blood Registry, Inc., concerning property located at 901 Mariner's Island Boulevard, San Mateo, California................................. 10.24(10) License Agreement effective April 19, 1996 between the Registrant and the National Institute of Health Office of Technology Transfer................................................................... 10.25(11) Form of Promissory Note secured by Deed of Trust between Registrant and Donald R. Sellers..................................................................... 10.26(11) Amendment No. 8 to Spieker Lease, dated August 26, 1996............................... 10.27* expanded and Amended License, Development and Supply Agreement dated October 28, 1996 by and between the Registrant and Schering-Plough K.K., a Japanese corporation................................................................ 10.28 Promissory Note Secured by Deed of Trust between Registrant and Thomas E. and Diane G. Moore dated July 14, 1995...................................... 10.29 Promissory Note Secured by Deed of Trust between Registrant and Thomas E. and Diane G. Moore dated December 26, 1995.................................. 21.1 Subsidiaries of Registrant............................................................ 23.1 Consent of Ernst & Young LLP, Independent Auditors.................................... 24.1 Powers of Attorney. See page [46].................................................... 27 Financial Data Schedule............................................................... - ------------------- (1) Incorporated by reference from the Company's Registration Statement on Form S-l (No. 33-45446), declared effective by the Commission on March 17, 1992. (2) Incorporated by reference from the Company's Registration Statement on Form S-8 (No. 33-66832) filed with the Commission on August 3, 1993. (3) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1992. (4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993. (5) Incorporated by reference from the Company's Report on Form 8-K dated August 19, 1994. (6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994. (7) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1994. (8) Incorporated by reference from the Company's Registration Statement on Form S-8 (No. 33-80911) filed with the Commission on December 28, 1995 (9) Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995. (10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (12) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. * Confidential treatment requested. ** Management compensatory plan or arrangement.
SCHEDULE A-1 ALPHA PATENTS [*REDACTED] - ------------------------- *Omitted and filed separately with the Commissioner. SCHEDULE A-2 SCICLONE PATENTS [*REDACTED] - ------------------------- *Omitted and filed separately with the Commissioner. SCHEDULE A-3 TA-1 SPECIFICATIONS [*REDACTED] - ------------------------- *Omitted and filed separately with the Commissioner. EXHIBIT C MARKS [*REDACTED] - ------------------------- *Omitted and filed separately with the Commissioner. EXHIBIT D DEVELOPMENT PROGRAM [*REDACTED] - ------------------------- *Omitted and filed separately with the Commissioner. SCHEDULE D-1 THE PHASE II DOSE RANGING SAFETY AND EFFICACY TRIAL OF THYMOSIN a1 IN CHRONIC HEPATITIS B [*REDACTED] - ------------------------- *Omitted and filed separately with the Commissioner. EXHIBIT E ADVERSE EVENT REPORTING PROCEDURES SciClone and SPKK hereby agree that the following conditions will govern disclosures of each party to the other with respect to adverse event reporting relating to the Licensed Products: I. DEFINITIONS A. An "Adverse Event" ("AE") is defined as: (i) any expected or unexpected experience which is adverse, including what are commonly described as adverse or undesirable experiences, adverse events, adverse reactions, side effects, or death due to any cause associated with the use of any Licensed Product, or observed in conjunction with the use of any Licensed Product, whether or not considered related to the use of such Licensed Product: o occurring in the course of the use of any Licensed Product, o associated with, or observed in conjunction with, Licensed Product overdose, whether accidental or intentional, o associated with, or observed in conjunction with, Licensed Product abuse, or o associated with, or observed in conjunction with, Licensed Product withdrawal. (ii) Any significant failure of expected pharmacological or biologic therapeutic action (with the exception of clinical trials). B. "Serious AE" and "Non-Serious AE" are defined as follows: (i) A "Serious AE" is one that is life-threatening or fatal, permanently disabling, requires in-patient hospitalization or prolonged hospitalization, or is a congenital anomaly, cancer or overdose. In addition, end-organ toxicity, including hematological, renal, hepatic, and central nervous system AEs may be considered Serious. In laboratory tests in animals, a serious AE includes any experience suggesting significant risk for human subjects. (ii) A "Non-serious AE" is any AE which does not meet the criteria for a serious AE. C. The following terms used in paragraphs (i) and (ii) above have the meanings set forth below: (i) "life-threatening" is defined as the patient being at immediate risk of death from the AE as it occurs; (ii) "end-organ toxicity" is defined as a medically significant event or laboratory value change in which a patient may not necessarily be hospitalized or disabled, but which is clinically significant enough to warrant monitoring (e.g. seizures, blood dyscrasias, etc.); (iii) "expected experience" is defined as an experience which is listed in SciClone's Investigator's Brochure for clinical trials, included in local labelling (e.g., Summary of Licensed Product Characteristics) for the Licensed Product, or, in countries with no local labelling, listed in SciClone's Corporate Standard Prescribing Document; (iv) "unexpected experience" is defined as an experience that does not meet the criteria for an expected AE or an AE which is listed but differs from that event in terms of severity or specificity; and (v) "associated with the use of any Licensed Product, or observed in conjunction with the use of any Licensed Product" means that a reasonable possibility exists that the AE was caused by the Licensed Product. II. REPORTING A. All initial reports and follow-ups (oral or written) for any and all Serious AEs as defined above (other than with respect to animal studies) which become known to one party (other than from disclosure by or on behalf of the other party) must be communicated by telephone or telefax to the other party within three (3) working days (or, in the case of a death, one (1) day) from receipt of the information. Written confirmation of a Serious AE should be sent to the other party as soon as it becomes available, but in any event within one (1) day of the initial report of the AE by the reporting party. SciClone may conduct its own investigation of reported Serious AEs. All initial reports, if any, and follow-ups, if any (oral and written), for all Non-serious AEs as defined above which become known to SPKK (other than from disclosure by or on behalf of SciClone) must be communicated in writing to SciClone on a monthly basis. SciClone may conduct its own investigation of any reported Serious AE and Non-serious AE. B. Other reporting requirements with respect to AEs shall be as follows: (i) For AEs occurring in animal studies which suggest a potential significant risk for humans, a written report must be forwarded to SciClone as soon as the results are received by SPKK. (ii) Within thirty (30) days of receipt of a request from SciClone, but not more often than twice a year, SPKK will give SciClone a print-out or computer disk of all AEs reported to it within the last year. (iii) If SciClone wishes access to AE reports of SPKK relating to Licensed Products, SPKK shall make available its records (including computer disks) for viewing and copying by SciClone promptly upon request. C. Disclosure of information concerning AEs by SPKK to SciClone shall continue as long as the SPKK continues to clinically test or market the Licensed Products. III. IMPLEMENTATION A. SciClone and the SPKK also agree to meet in a timely fashion from time to time as may be reasonably required to implement the adverse event reporting and consultation procedures described in this Article. EXHIBIT F [INTENTIONALLY OMITTED] EXHIBIT G PRIOR AGREEMENTS 1. Letter from Department of Health, Education and Welfare to the Board of Regents, University of Texas System, dated September 14, 1978. 2. Agreement by and between the Board of Regents, University of Texas System and Hoffmann-La Roche, Inc., dated April 23, 1980. 3. Letter from Hoffmann-La Roche, Inc. to the University of Texas System, dated February 9, 1984. 4. License Agreement by and between F. Hoffmann-La Roche & Co. Limited Company and Alpha-1 Biomedicals, Inc., dated October 21, 1988. 5. Letter Agreement between F. Hoffmann-La Roche & Co. Limited Company to Alpha-1 Biomedicals, Inc., dated March 4, 1991, of two pages. 6. Letter Agreement between F. Hoffmann-La Roche & Co. Limited Company to Alpha-1 Biomedicals, Inc., dated March 4, 1991, referring to the meeting of September 24, 1990. EXHIBIT H OUTLINE OF COMMERCIAL SUPPLY AGREEMENT 1. Commercial Price: o [*REDACTED] 2. Ordering: o [*REDACTED] 3. Forecasts: o rolling forecasts to be supplied by SPKK as set forth in Section 6.3.8 hereof 4. Payment Terms: o as set forth in Section 6.3.7 5. Delivery: o transportation and insurance costs, and risk of loss, to be negotiated o delivery schedule to be negotiated 6. Inspection, Acceptance, Rejection: o to be negotiated, with adequate time for SPKK's testing and evaluation of TA-1 Material 7. Remedies: o Repair or replacement 8. Warranties: o TA-1 Material to be manufactured in compliance with GMPs, according to Specifications, in good and workmanlike manner - ------------------------- *Omitted and filed separately with the Commissioner. 9. Indemnification: o SciClone to indemnify SPKK to the extent indemnified under the Alpha Agreement and, when and if SciClone itself manufactures TA-1 Material, as is usual and customary in the industry. 10. Contingent Manufacturing Rights: o As set forth in Section 6.3.3. 11. Term and Termination: o Term equal to that of the Expanded and Amended License, Development and Supply Agreement. EXHIBIT I THIRD PARTY ROYALTIES 1. SciClone's royalty obligations under the Agreement by and between the Board of Regents, University of Texas System, and Hoffmann-La Roche, Inc., dated April 23, 1980, as amended. 2. SciClone's royalty obligations under the license Agreement by and between F. Hoffmann-La Roche & Co. Limited Company and Alpha 1 Biomedicals, Inc., dated October 21, 1988, as amended. 3. SciClone's royalty obligations under the License and Supply Agreement by and between Alpha 1 Biomedicals, Inc. and SciClone Pharmaceuticals, Inc., dated September 21, 1990, as amended and restated dated August 19, 1994. 4. SciClone's royalty obligations under the Restated Services Agreement by and between SciClone Pharmaceuticals, Inc., SciClone Japan K.K. and Nichimen Corporation, dated October 5, 1992. EXHIBIT J ARBITRATION The parties recognize that a bona fide dispute as to certain matters may from time to time arise during the term of the Agreement. In the event of the occurrence of any dispute, controversy or claim arising out of or relating to the validity, construction, enforceability or performance of the Agreement including disputes relating to an alleged breach or termination of the Agreement it shall be settled by binding Alternative Dispute Resolution ("ADR") in the manner set forth below; provided, however, that the neutral referred to below shall give effect to the provisions of the Agreement and shall not adjust, modify or change the effects of termination as set forth in the Agreement. (a) If a party intends to begin an ADR to resolve a dispute, such party shall provide written notice (the "ADR Request") by certified or registered mail or properly documented overnight delivery to the other party informing such other party of such intention and the issues to be resolved. The notice shall explain the nature of the complaint and refer to the relevant sections of the Agreement upon which the complaint is based. The complaining party shall also set forth a proposed solution to the problem, including a suggested time frame within which the parties must act. (b) The non-complaining party must respond in writing within forty-five (45) days of receiving notice with an explanation, including references to the relevant provisions of the Agreement and a response to the proposed solution and suggested time frame for action. The non-complaining party may add additional issues to be resolved. (c) Within fifteen (15) days of receipt of the response from the non-complaining party, the parties shall meet and discuss options for resolving the dispute. The complaining party must initiate the scheduling of this resolution meeting. Each party shall make available appropriate personnel to meet and confer with the other party within the fifteen (15) day period following the complaining party's receipt of the response by the non-complaining party. (d) Any and all disputes that cannot be resolved pursuant to Paragraphs (a), (b) and (c) shall be submitted to a neutral who shall be selected by mutual agreement of the parties. If the parties are unable to agree upon a neutral, then the neutral shall be selected in accordance with the procedures of the American Arbitration Association. The neutral shall be an individual who shall preside over and resolve any disputes between the parties. The neutral selected shall be a former judge of a state or federal court and shall not be a current or former employee, director or shareholder of, or otherwise have any current or previous relationship with, either party or its respective affiliates. The ADR shall be conducted in accordance with the rules of the American Arbitration Association then in effect, subject to the time periods and other provisions of this Exhibit or as otherwise set forth in the Agreement. (e) Consistent with the time schedule established pursuant to Paragraphs (i) and (g) the neutral shall hold a hearing to resolve each of the issues identified by the parties and shall render the award as expeditiously as possible but in no event more than thirty (30) days after the close of hearings. In making the award the neutral shall rule on each disputed issue and shall be based on in whole or in part the proposed ruling of one of the parties on each disputed issue. (f) During the meeting referred to in Paragraph (c), the parties shall negotiate in good faith the scope and schedule of discovery, relating to depositions, document production and other discovery devices, taking into account the nature of the dispute submitted for resolution. If the parties are unable to reach agreement as to the scope and schedule of discovery, the neutral may order such discovery as he deems necessary. To the extent practicable taking into account the nature of the dispute submitted for resolution, such discovery shall be completed within sixty (60) days from the date of the selection of the neutral. At the hearing, which shall commence within twenty (20) days after completion of discovery unless the neutral otherwise orders, the parties may present testimony (either live witness or deposition), subject to cross-examination, and documentary evidence. To the extent practicable taking into account the nature of the dispute submitted for resolution and the availability of the neutral, the hearing shall be conducted over a period not to exceed thirty (30) consecutive business days, with each party entitled to approximately half of the allotted time unless otherwise ordered by the neutral. In the event that SciClone files the ADR Request pursuant to Paragraph (a) hereof, then the hearing shall be conducted in Newark, New Jersey. In the event that SPKK files the ADR Request pursuant to Paragraph (a) hereof, then the hearing shall be conducted in San Francisco, California. Each party shall have sole discretion with regard to the admissibility of any evidence and all other matters relating to the conduct of the hearing. The neutral shall, in rendering its decision, apply the substantive law of California. The decision of the neutral shall be final and not appealable, except in the case of fraud or bad faith on the part of the neutral or any party to the ADR proceeding in connection with the conduct of such proceedings. (g) At least twenty (20) business days prior to the date set for the hearing, each party shall submit to each other party and the neutral a list of all documents on which such party intends to rely in any oral or written presentation to the neutral and a list of all witnesses, if any, such party intends to call at such hearing and a brief summary of each witness' testimony. At least five (5) business days prior to the hearing, each party must submit to the neutral and serve on each other party a proposed findings of fact and conclusions of law on each issue to be resolved. Following the close of hearings, the parties shall each submit such post-hearing briefs to the neutral addressing the evidence and issues to be resolved as may be required or permitted by the neutral. (h) Except as otherwise set forth herein, the neutral shall determine the proportion in which the parties shall pay the costs and fees of the ADR, except that each party shall pay its own costs (including, without limitation, reasonable attorneys fees) and expenses in connection with such ADR; provided, however, that if the neutral determines that the action of any party was arbitrary, frivolous or in bad faith, the neutral may award such costs and expenses to the prevailing party. (i) The ADR proceeding shall be confidential and, except as required by law, neither party shall make (or instruct the neutral to make) any public announcement with respect to the proceedings or decision of the neutral without the prior written consent of the other party. The existence of any dispute submitted by ADR, and the award of the neutral, shall be kept in confidence by the parties and the neutral, except as required in connection with the enforcement of such award or as otherwise required by applicable law. (j) For the purposes of these arbitration provisions, the parties acknowledge their diversity and agree to accept the jurisdiction of the Federal District Court in Newark, New Jersey or San Francisco, California (as selected by the party seeking to enforce) for the purposes of enforcing awards entered pursuant to these arbitration provisions and for enforcing the agreements reflected in this Paragraph (j). (k) Nothing contained herein shall be construed to permit the neutral or any court or any other forum to award punitive, exemplary or any similar damages. By entering into the Agreement and exercising their rights to arbitrate, the parties expressly waive any claim for punitive, exemplary or any similar damages. The only damages recoverable under this Agreement are compensatory damages. (l) The procedures specified herein shall be the sole and exclusive procedures for the resolution of disputes between the parties which are expressly identified for resolution in accordance with these arbitration provisions. TABLE OF CONTENTS EXHIBITS
Page ---- EXHIBIT A DEFINITIONS -1- 1. "Affiliate"................................................................................. -1- 2. "Alpha"..................................................................................... -1- 3. "Alpha Agreement"........................................................................... -1- 4. "Alpha Improvements"........................................................................ -1- 5. "Alpha Patents"............................................................................. -1- 6. "Alpha Sublicensees"........................................................................ -1- 7. "Alpha Sublicensee Data".................................................................... -1- 8. "Alpha Sublicensee Improvements"............................................................ -2- 9. "Alpha Sublicensee Technology".............................................................. -2- 10. "Alpha Technical Information"............................................................... -2- 11. "Alpha Technology".......................................................................... -2- 12. "Budget".................................................................................... -2- 13. "CHB"....................................................................................... -2- 14. "CHC"....................................................................................... -3- 15. "Co-Marketing".............................................................................. -3- 16. "Co-Promotion".............................................................................. -3- 17. "Commercial Price".......................................................................... -3- 18. "Commercial Supply Agreement"............................................................... -3- 19. "Confidential Information".................................................................. -3- 20. "Cost of Finished Goods".................................................................... -3- 21. "Development Coordinators".................................................................. -3- 22. "Development Costs"......................................................................... -3- 23. "Development Program"....................................................................... -3- 24. "Final Processing".......................................................................... -4- 25. "Field"..................................................................................... -4- 26. "First Commercial Sale"..................................................................... -4- 27. "GLP"....................................................................................... -4- 28. "GCP"....................................................................................... -4- 29. "GMP"....................................................................................... -4- 30. "Intron A".................................................................................. -4- 31. "Improvements".............................................................................. -4- 32. "Inventions"................................................................................ -4- 33. "Joint Inventions".......................................................................... -4- 34. "Licensed Products"......................................................................... -5- 35. "Marketing Coordinator"..................................................................... -5- 36. "Marketing Plan"............................................................................ -5- 37. "Marks"..................................................................................... -5- 38. "MHW"....................................................................................... -5- 39. "NDA"....................................................................................... -5- 40. "Net Sales"................................................................................. -5- 41. "Phase III Clinical Trials"................................................................. -6- 18 42. "Prior Agreements".......................................................................... -6- 43. "Program Data".............................................................................. -6- 44. "Regulatory Filings"........................................................................ -6- 45. "Roche"..................................................................................... -6- 46. "Roche Agreement"........................................................................... -6- 47. "Roll-Backs"................................................................................ -6- 48. (Omitted)................................................................................... -6- 49. "SciClone Inventions"....................................................................... -7- 50. "SciClone Patents".......................................................................... -7- 51. "SciClone Sublicensee Data"................................................................. -7- 52. "SciClone Sublicensee Improvements"......................................................... -7- 53. "SciClone Sublicensees"..................................................................... -7- 54. "SciClone Sublicensee Technology"........................................................... -7- 55. "SciClone Technical Information"............................................................ -7- 56. "SciClone Technology"....................................................................... -8- 57. "SciClone Territory"........................................................................ -8- 58. "Specifications"............................................................................ -8- 59. "SPKK Customers"............................................................................ -8- 60. "SPKK Inventions"........................................................................... -8- 61. "SPKK Territory"............................................................................ -8- 62. "TA-1 Material"............................................................................. -8- 63. "Thymosin Alpha-l" or "TA-1"................................................................ -8- 64. "Universities".............................................................................. -8- 65. "Universities Agreement".................................................................... -8- SCHEDULE A-1 ALPHA PATENTS ................................................................................................ -9- SCHEDULE A-2 SCICLONE PATENTS ............................................................................................. -10- SCHEDULE A-3 TA-1 SPECIFICATIONS .......................................................................................... -11- EXHIBIT C MARKS ........................................................................................................ -13- EXHIBIT D DEVELOPMENT PROGRAM .......................................................................................... -14- SCHEDULE D-1 THE PHASE II DOSE RANGING SAFETY AND EFFICACY TRIAL OF THYMOSIN alpha 1 IN CHRONIC HEPATITIS B ............................................................. -17- EXHIBIT E ADVERSE EVENT REPORTING PROCEDURES ........................................................................... -18- 19 EXHIBIT F [INTENTIONALLY OMITTED]....................................................................................... -21- EXHIBIT G PRIOR AGREEMENTS.............................................................................................. -22- EXHIBIT H OUTLINE OF COMMERCIAL SUPPLY AGREEMENT....................................................................... -23- EXHIBIT I THIRD PARTY ROYALTIES......................................................................................... -25- EXHIBIT J ARBITRATION................................................................................................... -26-
20 EX-10.27 2 LICENSE, DEVELOPMENT AND SUPPLY AGREEMENT Exhibit 10.27 THYMOSIN ALPHA 1 EXPANDED AND AMENDED LICENSE, DEVELOPMENT AND SUPPLY AGREEMENT BETWEEN SCICLONE PHARMACEUTICALS, INC. AND SCHERING-PLOUGH K.K. October 28, 1996
ARTICLE 1 DEFINITIONS............................................................................................2 ARTICLE 2 GRANT OF RIGHTS........................................................................................2 2.1. License Grants.....................................................................................2 2.1.1 Alpha Technology and SciClone Technology.................................................2 2.1.2 SciClone Sublicensee Technology..........................................................2 2.1.3 Alpha Sublicensee Technology.............................................................2 2.1.4 SciClone Inventions: Joint Inventions...................................................2 2.1.5 Trademarks...............................................................................2 2.2. License Grant Limitations..........................................................................3 2.2.1 Exclusivity..............................................................................3 2.2.2 Prior Licensors..........................................................................3 2.2.3 Manufacturing Rights.....................................................................3 2.2.4 Trademarks...............................................................................3 2.2.5 Development Program......................................................................3 2.3. Sublicensing.......................................................................................3 2.3.1 Co Marketing or Co Promotion Partner.....................................................3 2.3.2 Subcontracting...........................................................................4 2.3.3 Additional Indications...................................................................4 2.4. Transfer of Technology.............................................................................4 ARTICLE 3 DEVELOPMENT PROGRAM....................................................................................4 3.1. Coordination of the Development Program............................................................4 3.1.1 Development Coordinators.................................................................4 3.1.2 Meetings of Coordinators.................................................................5 3.1.3 Shared Reports...........................................................................5 3.1.4 Travel Costs.............................................................................5 3.2. Visits to Facilities...............................................................................5 3.3. Development Obligations of SPKK....................................................................6 3.3.1 SPKK Commitment..........................................................................6 3.3.2 Phase II Efficacy Trials.................................................................6 3.3.3 Chief Investigators; Study Centers.......................................................6 3.3.4 Intentionally Omitted....................................................................6 3.3.5 Development Reports; Notices.............................................................6 3.3.6 Trademarks...............................................................................6 3.4. Development Obligations of SciClone................................................................7 3.4.1 Supply of TA 1 For Development Purposes..................................................7 3.4.2 Technical Assistance.....................................................................7 3.4.3 Development Efforts......................................................................7 3.5. Regulatory Matters.................................................................................7 i 3.5.1 Compliance with Regulations..............................................................7 3.5.2 Regulatory Filings.......................................................................7 3.5.3 Adverse Events...........................................................................8 3.5.4 Maintenance of Records...................................................................8 3.6. [*REDACTED]........................................................................................8 3.7. Third Party Contracts..............................................................................8 3.8. Co-Developer Status................................................................................8 ARTICLE 4 PROGRAM DATA; IMPROVEMENTS AND INVENTIONS..............................................................8 4.1. Program Data Rights and Licenses...................................................................8 4.2. Improvements.......................................................................................9 4.2.1 Development of Improvements..............................................................9 4.2.2 Transfer of Information..................................................................9 4.3. Inventions.........................................................................................9 4.4. License to SPKK Inventions and Joint Inventions...................................................10 ARTICLE 5 LICENSE PAYMENTS......................................................................................11 5.1. Milestone Payment for CHB.........................................................................11 5.2. Milestone Payment for CHC.........................................................................11 5.3. Waiver of Certain Milestone Payments..............................................................11 ARTICLE 6 SUPPLY OF TA-1 MATERIAL AND MANUFACTURE OF LICENSED PRODUCTS..........................................11 6.1. Manufacture and Supply of TA 1 Material...........................................................11 6.2. Clinical Supply...................................................................................11 6.3. Commercial Supply.................................................................................11 6.3.1 Commercial Supply Agreement.............................................................11 6.3.2 Cutbacks in Supply......................................................................12 6.3.3 SPKK Contingent Manufacturing Rights....................................................12 6.3.4 Specifications..........................................................................13 6.3.5 Product Introduction....................................................................13 6.3.6 Commercial Price........................................................................13 6.3.7 Payment.................................................................................13 6.3.8 Minimum Purchase Order..................................................................13 6.3.9 Effect of Improvements..................................................................13 6.3.10 Audit Rights...........................................................................14 6.4. Final Processing of Licensed Products.............................................................14 ARTICLE 7 MARKETING AND SALES OF LICENSED PRODUCTS..............................................................14 7.1. Marketing Coordinators............................................................................14 7.2. Marketing Plan....................................................................................14 7.3. Product Launch....................................................................................14 - --------------------------------- *Omitted and filed separately with the Commissioner. ii 7.4. Marketing of Licensed Products....................................................................14 7.5. Pre-existing Royalties............................................................................15 ARTICLE 8 [INTENTIONALLY OMITTED................................................................................15 ARTICLE 9 REPRESENTATIONS AND WARRANTIES........................................................................15 9.1. Mutual Representations and Warranties.............................................................15 9.1.1 Corporate Power.........................................................................15 9.1.2 Due Authorization.......................................................................15 9.1.3 Binding Agreement.......................................................................15 9.2. Representations and Warranties of SPKK............................................................15 9.3. Representations and Warranties of SciClone........................................................15 ARTICLE 10 CONFIDENTIALITY......................................................................................16 10.1. Confidentiality..................................................................................16 10.2. Exceptions.......................................................................................16 10.3. Authorized Disclosure............................................................................17 10.4. Third Party Beneficiary..........................................................................17 10.5. Press Releases...................................................................................17 10.6. Agreement Confidential...........................................................................17 ARTICLE 11 INTELLECTUAL PROPERTY................................................................................18 11.1. Prosecution and Maintenance of Alpha Patents.....................................................18 11.2. Prosecution and Maintenance of SciClone Patents..................................................18 11.3. Joint Patent Applications or Inventions..........................................................19 11.3.1 Inventions.............................................................................19 11.3.2 Joint Inventions.......................................................................19 11.3.3 Abandonment............................................................................19 11.3.4 No Representation......................................................................19 11.4. Assignments......................................................................................19 11.4.1 Inventions or Program Data.............................................................19 11.4.2 Joint Inventions.......................................................................20 11.5. Patent Marking...................................................................................20 11.6. Enforcement......................................................................................20 11.7. Patent Term Extensions...........................................................................20 11.8. Trademarks.......................................................................................20 11.8.1 Ownership of Marks.....................................................................20 11.8.2 Defense of Marks.......................................................................20 11.8.3 Registration...........................................................................21 ARTICLE 12 TERM; TERMINATION....................................................................................21 12.1. Term.............................................................................................21 12.2. Extension or Renewal; Right to Marks.............................................................21 12.3. Termination by SciClone..........................................................................21 iii 12.4. Termination by SPKK..............................................................................21 12.4.1 Termination Without Cause..............................................................22 12.4.2 Termination For Breach.................................................................23 12.5. Effect of Termination............................................................................23 12.5.1 Survival...............................................................................23 12.5.2 Data Regulatory Filings................................................................23 12.6. SciClone Retained Rights.........................................................................23 ARTICLE 13 INDEMNIFICATION......................................................................................23 13.1. Indemnification by SPKK..........................................................................24 13.2. Indemnification..................................................................................24 ARTICLE 14 DISCLAIMER OF WARRANTIES; FURTHER ACTION.............................................................24 14.1. Disclaimers......................................................................................24 14.1.1 SciClone Disclaimer....................................................................24 14.1.2 SPKK Disclaimer........................................................................25 14.2. Additional Documents.............................................................................25 ARTICLE 15 DISPUTE RESOLUTION; VENUE AND GOVERNING LAW..........................................................25 15.1. Dispute Resolution...............................................................................25 15.2. Governing Law, Jurisdiction and Venue............................................................25 ARTICLE 16 [INTENTIONALLY OMITTED...............................................................................26 ARTICLE 17 MISCELLANEOUS........................................................................................26 17.1. Agreement Registration...........................................................................26 17.2. Waiver...........................................................................................26 17.3. Assignment.......................................................................................26 17.4. Payments; Reports................................................................................26 17.5. Notices..........................................................................................26 17.6. Headings and Title...............................................................................27 17.7. Amendment........................................................................................27 17.8. Force Majeure....................................................................................27 17.9. Government Approvals.............................................................................28 17.10. Official Language...............................................................................28 17.11. Independent Contractors.........................................................................28 17.12. Severability....................................................................................28 17.13. Cumulative Rights...............................................................................28 17.14. Parties Advised by Counsel......................................................................28 17.15. Entire Agreement................................................................................28 17.16. Future Agreements...............................................................................29 17.17. Counterparts....................................................................................29 iv
THYMOSIN ALPHA I EXPANDED AND AMENDED LICENSE, DEVELOPMENT AND SUPPLY AGREEMENT THIS AGREEMENT (the "Agreement"), signed as of October 28, 1996 (the "Signing Date") and dated as of January 2, 1993 (the "Effective Date"), is made by and between SciClone Pharmaceuticals Inc., a California corporation ("SciClone"), and Schering Plough K.K., a Japanese corporation ("SPKK"), with reference to the following: BACKGROUND RECITALS WHEREAS, SciClone has been granted certain license rights with respect to the development, use, sale and distribution of Thymosin Alpha 1 (or "TA 1," as further defined in Exhibit A) by SciClone or its sublicensees, within a specified territory, including Japan, and the manufacture and supply of TA 1, pursuant to that certain License and Supply Agreement by and between SciClone and Alpha 1 Biomedicals, Inc. ("Alpha"), dated as of September 21, 1990, as amended and restated pursuant to that certain License Agreement between SciClone and Alpha dated as of August 19, 1994 (collectively, the "Alpha Agreement"); and WHEREAS, SciClone owns or has rights to certain patents and patent applications relating to methods of treatment using TA 1, processes of making TA 1 and TA 1 composition of matter; and WHEREAS, SciClone's business strategy is to sublicense certain of the rights it possesses with respect to TA 1 to third parties for the development, distribution and sale of TA 1 within SciClone's licensed territory, including Japan; and WHEREAS, SPKK possesses significant scientific, business and marketing expertise and capabilities with respect to the research, development and commercialization of human pharmaceutical products in Japan, including products for the treatment of hepatitis in humans; and WHEREAS, SciClone and SPKK desire to expand and amend their long term, cooperative licensing and supply agreement, dated as of January 2, 1993, for the development and marketing of products incorporating TA 1 in Japan; and this Agreement supersedes and replaces said 1993 agreement in its entirety. NOW, THEREFORE, in consideration of the foregoing premises and the covenants and obligations set forth in this Agreement, the parties hereby agree as follows: 1 ARTICLE 1 DEFINITIONS The capitalized terms used herein but not separately defined herein shall have the meanings set forth in Exhibit A hereto. ARTICLE 2 GRANT OF RIGHTSARTICLE 2 GRANT OF RIGHTS 2.1. License Grants. 2.1.1 Alpha Technology and SciClone Technology. Subject to the terms of this Agreement, SciClone hereby grants to SPKK a right and license to practice and use the Alpha Technology and the SciClone Technology in the Field and in the SPKK Territory, (i) to use, test, evaluate and develop TA 1, and (ii) to use, perform Final Processing of, sell and distribute Licensed Products. 2.1.2 SciClone Sublicensee Technology. Subject to the terms of this Agreement, SciClone hereby grants to SPKK a right and license to practice and use the SciClone Sublicensee Technology in the SPKK Territory and in the Field, (i) to use, test, evaluate and develop TA 1, and (ii) to use, perform Final Processing of, sell and distribute Licensed Products. 2.1.3 Alpha Sublicensee Technology. Subject to the terms of this Agreement, SciClone hereby grants to SPKK a right and license to practice and use the Alpha Sublicensee Technology in the SPKK Territory and in the Field, (i) to use, test, evaluate and develop TA 1, and (ii) to use, perform (or have performed) Final Processing of, sell and distribute Licensed Products. 2.1.4 SciClone Inventions: Joint Inventions. Subject to the terms of this Agreement, SciClone hereby grants to SPKK a right and license to practice and use SciClone Inventions and Joint Inventions (as defined in Article 4) in the SPKK Territory and in the Field, in the course of testing, evaluating and developing TA 1 or using, performing (or having performed) Final Processing and all other activities necessary for the promoting, marketing, distributing and selling of Licensed Products. 2.1.5 Trademarks. Subject to the terms of this Agreement, SciClone hereby grants to SPKK a royalty free right and license to use the Marks in the SPKK Territory in connection with SPKK's development, testing, evaluating, using, promoting, marketing, distributing and selling of Licensed Products pursuant to Article 7. 2.2. License Grant Limitations. 2.2.1 Exclusivity. Except as otherwise expressly set forth in this Agreement, the rights and licenses granted pursuant to Section 2.1 shall be exclusive, even as to SciClone in the SPKK Territory. 2 2.2.2 Prior Licensors. SPKK acknowledges and understands that the Alpha Technology is licensed to SciClone by Alpha pursuant to the Alpha Agreement, and accordingly, that the rights to the Alpha Technology granted to SPKK hereunder are subject to the terms and conditions of the Alpha Agreement, including the retention of certain rights retained by Roche pursuant to the Roche Agreement and by the Universities pursuant to the Universities Agreement. SPKK further acknowledges that in no event shall the license grant contained in Section 2.1.1 with respect to the Alpha Technology be construed as conferring upon SPKK any greater rights than are conferred upon SciClone by Alpha under the Alpha Agreement. 2.2.3 Manufacturing Rights. Excepting only as to the extent specified in Section 6.3.3 of this Agreement, no rights are granted to SPKK to make, have made or manufacture TA 1 Material. The parties acknowledge that Final Processing by SPKK is permitted and licensed pursuant to this Agreement, and Final Processing is not deemed to be an unlicensed manufacturing activity. 2.2.4 Trademarks. During the term of this Agreement, SciClone reserves the right to use the Marks worldwide in trade shows, scientific presentations, marketing presentations, general global advertising campaigns, and other circumstances to support and benefit the identity and marketing of Licensed Products. 2.2.5 Development Program. As specified in Article 3 of this Agreement, SciClone (or its permitted designee) is to participate in the Development Program in Japan, and SciClone therefore reserves the non-exclusive right in Japan to use any and all of the Alpha Technology, SciClone Technology, SciClone Sublicensee Technology, Alpha Sublicensee Technology, SciClone Inventions and Joint Inventions, but only to the extent it may be necessary to enable SciClone (or its permitted designee) to perform the obligations imposed on SciClone under Article 3 of this Agreement for completing the Development Program in Japan. 2.3. Sublicensing. 2.3.1 Co Marketing or Co Promotion Partner. Subject to obtaining consent from SciClone as set forth herein, SPKK shall have the right, in the SPKK Territory, (i) to enter into a Co Promotion or Co Marketing arrangement with any third party with respect to the sale and distribution of Licensed Products and to sublicense the rights granted pursuant to Section 2.1 to the extent necessary to effectuate such arrangement; and (ii) to sublicense any of the rights granted herein to any third party, with respect to any or all Licensed Products for any or all indications; provided, however, that SPKK shall give SciClone written notice of any such proposed Co Marketing or Co Promotion partner, or of any such sublicense, [*REDACTED] 2.3.2 Subcontracting. SPKK shall have the right to sublicense the rights granted in Sections 2.1.1(i), 2.1.2(i), 2.1.3(i), 2.1.4 and 2.1.5 to third parties for the purpose of subcontracting all or part of the commercial development, evaluation, testing and Final Processing of TA 1, and to sublicense the rights granted in Section 2.1.1(ii), 2.1.2(ii), 2.1.3(ii), 2.1.4 and - ---------------------- *Omitted and filed separately with the Commissioner. 3 2.1.5 to the extent necessary to allow distributors, wholesalers and similar entities to market and sell Licensed Products and to allow end users to use Licensed Products. 2.3.3 Additional Indications. Pursuant to the Development Program described in Exhibit D hereto, SPKK and SciClone are pursuing development efforts for CHB and CHC indications. While SPKK is still pursuing development and/or commercialization of either CHB or CHC, if SciClone presents to SPKK all data then available to SciClone as to the use of the Alpha Technology and/or the SciClone Technology to reasonably support an additional indication within the Field in the SPKK Territory, then SPKK shall decide within one hundred twenty (120) days if SPKK wants to add to the Development Program the development work for said additional indication; and if SPKK decides not to so add said additional indication, then SPKK and SciClone shall consider the suitability and desirability of a sublicense arrangement for the development and commercialization of the Alpha Technology and/or the SciClone Technology for said indication in the SPKK Territory, taking into account the business needs of each party and to the extent practicable fully protecting SPKK's market for all Licensed Products, and SciClone shall not grant any such sublicense rights for said additional indications without SPKK's prior written consent, which consent may be withheld in SPKK's sole discretion. 2.4. Transfer of Technology Following the Effective Date and through the term of this Agreement, SciClone shall make available to SPKK all Alpha Technical Information, SciClone Technical Information, Alpha Improvements, Alpha Sublicensee Technology and SciClone Sublicensee Technology in SciClone's possession, subject to the terms of this Agreement. ARTICLE 3 DEVELOPMENT PROGRAMARTICLE 3 DEVELOPMENT PROGRAM 3.1. Coordination of the Development Program. 3.1.1 Development Coordinators. To facilitate and coordinate the relationship of SciClone and SPKK with regard to the development work to be performed hereunder by SPKK and SciClone (the "Development Program", set forth in Exhibit D), SPKK and SciClone shall each appoint one (1) authorized representative (hereafter "Development Coordinators"). Except as otherwise agreed by the parties in writing, or as set forth in Section 7.1 hereof, all communications between the parties shall be made through the Development Coordinators. The Development Coordinators shall determine mechanisms required for the exchange of technical, business and regulatory information with respect to the Development Program, to the extent not fully set forth herein. From time to time as appropriate, the Development Coordinators may also determine and add to the Development Program (Exhibit D) by mutual agreement in writing the further implementing details, projects and tasks necessary to complete the development and to obtain the required regulatory approvals for sale and use of the Licensed Products in Japan. If the Development Coordinators deadlock for at least sixty (60) days on reaching a decision as to such implementing details, projects or tasks, then the subject of the deadlock shall be referred to the Chief Executive Officers of the parties (or their designees) for an additional sixty (60) days of 4 negotiations, and if the deadlock is still not then resolved, the deadlock shall be resolved by binding arbitration in accordance with the provisions set forth in Exhibit J hereto. 3.1.2 Meetings of Coordinators. The Development Coordinators or such other representatives of the parties as are agreed shall meet in person (or by telephone if mutually agreed) as needed, but no less than once a month for one year after the Signing Date, and once every three (3) months thereafter, unless mutually agreed otherwise. Such meetings shall alternate between Japan and California except as otherwise agreed by the Development Coordinators. At such meetings, among other things, the parties will review the objectives (including the development of Licensed Products for indications other than CHC and CHB if mutually approved in writing by both parties), review funding requirements, protocols or procedures of or used in the Development Program, will discuss any additional objectives or funding requirements necessary for the implementation of the Development Program and commercialization of Licensed Products, and determine the occurrence of the milestone events described in Sections 5.1 and 5.2. SPKK (and to the extent applicable, SciClone) shall present an evaluation of the status of the Development Program at such meetings. Such meetings shall be in English, and at such times and places (alternating between Japan and California) as are agreed to by the parties and shall be conducted in person (or by telephone, facsimile or in any other manner as the parties shall agree). At such meeting, SPKK and SciClone shall each give their evaluation as to the progress of the implementing work for the Development Program, and SPKK and SciClone shall respond to each other's questions concerning the progress of the Development Program. 3.1.3 Shared Reports. Subject to the confidentiality provisions of Article 10, the parties shall freely share copies of technical reports and other written documentation, in Japanese, with English summaries at SPKK's expense, and make such oral presentations as may be necessary to fully evaluate the progress of the Development Program. 3.1.4 Travel Costs. The costs for travel and lodging to attend all meetings, including pursuant to Sections 3.1 and 7.1, shall be borne by the traveling party. 3.2. Visits to Facilities Representatives of SciClone may, upon reasonable request and notice and at times and intervals reasonably acceptable to SPKK, (i) visit SPKK's or its sublicensee's facilities where the Development Program is being conducted, and (ii) in conjunction with SPKK's Development Coordinator, consult informally with personnel of SPKK conducting the Development Program during such visits, by telephone, facsimile transmission or such other manner as the parties shall agree. 3.3. Development Obligations of SPKK. 3.3.1 SPKK Commitment Conditioned upon the availability to SPKK of necessary TA 1 Material, SPKK hereby commits to use diligent efforts and to work diligently with SciClone (or its designee), consistent with accepted business practices and legal requirements in Japan, to develop Licensed Products for CHB and CHC in the SPKK Territory as set forth herein and in Exhibit D hereto and as the Development Program is supplemented in the future as specified in Section 3.1.1 hereof; provided, however, that where SPKK can demonstrate to 5 SciClone's reasonable satisfaction that sound medical and scientific grounds exist for SPKK not to complete such development of any such Licensed Product(s), SPKK shall not be so obligated; and provided further, [*REDACTED] SPKK agrees to provide scientific, technical, clinical and regulatory personnel, equipment, time and resources to the development of Licensed Products sufficient to meet its obligations hereunder. Further, SPKK agrees to communicate promptly to SciClone the progress and status of said development activities. 3.3.2 Phase II Efficacy Trials. The parties acknowledge and understand that SPKK initiated development efforts with respect to TA 1 in CHB prior to the Signing Date, and has nearly completed a Phase II efficacy clinical trial for CHB. SPKK agrees to use diligent efforts [*REDACTED] for CHC as set forth in the Development Program in Exhibit D. 3.3.3 Chief Investigators; Study Centers. For any multi center Phase II and Phase III clinical trials which may be agreed upon by the parties hereto, one or more chief investigators shall be selected [*REDACTED] as well as the identity of such centers. 3.3.4 Intentionally Omitted. 3.3.5 Development Reports; Notices. SPKK will prepare and deliver to SciClone, in English, beginning January 30, 1997, and on or before January 30 of each year thereafter, an annual development plan for TA 1 in CHC and CHB and such other indications as are agreed upon by the parties, as well as quarterly progress reports within thirty (30) days after the end of each calendar quarter. SPKK shall notify SciClone upon the conclusion of each phase of clinical trials with respect to a given indication. 3.3.6 Trademarks. Except as otherwise agreed in writing, SPKK agrees and acknowledges that SPKK and its permitted sublicensees shall use only the Marks and no other trademarks in connection with the development and testing of Licensed Products. 3.4. Development Obligations of SciClone. 3.4.1 Supply of TA 1 For Development Purposes. SciClone agrees to supply SPKK with its requirements for TA 1 Material for SPKK's development efforts [*REDACTED] in accordance with Section 6.2. 3.4.2 Technical Assistance. SciClone shall provide technical assistance as requested by SPKK, as agreed upon by the parties and subject to reasonable availability of resources. SPKK and SciClone shall [*REDACTED] incurred by SciClone after the Signing Date in supplying such technical assistance. SciClone agrees and acknowledges that the costs associated with SciClone's attendance at all other meetings which take place, including, without limitation, pursuant to Sections 3.1 and 7.1 hereof, shall not be the responsibility of SPKK, but shall be borne by SciClone. 3.4.3 Development Efforts. SciClone (or its designee) shall work diligently with SPKK, consistent with the terms of this Agreement and with accepted business practices and legal - ---------------------- *Omitted and filed separately with the Commissioner. 6 requirements in Japan, to develop Licensed Products, and agrees to provide scientific, technical, clinical and regulatory personnel, time and resources sufficient to meet its obligations hereunder. 3.5. Regulatory Matters. 3.5.1 Compliance with Regulations. Both parties hereto shall conduct their efforts hereunder in compliance with all applicable GLPs, GMPs and GCPs and other applicable regulatory requirements. 3.5.2 Regulatory Filings. SPKK shall prepare and file, and shall be the owner of all filings with the MHW and any other Japanese regulatory authorities with respect to the Licensed Products (the "Regulatory Filings"), and SPKK shall be responsible for processing such applications through the approval process; provided, however, that, to the extent permitted under Japanese law and regulations, both SPKK and SciClone (or its designee) shall be co-parties of record with the MHW for all such Regulatory Filings. SciClone shall have rights of consultation with SPKK personnel responsible for Regulatory Filings with respect to the preparation and submission of such Regulatory Filings, and SciClone shall cooperate with SPKK in such manner as SPKK may reasonably request to assist in obtaining regulatory approval for such Licensed Products or Improvements. SPKK shall promptly deliver to SciClone copies, in Japanese, of all Regulatory Filings and correspondence with the Japanese regulatory authorities related thereto, and summaries of all such Regulatory Filings and correspondence, in English, [*REDACTED]. SPKK shall deliver English language translations of significant and relevant portions of any Regulatory Filings and correspondence at which SciClone may reasonably require in connection with its rights or obligations in Japan under this Agreement, at the joint and equal expense of SPKK and SciClone. 3.5.3 Adverse Events. The parties shall advise each other of any Adverse Event to the use of TA 1, either as a result of its development efforts hereunder, or otherwise, as set forth in Exhibit E hereto. 3.5.4 Maintenance of Records. SPKK shall maintain records with respect to the Program Data in sufficient detail and in good scientific manner appropriate for Japanese regulatory approval purposes and as will reflect all studies conducted and results achieved by SPKK in the course of the Development Program. 3.6. [*REDACTED] 3.7. Third Party Contracts. As to any contract for work to be performed by third parties [*REDACTED], said contract shall be submitted to both parties (in an English translation) for review, comment and approval prior to a party entering into the contract, which approval shall not be withheld or delayed unreasonably. 3.8. Co-Developer Status. Notwithstanding SPKK's ownership interests, to the extent permitted by applicable Japanese law or regulations, it is the intention and agreement of the - ---------------------- *Omitted and filed separately with the Commissioner. 7 parties that SciClone (or its designee) and SPKK shall be co developers and co parties of record for the Program Data, the Regulatory Filings, and any applicable governmental approvals or licenses for the manufacture, use and/or sale of Licensed Products in Japan. To the extent that applicable Japanese law or regulation permits such co developer status or co parties of record status only through some special arrangement or mechanism (such as SciClone using an in country caretaker or CRO agent, or SciClone or its designee performing at least 10% of the work, or SciClone assigning or sublicensing certain obligations to a designee, or some other arrangement), then SciClone may implement such an arrangement or mechanism, notwithstanding anything to the contrary contained elsewhere in this Agreement. The intention and effect of said co developer status or co parties of record status is to enable SciClone (or its designee) to be in a position, immediately upon any termination of SPKK's exclusive license rights under this Agreement, to market and sell Licensed Products in Japan without any delay. ARTICLE 4 PROGRAM DATA; IMPROVEMENTS AND INVENTIONS 4.1. Program Data Rights and Licenses All right, title and interest in and to the Program Data shall reside solely with SPKK; provided, however, that SPKK hereby grants to SciClone: (a) an exclusive, even as to SPKK, royalty free, perpetual license, with the right to sublicense to the SciClone Sublicensees, to use such Program Data within the SciClone Territory solely for SciClone's development, marketing and sale of TA 1 products in the SciClone Territory, including marketing activities and governmental filings for regulatory approvals and patent filing, prosecution and maintenance; (b) a perpetual, exclusive (even as to SPKK) license to use such Program Data outside the SPKK Territory and the SciClone Territory solely for the development, marketing and sale of TA 1 products, with the right to sublicense to Alpha, the Alpha Sublicensees and Roche, subject to the negotiation in good faith of the consideration for such sublicense (whether in the form of royalties or license fees) by SciClone and SPKK, at the time of any such sublicense grant, based upon the commercial value of such Program Data and SPKK's overall licensing policies; and (c) with respect to any license granted to SciClone under Sections 4.1(a) or (b) above which relates to or is derived from Intron A, said license shall be only to develop (including the governmental filings set forth in Paragraph 4.1(a) above), market and sell TA-1, and said license is subject to the consent of SPKK, which consent can be withheld only if SPKK (or any of its Affiliates) reasonably determines that such license would have a significant negative impact on the sales of Intron A either in Japan or worldwide. 8 SPKK will make available to SciClone any and all Program Data it generates or acquires, in its original form, together with an English translation paid for equally by SPKK and SciClone. The foregoing grants to SciClone shall not inhibit or otherwise impair rights of SPKK or any of its Affiliates to use the program data to develop, market, sell and use INTRON-A in any country in the world. 4.2. Improvements. 4.2.1 Development of Improvements. Subject to and consistent with the other terms of this Agreement, SPKK and SciClone each agree to cooperate with respect to Improvements, including expansion of the indications for TA l, improving TA l's efficacy and enhancing TA l's proprietary position. 4.2.2 Transfer of Information. SPKK and SciClone shall each cooperate to fully disclose to the other (but only where such disclosure would not adversely affect attainment of patent protection), within sixty (60) days after the Signing Date and on an ongoing basis, any and all Improvements, including, without limitation, all data, materials, copies of notebooks, know how, related patent applications and the like related thereto. 4.3. Inventions. Each party acknowledges and agrees that any and all Inventions arising from any Improvements that are made or discovered pursuant to this Agreement solely by its employees or agents shall be owned solely by it (the "SPKK Inventions" or the "SciClone Inventions" as the case may be) and that any and all Inventions made jointly by employees or agents of each pursuant to this Agreement shall be jointly owned ("Joint Inventions"), all as determined in accordance with U.S. laws of inventorship; provided, however, that in the event of any conflict between U.S. law and the applicable laws of Japan which arises in the course of the prosecution in Japan of any patent application on any SPKK Invention or Joint Invention, the applicable laws of Japan shall control. Notwithstanding the foregoing, with respect to Japan, any Inventions arising from Improvements made or discovered pursuant to this Agreement relating to or derived from Intron A or treatment, alone or in combination with other pharmaceutical compositions, with Intron A, shall be solely owned by SPKK, provided, however, said ownership by SPKK is not necessarily indicative of, or is to be construed as an admission as to, inventorship or priority of inventorship of any invention, including without limitation, existing patents and pending patent applications worldwide to which SciClone has rights. 4.4. License to SPKK Inventions and Joint Inventions. (a) Subject to the terms and conditions of this Agreement, including, in particular, Sections 4.4(b) and 6.3.9, SPKK hereby grants to SciClone: (i) an exclusive, even as to SPKK, royalty free, perpetual license to practice and use the SPKK Inventions and the Joint Inventions, within the SciClone Territory, with the right to sublicense to the SciClone Sublicensees which use shall include, without limitation, marketing activities and governmental filings for regulatory approvals and patent filing, prosecution and maintenance, for SciClone's development and marketing of TA 1 products in the SciClone Territory; and 9 (ii) a perpetual, non exclusive license to practice and use the SPKK Inventions and the Joint Inventions, outside the SPKK Territory and the SciClone Territory, with the right to sublicense to Alpha, the Alpha Sublicensees and Roche. The foregoing grants to SciClone shall not inhibit or otherwise impair the rights of SPKK or any of its Affiliates to use SPKK inventions and/or the Joint Inventions to develop, market, sell and use INTRON-A in any country in the world. As to any sublicenses granted after the Signing Date under subparagraphs (i) or (ii) above, SciClone shall diligently seek to obtain fair and reasonable compensation for the granting of such sublicenses, and shall share with SPKK a fair and reasonable portion of any compensation which SciClone receives from any such sublicensee, [*REDACTED] and a reasonable portion of any other non-royalty consideration received by SciClone from such sublicensee. SciClone and SPKK shall negotiate in good faith to determine the reasonable portion of said consideration to be paid to SPKK, based upon, and taking into full account, all relevant legal and factual matters, considerations, and relative contributions related to the sublicense transaction. If the parties are unable to reach agreement as to the proportion to be paid by SciClone to SPKK, then said portion shall be determined pursuant to the dispute resolution provisions set forth in Article 15 of this Agreement. The parties acknowledge that the rights granted in clause (ii) above have been extensively negotiated, reflect SPKK's expressed concern that the SPKK Inventions and the Joint Inventions not flow into the hands of its competitors or potential competitors without compensation, and reflect SciClone's commercially reasonable efforts to obtain for Alpha, Roche and the Alpha Sublicensees rights to the SPKK Inventions and the Joint Inventions in accordance with the Alpha Agreement. (b) With respect to any license granted to SciClone under Section 4.4 (a) above which relates to or is derived from Intron A, said license shall be only to develop, market and sell TA-1, and said license is subject to the consent of SPKK, which consent can be withheld only if SPKK (or any of its Affiliates) reasonably determines that such license would have a significant negative impact on the sales of Intron A either in Japan or worldwide. ARTICLE 5 LICENSE PAYMENTS 5.1. Milestone Payment for CHB. Except as provided in Section 5.3, SPKK shall make to SciClone the following non refundable CHB milestone payment [*REDACTED]. 5.2. Milestone Payment for CHC. Except as provided in section 5.3, SPKK shall make to SciClone the following non refundable CHC milestone payment [*REDACTED]. 5.3. Waiver of Certain Milestone Payments. In the event SPKK is successful in obtaining an extension to Japanese Patent No. [*REDACTED], contained in the Alpha Patents (whether by actions relating solely to such patent or by more general lobbying efforts with respect - ---------------------- *Omitted and filed separately with the Commissioner. 10 to changes in Japanese patent law), [*REDACTED]. SPKK acknowledges and agrees that in the event such an extension is obtained primarily for reasons unrelated to actions on the part of SPKK, the waiver set forth above shall not apply. ARTICLE 6 SUPPLY OF TA-1 MATERIAL AND MANUFACTURE OF LICENSED PRODUCTS 6.1. Manufacture and Supply of TA 1 Material. SciClone warrants and represents that as of the Signing Date it has the right under the terms of the Alpha Agreement (as amended) to make, manufacture, synthesize or otherwise produce or have made, manufactured, synthesized or otherwise produced TA 1 Material. 6.2. Clinical Supply. SciClone shall use diligent efforts to cause to be supplied to SPKK, [*REDACTED] such amounts of TA-1 Material necessary to conduct preclinical and clinical studies pursuant to the Development Program and to obtain regulatory approval for Licensed Products. SPKK will provide SciClone with rolling six (6) month forecasts of its clinical requirements for TA-1 Material on a quarterly basis, beginning within thirty (30) days after the Signing Date. 6.3. Commercial Supply. 6.3.1 Commercial Supply Agreement. SciClone agrees that it will use diligent efforts for it or its designated Affiliate to manufacture and sell, and SPKK will purchase from SciClone or SciClone's designated Affiliate, all of SPKK's reasonable commercial requirements of (i) TA 1 Material; and (ii) in the event that SPKK notifies SciClone that it is unable to perform all aspects of the Final Processing of TA 1 Material to produce Licensed Products, such other unfinished materials prepared from TA 1 Material (e.g., lyophilized TA 1 Material) as to enable SPKK to produce Licensed Products, regardless of the number of filed NDA(s) and marketing methods used for Licensed Products. Such supply shall be pursuant to a commercial supply agreement to be negotiated in good faith between the parties, which agreement adequately reflects both SPKK's needs for TA 1 Material and SciClone's available resources and commitments (the "Commercial Supply Agreement"). Negotiation for said Commercial Supply Agreement shall be commenced within thirty (30) days after, and shall be completed within twelve (12) months after, the filing of the first NDA with respect to a Licensed Product. Such Commercial Supply Agreement will incorporate those terms substantially as set forth below with respect to commercial supply of TA 1 Material and other unfinished material to be supplied by SciClone, if any, as well as certain additional terms related to ordering and delivery of TA 1 Material and other unfinished material to be supplied by SciClone, if any, forecasts, compliance with specifications, and inspection, acceptance, and return of TA 1 Material and other unfinished material to be supplied by SciClone, if any, as outlined in Exhibit H, and other provisions customary to this kind of contract in the pharmaceutical industry. - ---------------------- *Omitted and filed separately with the Commissioner. 11 6.3.2 Cutbacks in Supply. In the event SciClone is unable to supply, or cause to be supplied, to SPKK and the SciClone Sublicensees all of each of their reasonable commercial requirements of TA 1 Material, SciClone shall decrease the amount to be supplied to each SciClone Sublicensee and SPKK proportionately according to the prior sales of each of them. 6.3.3 SPKK Contingent Manufacturing Rights. Subject to the terms of the Alpha Agreement, and to the terms of this Agreement, SciClone hereby grants to SPKK a sublicense of its rights under the Alpha Agreement to make, manufacture, synthesize or otherwise produce or have made, manufactured, synthesized or otherwise produced, SPKK's commercial requirements of TA 1 Material, which sublicense shall become effective if and only if: (i) either: (a) SciClone determines that it is not reasonably able to supply, or arrange to supply, all of SPKK's reasonable commercial requirements of TA 1 Material; or (b) SciClone is unable to supply SPKK's reasonable commercial requirements of TA 1 Material in such amounts and for such period of time as is agreed upon by the parties at the time of negotiation of, and as set forth in, the Commercial Supply Agreement; or (c) SciClone and SPKK have reasonably agreed such sublicense shall become effective; and (i) the parties have agreed, pursuant to good faith negotiations, to a mechanism (including the royalty payable to SciClone as set forth in Section 6.3.6 hereof) for minimizing any adverse financial effects to either party that may result from the cessation of supply of TA 1 Material by SciClone and the conferral of such contingent manufacturing rights upon SPKK; and (ii) SciClone shall be permitted to resume being the exclusive manufacturer and supplier of TA 1 Material as soon as is reasonably feasible, subject to: (i) reasonable and appropriate arrangements being made to enable SPKK to recover or amortize its start up costs (including without limitation the costs of additional clinical or other trials)incurred to replace on a temporary basis SciClone as the manufacturer and supplier of the TA 1 Material; and (ii) the requirements of Japanese law or regulations. 6.3.4 Specifications. All TA 1 Material manufactured and supplied hereunder shall be manufactured in conformity with the Specifications and in compliance with applicable Japanese rules and regulations, including cGMPs. The parties understand and agree that the Specifications may be revised or supplemented from time to time and as agreed by the parties, or in order to comply with government regulations or to take into account Improvements, Alpha Improvements, Alpha Sublicensee Improvements and SciClone Sublicensee Improvements, where and to the extent the same has been licensed to the party then manufacturing TA 1 Material. 6.3.5 Product Introduction. During the first six (6) months after the first public announcement of the introduction of a Licensed Product for commercial use, SPKK shall 12 purchase from SciClone TA 1 Material to be used for marketing and promotion of such Licensed Product[*REDACTED] and in such amounts and at such prices as are set forth in the Commercial Supply Agreement. 6.3.6 Commercial Price. [*REDACTED] SPKK shall use good faith and commercially reasonable efforts to obtain from MHW the most favorable price for Licensed Products and SPKK shall consult with SciClone and keep SciClone fully informed concerning these efforts with MHW. [*REDACTED] 6.3.7 Payment. Payment for commercial requirements of TA 1 Material ordered hereunder shall be made in accordance with the terms of the Commercial Supply Agreement. 6.3.8 Minimum Purchase Order. SPKK acknowledges and agrees that during the term of this Agreement it shall be obligated to purchase from SciClone such quantities of TA 1 Material as are consistent with commercially reasonable efforts to market and sell Licensed Products. The Commercial Supply Agreement for each Licensed Product shall set forth SPKK's estimated purchase requirements for TA 1 Material for [*REDACTED]. During the term of the Commercial Supply Agreement SPKK will, at least [*REDACTED] prior to the beginning of each calendar quarter prepare and provide to SciClone rolling estimated purchase requirements for TA 1 Material for [*REDACTED] period beginning on the first day of the quarter [*REDACTED]. Estimated purchase requirements will be based on past sales and future sales forecasts generated by SPKK for Licensed Products. Each of SPKK and SciClone acknowledge and agree that for each such estimate the [*REDACTED] purchase requirements set forth therein shall be binding on both parties, and that the remainder of such estimates shall be non binding and are provided for information purposes only. 6.3.9 Effect of Improvements. The parties agree that in the event any Improvement, Alpha Improvement, SciClone Sublicensee Improvement or Alpha Sublicensee Improvement has the effect of reducing the cost of processing, manufacturing or producing TA-1 Material, the parties shall negotiate a new Commercial Price so as to ensure, so far as is practicable, that the parties share equally in the economic benefit of such Improvement. 6.3.10 Audit Rights. SciClone and SPKK each agree to keep proper records and books of account and all proper entries therein relating to the manufacture, supply and Final Processing of Licensed Products. Either party may cause an audit to be made of the applicable records of the other party in order to verify any price, costs or statements rendered hereunder, at the auditing party's expense. 6.4. Final Processing of Licensed Products SPKK will be responsible for and assume all costs associated with Final Processing, quality control, and storage of Licensed Products. [*REDACTED] - ---------------------- *Omitted and filed separately with the Commissioner. 13 ARTICLE 7 MARKETING AND SALES OF LICENSED PRODUCTS 7.1. Marketing Coordinators. No later than six months before the estimated date of first commercial sale of the first Licensed Product hereunder, the parties shall each appoint one authorized representative (hereinafter "Marketing Coordinator") for the exchange of all communications related to the promotion and marketing of Licensed Products in the SPKK Territory. To facilitate the commercialization of each Licensed Product in the SPKK Territory, the Marketing Coordinators, or such other representatives of the parties as are agreed, shall meet as needed, but no less than once every six (6) months. Such meetings shall be at times and places agreed to by SPKK and SciClone. At such meetings the parties will review the Budget, discuss the Marketing Plan, coordinate the marketing objectives therein, set priorities thereunder, discuss and define the Specifications and quality control of Licensed Products. SciClone agrees that final decisions as to the promotion and marketing of Licensed Products shall be made by SPKK, after giving due consideration to SciClone's input. 7.2. Marketing Plan. SPKK will prepare and deliver to SciClone [*REDACTED] a marketing plan for each of the Licensed Products (the "Marketing Plan"). 7.3. Product Launch. Upon gaining the necessary regulatory, pricing and reimbursement approvals, SPKK agrees to work diligently, consistent with accepted business practices and legal requirements, to launch, promote, and commercialize each Licensed Product, devoting a comparable degree of attention and diligence to such promotion efforts as it devotes to the promotion of its other pharmaceutical products of comparable market potential. 7.4. Marketing of Licensed Products. SPKK agrees and acknowledges that as a condition to the license rights contained in this Agreement, SPKK and its permitted sublicensees shall use only the Marks in connection with the sale or advertising of Licensed Products, provided, however, that where SPKK offers good cause as to why a Mark is unsuitable for commercialization of Licensed Products in the SPKK Territory, SciClone shall file for and maintain, at its expense, during the term of this Agreement, variations on any Mark [*REDACTED] to ensure the optimal trademark for the SPKK Territory. SPKK and SciClone will discuss and decide jointly prior to filing of the initial NDA with respect to a Licensed Product whether it is most advantageous to the parties to market Licensed Products under a single or multiple Mark. 7.5. Pre-existing Royalties. SPKK, or its designee, shall pay directly to such third parties all royalties due to third parties on SPKK's Net Sales of Licensed Products, including those due to the Universities, Roche and Alpha pursuant to the Alpha Agreement, as set forth in Exhibit I; provided, [*REDACTED] of SPKK's Net Sales in any calendar year; and provided, further, that in the event any such third party royalty shall expire or decline, SPKK's obligation hereunder shall be adjusted accordingly. - ---------------------- *Omitted and filed separately with the Commissioner. 14 ARTICLE 8 [INTENTIONALLY OMITTED] ARTICLE 9 REPRESENTATIONS AND WARRANTIES 9.1. Mutual Representations and Warranties. Each party hereby represents and warrants: 9.1.1 Corporate Power. Such party is duly organized and validly existing under the laws of the state or country of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof. 9.1.2 Due Authorization. Such party is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder. 9.1.3 Binding Agreement. This Agreement is a legal and valid obligation binding upon it and enforceable in accordance with its terms. The execution, delivery and performance of this Agreement by such party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it. 9.2. Representations and Warranties of SPKK. SPKK represents and warrants that it has had the opportunity to fully review, and has finally reviewed the Alpha Agreement and the Prior Agreements and understands the terms and conditions stated therein. 9.3. Representations and Warranties of SciClone. SciClone represents and warrants that it will use its best efforts to comply with the Alpha Agreement to the extent necessary to avoid termination of the rights of SPKK to develop and commercialize Licensed Products in the SPKK Territory. SciClone further represents and warrants that to its best knowledge the Marks are valid and subsisting and that SciClone has received no actual notice that any of the Marks infringe the rights of any third party. ARTICLE 10 CONFIDENTIALITY 10.1. Confidentiality. During the term of this Agreement, and thereafter, each party hereto will maintain in confidence all Confidential Information disclosed by the other party hereto. Neither party will use, disclose or grant use of such Confidential Information except as expressly authorized by this Agreement. To the extent that disclosure is authorized by this Agreement, the disclosing party will obtain prior written agreement from its employees, agents, consultants or clinical investigators to whom disclosure is to be made to hold in confidence and not make use of 15 such information for any purpose other than those permitted by this Agreement. Each party will use at least the same standard of care as it uses to protect its own trade secrets or proprietary information to ensure that such employees, agents, consultants and clinical investigators do not disclose or make any unauthorized use of such Confidential Information. Each party will promptly notify the other upon discovery of any unauthorized use or disclosure of the Confidential Information. 10.2. Exceptions. Confidential Information shall not include any information which: (i) was already known to the receiving party, other than under an obligation of confidentiality to the disclosing party, at the time of disclosure by the other party; (ii) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the other party; (iii) becomes generally available to the public or otherwise part of the public domain after its disclosure other than through any act or omission of the receiving party in breach of this Agreement; (iv) was disclosed to the receiving party, other than under an obligation of confidentiality, by a Third Party who had no obligation to the other party not to disclose such information to others; (v) is required to be disclosed in a judicial or administrative proceeding after all reasonable legal remedies for maintaining such information in confidence have been exhausted; or (vi) is subsequently and independently developed by employees, consultants or agents of the disclosing party without the aid, application or use of any Confidential Information. 10.3. Authorized Disclosure. Each party may disclose the Confidential Information to the extent such disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation or complying with applicable governmental regulations, provided that if such party is required to make any such disclosure of the Confidential Information it will to the extent practicable give reasonable advance notice to the other party of such disclosure requirement and, except to the extent inappropriate in the case of patent applications, will use its best efforts to secure confidential treatment of such information required to be disclosed. To the extent necessary to perform its obligations under this Agreement, SPKK may disclose (subject to the confidentiality restrictions contained herein) Confidential Information to investigators and third party contractors, such as potential lyophilization contractors, or suppliers of materials required for lyophilization and finishing of TA l Material for preclinical and clinical studies (provided such investigators and third parties execute confidentiality agreements containing terms no less strict than those contained herein). 10.4. Third Party Beneficiary. The parties agree that Alpha is a third party beneficiary of this Agreement, but only as it relates to "Confidential Information" as defined under the Alpha 16 Agreement, and that Alpha is entitled to enforce each and every provision of this Agreement pertaining to such "Confidential Information" as if it were a party hereto. 10.5. Press Releases. Prior to the Signing Date, SciClone has furnished to SPKK a form of press release which SciClone is required by law to make with respect to this Agreement, which press release has been approved by SPKK. Any additional or subsequent press releases by SciClone or SPKK with respect to this Agreement or the subject matter hereof, or any right, obligation or development thereunder (including, without limitation, any result of or development under the Development Program), shall be subject to the prior review and approval by the other party, which approval shall not be unreasonably withheld or delayed. Under no circumstance shall either party hereto quote or speak on behalf of the other party without the specific written permission of such other party. Notwithstanding anything to the contrary, if the applicable laws or governmental regulations obligate a party to issue a press release, the party shall be entitled to do so, although the party first shall use good faith efforts to submit to the other party a draft of the proposed press release and to give due consideration to any suggested revisions recommended by the other party. 10.6. Agreement Confidential. The parties agree that the contents of this Agreement shall constitute Confidential Information, and as such, will not be disclosed by either party without the prior written consent of the other, except as required by law or prior contractual obligation, and provided that such written consent will not be unreasonably delayed or withheld. SPKK understands and acknowledges that SciClone is obligated to file a copy of this Agreement with the United States Securities and Exchange Commission, and SciClone is authorized to do so without prior consent from SPKK. SciClone shall request the Securities and Exchange Commission to give confidential treatment to sensitive provisions of this Agreement, and will consult with SPKK concerning such provisions. The parties agree that information concerning this Agreement which is made public in accordance with the provisions of Sections 10.5 and 10.6 hereof may be repeated at subsequent times and in subsequent forms without the need for prior consent from either party. ARTICLE 11 INTELLECTUAL PROPERTY 11.1. Prosecution and Maintenance of Alpha Patents. The Alpha Patents shall be prosecuted and maintained by SciClone, Alpha or Roche, as provided under the Alpha Agreement. In the event SciClone receives notification from Alpha that it does not choose to continue prosecution of one or more of the Alpha Patents and is able to transfer such rights to SciClone, SciClone shall either take such actions as are necessary to prosecute or maintain such patent application or patent, at its expense, or, where practicable, shall give SPKK not less than two (2) months' notice before any relevant deadline and SPKK shall have the right to pursue, at its expense, prosecution of such patent application or maintain such patent. In such event SciClone shall promptly assign its rights therein to SPKK, subject to the rights retained by Alpha and Roche pursuant to Section 10.1 of the Alpha Agreement. The transfer of any patent rights hereunder shall not effect in any way SPKK's obligations to make all payments set forth in this Agreement. In the event of termination or expiration of this Agreement pursuant to Article 12, SPKK shall re 17 assign any such patent or patent application to SciClone upon SciClone's request and pursuant to Alpha's request of the same from SciClone, to the extent practicable within thirty (30) days after the date of such termination or expiration and upon reimbursement by SciClone to SPKK of all costs incurred by it for the prosecution and maintenance of such patents or patent applications. 11.2. Prosecution and Maintenance of SciClone Patents. SciClone Patents shall be prosecuted and maintained by SciClone, at its expense; provided, that in the event SciClone elects not to pursue prosecution of any patent or patent application contained in the SciClone Patents, SciClone shall give SPKK not less than two (2) months' notice before any relevant deadline and SPKK shall have the right to pursue, at its expense, prosecution of such patent application. In such event SciClone shall promptly assign its rights therein to SPKK. The transfer of any patent rights hereunder shall not effect in any way SPKK's obligations to make all payments set forth in this Agreement. 11.3. Joint Patent Applications or Inventions. 11.3.1 Inventions. Each of SciClone and SPKK shall be free to determine those SciClone Inventions or SPKK Inventions, respectively, upon which it chooses to file one or more patent applications in accordance herewith. In the event SciClone or SPKK determines to file a patent application with respect to any SciClone Invention or SPKK Invention, respectively, that party shall conduct such patent prosecution process (including interferences and foreign oppositions) according to its own internal standards so as to most effectively cover such Invention for use by both SciClone and SPKK. The other party shall have full rights of consultation with the filing party's counsel and any outside patent attorney with respect to a patent application on any Invention. The filing party shall also promptly deliver to the other party copies of all patent applications, amendments, related correspondence and other related matters. All expenses associated with the prosecution and maintenance of all patent applications described herein shall be borne by the filing party. 11.3.2 Joint Inventions. The parties will jointly determine whether to seek patent protection for any Joint Invention. SciClone shall have the responsibility for promptly filing patent applications on Joint Inventions. The expense of preparing, filing, prosecuting and maintaining patent applications on Joint Inventions shall be borne [*REDACTED]. All such joint patent applications shall be mutually approved by the parties and filed in the name of SciClone and SPKK, or their designees, [*REDACTED]. In the event the parties do not mutually agree to proceed with a patent application on a Joint Invention, the party wishing to file may do so at its own expense. 11.3.3 Abandonment. In the event either party elects not to pursue prosecution of a patent application described in Section 11.3.1 or 11.3.2 above (including any foreign counterpart application of a U.S. patent application filed) or pay any annuity as it becomes due, such party shall give the other party not less than two (2) months' notice before any relevant deadline and such other party shall have the right to pursue, at its expense, prosecution of such - ---------------------- *Omitted and filed separately with the Commissioner. 18 patent application. In such event the abandoning party shall promptly assign its rights therein to the other party. 11.3.4 No Representation. Each party specifically excludes any representation or warranty, express or implied, that it will successfully obtain any patent on any Invention or Joint Invention. 11.4. Assignments. 11.4.1 Inventions. or Program Data Each party to which any portion of the Inventions or Program Data vests other than as intended and set forth in this Agreement shall, to the extent required by the intent or provisions herein, immediately assign to the other such right, title, and interest therein. Each party agrees to cooperate with the other and take all reasonable additional actions and execute such agreements, instruments, and documents as may be reasonably required to perfect the other's ownership interest in accordance with the intent of this Article 11, including, without limitation, the execution of necessary and appropriate instruments of assignment. 11.4.2 Joint Inventions. Each party agrees not to assign any rights to the Joint Inventions (except to its Affiliates) without the prior written consent of the other party. 11.5. Patent Marking. SPKK shall mark all Licensed Products manufactured, used or sold under the terms of this Agreement, or their containers, in accordance with the applicable patent marking laws, as required. 11.6. Enforcement. In the event SciClone or SPKK becomes aware of any actual or threatened infringement or misappropriation of any Alpha Technology, SciClone Technology, Alpha Sublicensee Technology, SciClone Sublicensee Technology or Improvements, that party shall promptly notify the other. In the case of infringement of Alpha Technology, the parties acknowledge that pursuant to Section 13.2 of the Alpha Agreement, SciClone shall have the first right to bring an infringement action against the third party infringer. To the extent allowed under Section 13.2 of the Alpha Agreement, Alpha shall have the right to bring such an action in the event SciClone elects not to bring such an infringement action. In the further event that Alpha elects not to pursue such infringement action, it shall so notify SPKK, in which event SPKK shall have the right to bring such action, at its own expense, and in accordance with the requirements of Section 13.2 of the Alpha Agreement. 11.7. Patent Term. Extensions SciClone and SPKK shall reasonably cooperate to obtain the benefits of any patent term extension which may be available for any patent subject to this Agreement. 11.8. Trademarks. 11.8.1 Ownership of Marks. SPKK hereby acknowledges SciClone's ownership of the Marks and covenants that SPKK shall not contest or challenge, directly or indirectly, the validity of the Marks at any time. Such Marks shall bear the designation TM or the designation R within a circle, as specified by SciClone. If SPKK, in the course of marketing and distribution of 19 the Licensed Products, acquires any goodwill or reputation in the Marks, all such goodwill or reputation shall automatically vest in SciClone upon termination or expiration of this Agreement, without separate payment or other consideration to SPKK. 11.8.2 Defense of Marks. In the event SPKK becomes aware of any actual or threatened infringement of the Marks in the SPKK Territory, SPKK shall promptly notify SciClone. SPKK shall, at the request and expense of SciClone, do such acts or things as SciClone may reasonably require for the purpose of obtaining, maintaining, enforcing and preserving any of the Marks in the SPKK Territory; provided, however, that SPKK agrees that only SciClone has the right to enjoin any infringement or registration by a third party of the Marks; except that, in the event SciClone elects not to seek to enjoin any such infringement or registration, SPKK shall have the right, at its election and expense, to do so. SPKK agrees to cooperate fully with SciClone at the expense of SciClone if SciClone sues to enjoin such infringements or to oppose or invalidate any such registration. 11.8.3 Registration. SciClone acknowledges and agrees that within fourteen (14) business days after the Signing Date it shall file this Agreement with the Japanese Trademark Authorities for the purpose of registering SPKK therewith as a licensee of the Marks. If any additional filing or registration is required by applicable Japanese law to so register SPKK as a licensee of the Marks, SciClone shall do so. Costs for the foregoing shall be borne by SPKK as specified in Section 17.1 hereof. ARTICLE 12 TERM; TERMINATION 12.1. Term. The term of this Agreement shall commence upon the Effective Date and expire upon the last to occur of: (i)) [*REDACTED] or (ii) [*REDACTED] or (iii) [*REDACTED]. Upon the expiration of this Agreement (as distinguished from an early termination of this Agreement), SPKK shall enjoy a non exclusive, royalty free, paid up license to all licenses from SciClone granted pursuant to this Agreement (including, without limitation, the right to use the Marks upon expiration), subject to Sections 2.2.2 and 12.2 hereof. 12.2. Extension or Renewal; Right to Marks. Prior to expiration of this Agreement, SPKK and SciClone shall, where mutually beneficial, negotiate in good faith to extend or renew this Agreement and/or the Commercial Supply Agreement with the objective of continuing the relative economic benefits enjoyed by the parties prior to expiration, but taking into account the expiration of the relevant patents. In the event this Agreement is terminated by SPKK pursuant to Section 12.4.2, SPKK shall retain the right and license to use the Marks as provided for in this Agreement. In the event this Agreement is terminated by SPKK pursuant to Section 12.4.1 or is terminated by SciClone pursuant to Section 12.3, then SPKK shall not have any further right or license to use the Marks. - ---------------------- *Omitted and filed separately with the Commissioner. 20 12.3. Termination by SciClone. SciClone may, in its sole discretion, terminate this Agreement, effective after the grace periods described below, by giving written notice of such termination to SPKK, if SPKK fails to comply with any material obligation of this Agreement, including without limitation, failure of SPKK to perform any of its material development obligations under Section 3.3 and Exhibit D, or failure of SPKK to make any payments when due and payable hereunder (except payment of amounts that are under bona fide dispute by SPKK, which dispute shall then be resolved promptly under the provisions of Article 15 hereof), and SPKK fails to cure such failure within sixty (60) days after written notice thereof by SciClone; provided, however, that if SPKK is unable to cure a failure for causes beyond its reasonable control pursuant to Section 17.8, then such sixty (60) day period shall be extended for a period of time reasonable under the circumstances. Upon effective termination by SciClone, all payments then outstanding under this Agreement shall become immediately due and payable. Upon any such termination by SciClone, all licenses from SciClone shall terminate. 12.4. Termination by SPKK. 12.4.1 Termination Without Cause. (a) Notwithstanding any provision in this Agreement to the contrary, SPKK shall have the right to terminate this Agreement [*REDACTED] SciClone of SPKK's intent to so terminate. Within [*REDACTED] days after said notice of intent, the CEOs of SPKK and SciClone shall meet in Japan to discuss said notice of intent to terminate (unless such CEOs have agreed in writing to an alternative process). (b) If SPKK gives notice of intent to terminate this Agreement with respect to both the CHB and CHC indications, then at any time(s) after the [*REDACTED], SciClone shall give to SPKK all data then available which reasonably supports the commercial and/or scientific feasibility of the use of TA-1 for other indications in Japan and a written plan and budget as to the development of such other indication(s) (excluding CHB and CHC), of which SciClone is aware, whereupon SPKK shall have sixty (60) days to deliver to SciClone a written commitment to so develop and commercialize the SciClone Technology for said indication(s); and if SPKK does not so commit, then SPKK shall have no further rights with respect to said indication(s). (c) During the [*REDACTED] period following any notice of intent to terminate given hereunder by either party, [*REDACTED]. (d) After receipt of any SPKK notice of intent to terminate, SciClone shall have the right to offer to any third party, whether in or outside of the SPKK Territory, the right to develop, use and sell TA 1 based products for any such rejected indication, although such rights may be granted to the third party only upon the effective date of the termination of SPKK's rights to said indication(s). - ---------------------- *Omitted and filed separately with the Commissioner. 21 (e) If SPKK terminates this Agreement with respect to both the CHB and CHC indications, then SPKK shall have no further rights with respect to CHB and CHC indications; and SPKK's rights for all additional indications shall cease [*REDACTED] following said termination as to both the CHB and CHC indications, excepting only that SPKK's rights under this Agreement shall continue in full effect for any indication(s) with respect to which SPKK is pursuing and continues to pursue diligent development and/or commercialization efforts. (f) At the time SPKK terminates this Agreement with respect to a particular indication(s), if SPKK has already then obtained the required regulatory and pricing approvals for marketing and selling Licensed Products for said rejected indication(s), then SciClone [*REDACTED] of net sales (defined according to the definition of Net Sales, mutatis mutandis) in Japan by SciClone or any new third party licensee of any such product(s) for the rejected indication(s). The rate of said [*REDACTED] shall depend upon the economic feasibility for SciClone and/or such new third party licensee to make a fair and customary profit and return of investment, and still have revenues from the sale of Licensed Products available to fund said [*REDACTED]. If SciClone and SPKK are not able to reach mutual agreement as to the amount of [*REDACTED] then such [*REDACTED] shall be determined pursuant to binding arbitration in accordance with the provisions of Exhibit J hereof. SciClone's [*REDACTED] incurred pursuant to this Section 12.4.1 shall be [*REDACTED] incurred by SPKK for the rejected indication(s) during the period commencing on the Signing Date and ending on the effective date of termination of this Agreement with respect to a particular indication(s) under this Section 12.4.1. 12.4.2 Termination For Breach. SPKK, in its sole discretion, may terminate this Agreement at any time, effective after the cure period described below, by giving written notice of such termination to SciClone, if SciClone fails to comply with any material obligation of this Agreement and SciClone fails to cure such failure within [*REDACTED] after written notice thereof by SPKK, provided, however, that if SciClone is unable to cure a failure for causes beyond its reasonable control pursuant to Section 17.8 hereof, then such [*REDACTED] shall be extended for a period of time reasonable under the circumstances. Upon any termination of this Agreement pursuant to this Section 12.4.2, all licenses from SciClone shall continue in effect, subject to SPKK making payments to SciClone as contemplated by Section 6.3.6 hereof, and subject to reasonable renegotiation of Section 6.3.6 to reflect the changed contributions of the parties. 12.5. Effect of Termination. 12.5.1 Survival. Notwithstanding any termination or expiration, the provisions of Article 4, other than Sections 4.2 and 4.4, and Articles 9, 10, 11, 12, 13, 14, 15 and 17, and Section 7.4 shall survive to the extent required therein. 12.5.2 Data Regulatory Filings. Upon termination of this Agreement by SciClone in accordance with 12.3, or upon termination of this Agreement by SPKK in accordance with Section 12.4.1, SPKK shall promptly transfer or assign to SciClone (or its designee), to the extent - ---------------------- *Omitted and filed separately with the Commissioner. 22 permitted by law, any and all licenses issued by the Japanese regulatory authorities with respect to the Licensed Products, and shall deliver to SciClone any and all Program Data and Improvements, and any and all Licensed Products and TA 1 Material in its possession. SciClone shall pay to SPKK SPKK's actual cost of such Licensed Products and TA 1 Material. 12.6. SciClone Retained Rights. Notwithstanding anything to the contrary contained in this Agreement, in the event that this Agreement is terminated pursuant to Sections 12.3 or 12.4.1, then: (a) SciClone shall have full rights (and SPKK shall have no rights) to (i) develop, commercialize, make and sell Licensed Products, (ii) use Alpha Technology, SciClone Technology, SciClone Sublicensee Technology, Alpha Sublicensee Technology, SciClone Inventions and Joint Inventions, (iii) own and use all Regulatory Filings and Program Data, and (iv) own and use exclusively all Marks; and (b) the license to the SPKK Inventions set forth in Section 4.4 hereof shall survive such termination. ARTICLE 13 INDEMNIFICATION 13.1. Indemnification by SPKK. SPKK expressly and unequivocally agrees to and hereby does indemnify, release, defend and hold SciClone harmless from and against all claims, damages, losses, costs and expenses, including attorneys' fees, arising in favor of any person, firm or corporation resulting from or arising out of SPKK's liability in any way relating to the Licensed Products ("Claims"), including without limitation, the manufacture, packaging, use, sale or other distribution of Licensed Products by SPKK, or any representation made or warranty given by SPKK with respect to any Licensed Product, provided that SciClone (i) gives SPKK notice of such claim, (ii) cooperates with SPKK, at SPKK's expense, in the defense of such claim, and (iii) gives SPKK the right to control the defense and settlement of any such claim, except that SPKK shall not enter into any settlement which affects SciClone's rights or interest without SciClone's prior written approval; provided, however, that SPKK shall not so indemnify and hold SciClone harmless for any Claims arising from defects in any TA 1 Material supplied by SciClone which are present at the time of acceptance of such TA 1 Material by SPKK. SciClone shall have no authority to settle any claim on behalf of SPKK. 13.2. Indemnification. SciClone expressly and unequivocally agrees to and hereby does indemnify, release, defend and hold SPKK harmless from and against all claims, damages, losses, costs and expenses, including attorneys' fees, arising in favor of any person, firm or corporation arising out of liability based on: (a) claims arising from defects in any TA 1 Material supplied by SciClone which are present at the time of acceptance of such TA 1 Material by SPKK; (b) a claim that the use by SPKK of the SciClone Technical Information infringes any proprietary rights of third parties; or (c) a claim that the use of the Marks by SPKK in accordance with this Agreement infringes any proprietary rights of third parties. SciClone shall be liable for all such claims, damages, losses and the like incurred by SPKK, provided that SPKK (i) gives SciClone prompt notice of such claim, (ii) cooperates with SciClone, at SciClone's expense, in the defense of such claim, and (iii) gives SciClone the right to control the defense and settlement of any such claim, except that SciClone shall not enter into any settlement that affects SPKK's rights or interest 23 without SPKK's prior written approval. SPKK shall have no authority to settle any claim on behalf of SciClone. ARTICLE 14 DISCLAIMER OF WARRANTIES; FURTHER ACTION 14.1 Disclaimers. 14.1.1 SciClone Disclaimer. THE ALPHA TECHNOLOGY, SCICLONE TECHNOLOGY, ALPHA SUBLICENSEE TECHNOLOGY AND SCICLONE SUBLICENSEE TECHNOLOGY PROVIDED BY SCICLONE HEREUNDER ARE PROVIDED "AS IS" AND, EXCEPT AS PROVIDED IN Section 13.2 ABOVE, SCICLONE HEREBY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION THE WARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES OR ARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICES, IN ALL CASES WITH RESPECT THERETO. Without limiting the generality of the foregoing, SciClone expressly does not warrant (i) the success of any study or test commenced pursuant to the Development Program, or (ii) the safety or usefulness for any purpose of TA 1, Alpha Technology, SciClone Technology, Alpha Sublicensee Technology, SciClone Sublicensee Technology, or Program Data. 14.1.2 SPKK Disclaimer. THE PROGRAM DATA, IMPROVEMENTS, SPKK INVENTIONS AND JOINT INVENTIONS PROVIDED BY SPKK HEREUNDER ARE PROVIDED "AS IS" AND, EXCEPT AS PROVIDED IN SECTION 13.1 ABOVE, SPKK HEREBY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION THE WARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES OR ARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICES, IN ALL CASES WITH RESPECT THERETO. Without limiting the generality of the foregoing, SPKK expressly does not warrant the safety or usefulness for any purpose of the Program Data, or any Improvement, SPKK Invention or Joint Invention. 14.2. Additional Documents. Each party agrees to execute such further papers or agreements as may be necessary to effect the purposes of this Agreement. ARTICLE 15 DISPUTE RESOLUTION; VENUE AND GOVERNING LAW 15.1. Dispute Resolution. In the event that at any time during the term of this Agreement a disagreement, dispute, controversy or claim should arise out of or relating to the interpretation of or performance under this Agreement, or the breach, or invalidity thereof, the 24 parties will attempt in good faith to resolve their differences before resorting to the termination procedures provided in Article 12 of this Agreement. If the dispute relates primarily to regulatory issues or the Development Program, it shall be negotiated by the Development Coordinators, and if it relates primarily to commercial or marketing issues, it shall be negotiated by the Marketing Coordinators. If the appropriate Coordinators cannot resolve the disputed matter within thirty (30) days, such matter shall be referred to the Chief Executive Officers of the parties (or their designees) for an additional thirty (30) days of negotiating, following which, subject to the provisions of Sections 15.2, 17.8 and Exhibit J hereof, the dispute shall be resolved by binding arbitration pursuant to Exhibit J, subject to the right of either party to take any action and seek any remedy it may have at law or in equity, including specific performance and injunctive relief, to protect the party's rights pending the outcome of the arbitration. 15.2. Governing Law, Jurisdiction and Venue. This Agreement is made in accordance with and shall be governed and construed under the laws of the State of California, U.S.A., as applied to agreements executed and performed entirely in California by California residents, without regard to conflicts of laws rules, and in no event shall this Agreement be governed by the United Nations Convention on Contracts for the International Sale of Goods. The parties each acknowledge and agree in the event that any disagreement, dispute, controversy or claim that is not resolved pursuant to Section 15.1 shall be resolved through binding arbitration under the provisions set forth in Exhibit J, which is attached hereto and incorporated herein by reference. ARTICLE 16 [INTENTIONALLY OMITTED] ARTICLE 17 MISCELLANEOUS 17.1. Agreement Registration SPKK shall [*REDACTED]. 17.2. Waiver. No waiver by either party hereto of any breach or default of any of the covenants or agreements herein set forth shall be deemed a waiver as to any subsequent or similar breach or default. 17.3. Assignment. Except as otherwise provided herein, neither this Agreement nor any interest hereunder will be assignable in part or in whole by any party without the prior written consent of the other; provided, however, that either party may assign all or part of this Agreement to any of its Affiliates, and either party shall assign this Agreement to any successor by merger or sale of substantially all of its business unit to which this Agreement relates in a manner such that both the assignor and the assignee will be liable and responsible for the performance and observance of all its duties and obligations hereunder. This Agreement will be binding upon the - ---------------------- *Omitted and filed separately with the Commissioner. 25 successors and permitted assigns of the parties and the name of a party appearing herein will be deemed to include the names of such party's successors and permitted assigns to the extent necessary to carry out the intent of this Agreement. Any assignment which is not in accordance with this Section will be void. 17.4. Payments; Reports. All payments due hereunder shall be paid by SPKK to SciClone in U.S. Dollars. During each quarter during which any amount is due hereunder from SPKK to SciClone, SPKK shall prepare and deliver to SciClone a report of a financial officer of SPKK detailing the basis for all calculations of amounts due in such quarter. [*REDACTED]. SPKK shall obtain a receipt from [*REDACTED] for all [*REDACTED] and forward such receipts to SciClone. In addition, SPKK agrees to take all reasonable steps which may be necessary or appropriate to enable or assist SciClone to make appropriate claims under any double taxation or similar agreement or treaty from time to time in force. 17.5. Notices. Any notice or other communication required or permitted to be given to either party hereto shall be in writing and shall be deemed to have been properly given and to be effective on the date of delivery if delivered in person or by facsimile or five days (5) after mailing by registered or certified mail, postage paid, to the other party at the following address: In the case of SciClone: SciClone Pharmaceuticals, Inc. 901 Mariners Island Boulevard, #315 San Mateo, California 94404 Telephone: 415/358 3456 FAX: 415/358 3469 Attn.: Chief Executive Officer In the case of SPKK: Schering Plough K.K. Urban Ace Kitahama Building 2 3 7 Hiranomachi Chuo Ku, Osaka 541 Japan Telephone: 81 6 201 1701 FAX: 81 6 201 1791 Attn.: President with a copy to: Schering Corporation 2000 Galloping Hill Road Kenilworth, New Jersey 07033 Telephone: 908/298 4684 FAX: 908/298 5379 Attn.: Vice President, Business Development - ---------------------- *Omitted and filed separately with the Commissioner. 26 Either party may change its address for communications by a notice to the other party in accordance with this section. 17.6. Headings and Title. The title of this Agreement and the headings of the several sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 17.7. Amendment. No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed by both parties. 17.8. Force Majeure. Any delays in performance by any party under this Agreement shall not be considered a breach of this Agreement if and to the extent caused by occurrences beyond the reasonable control of the party affected, including but not limited to acts of God, embargoes, governmental restrictions or other governmental action or inaction, strikes or other concerted acts of workers, fire, flood, weather, unavoidable accident, explosion, riots, wars, civil disorder, rebellion or sabotage. The party suffering such occurrence shall immediately notify the other party and any time for performance hereunder shall be extended by the actual time of delay caused by the occurrence. 17.9. Government Approvals. All governmental approvals or consents required for the export of TA l Material as provided hereunder shall be the responsibility of SciClone, and all governmental approvals or consents required for the importation of TA l Material as provided hereunder shall be the responsibility of SPKK, provided, that each party agrees to cooperate fully, at its own expense, with the other party in obtaining such approvals or consents. 17.10. Official Language. The official text of this Agreement and any appendices, exhibits and schedules hereto, or any notice given or accounts or statements required by this Agreement shall be in English. In the event of any dispute concerning the construction or meaning of this Agreement, reference shall be made only to this Agreement as written in English and not to any other translation into any other language. 17.11. Independent Contractors. In making and performing this Agreement, SPKK and SciClone act and shall act at all times as independent contractors and nothing contained in this Agreement shall be construed or implied to create an agency, partnership or employer and employee relationship between SciClone and SPKK. At no time shall one party make any commitment or incur any charge or expense for or in the name of the other party. 17.12. Severability. If any term, condition or provision of this Agreement is held to be unenforceable for any reason, it shall, if possible, be interpreted rather than voided, in order to achieve the intent of the parties to this Agreement to the extent possible. In any event, all other terms, conditions and provisions of this Agreement shall be deemed valid and enforceable to the full extent. 17.13. Cumulative Rights. The rights, powers and remedies hereunder shall be in addition to, and not in limitation of, all rights, powers and remedies provided at law or in equity, or under 27 any other agreement between the parties. All such rights, powers and remedies shall be cumulative, and may be exercised successively or cumulatively. 17.14. Parties Advised by Counsel. No Interpretation Against Drafter. This Agreement has been negotiated between unrelated parties who are sophisticated and knowledgeable in the matters contained in this Agreement and who have acted in their own self interest. In addition, each party has been represented by legal counsel. Accordingly, any rule of law, including Section 1654 of the California Civil Code, as well as any other statute, law, ordinance, or common law principle or other authority of any jurisdiction of similar effect, or legal decision that would require interpretation of any ambiguities in this Agreement against the party who has drafted it is not applicable and is hereby waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the purpose of the parties, and this Agreement shall not be interpreted or construed against any party to this Agreement because that party or any attorney for or representative of that party drafted this Agreement or participated in the drafting of this Agreement. 17.15. Entire Agreement. This Agreement together with any and all Schedules and Exhibits referred to herein embodies the entire understanding of the parties with respect to the subject matter hereof and shall supersede all previous communications, representations or understandings, either oral or written, between the parties relating to the subject matter hereof, including the previously existing License, Development and Supply Agreement dated as of January 2, 1993. 17.16. Future Agreements. Whenever in this Agreement it is specified that the parties will mutually agree on a matter, the parties shall use diligent and good faith efforts to agree upon commercially reasonable terms, taking into consideration all relevant facts and circumstances. In the event that the parties are unable to reach such an agreement, then either party may submit the unresolved matter to binding arbitration, in accordance with the provisions set forth in Exhibit J. 17.17. Counterparts. This Agreement may be signed in counterparts, and signatures may be transmitted by facsimile. IN WITNESS WHEREOF, both SPKK and SciClone have executed this Agreement by their respective officers hereunto duly authorized. SCHERING PLOUGH K.K. SCICLONE PHARMACEUTICALS, INC. By:_________________________ By:__________________________ Masao Torii Donald Sellers President President 28 EX-10.28 3 PROMISSORY NOTE SECURED BY DEED OF TRUST EXHIBIT 10.28 PROMISSORY NOTE SECURED BY DEED OF TRUST $95,000 San Mateo, California As of July 14, 1995 In installments as stated in this Note, for value received, Thomas E. Moore and Diane G. Moore, husband and wife, (together, "Borrowers"), hereby promise to pay to SciClone Pharmaceuticals, Inc., a California corporation ("Lender") on order, at its offices at 901 Mariners Island Boulevard, San Mateo, California, or at such other place as Lender may from time to time designate in writing, the principal sum of Ninety-Five Thousand Dollars ($95,000), with interest on the unpaid balance of principal from the date of this Note until paid at the rate of 7.375% per annum (the "Note Rate"), on the following terms: I. Payment. The principal and interest due pursuant to this Note shall be paid as follows: A. The entire principal balance with all accrued interest shall be due and payable on July 14, 1997, unless the term hereof is renewed as set forth herein. At the election of the Lender, the Lender may extend the term of this Note, which extension shall be deemed effective upon written notice from Lender to Borrowers delivered at any time before the initial maturity date hereof, which notice shall state the extended maturity date selected by Lender. As of the effective date of such notice, this Note shall be extended on all the same terms and conditions as are set forth herein, except for the extended maturity date. B. Principal and interest shall be payable in lawful money of the United States. Interest shall be calculated on the basis of a 360-day year consisting of 12 thirty-day months. Each payment shall be applied first to interest then due and the balance of said installment shall be applied to the principal sum. C. This Note may be prepaid at any time, without penalty. II. Security. This Note is secured by a deed of trust of even date herewith made by Borrowers, as trustor, to Western Title Company, Inc., as trustee, for Lender, as beneficiary (the "Deed of Trust"), encumbering certain real property commonly known as 771 Burgundy Road, Incline Village, Nevada (the "Property"). III. Default and Acceleration. A. Unless otherwise prohibited by law, upon the occurrence of any of the following events, the Lender of this Note shall have the option, without demand or notice, to declare the entire balance of principal of this Note together with all accrued interest to be immediately due and payable: 1. Borrowers default in the payment of principal or interest when due pursuant to the terms hereof or default in the performance of any obligaton of Borrowers in the Deed of Trust or any other deed of trust, security agreement or other agreement (including any amendment, modification or extension thereof) which may hereafter be executed by Borrowers for the purpose of securing this Note; or 2. Borrowers voluntarily or by operation of law sell, convey, assign, further encumber or otherwise transfer or agree to sell, convey or otherwise transfer, all or substantially all, or any portion of, or Borrowers' interest in the Property. IV. Default Interest Rate. If Borrowers fail to make payment within fifteen (15) days after payment becomes due and payable, Borrowers are to pay interest on the late payment, including that portion of the late payment which consists of past-due interest, at an annual rate (the "Default Rate") of three percent (3.0%) in excess of the Note Rate, from the date the payment was due until Borrowers pay in full all sums due under this Note. V. Attorneys' Fees. In the event of any default hereunder, Borrowers hereby promise to pay all costs of collection, including reasonable attorneys' fees incurred by Lender hereof on account of such collection, whether or not suit is filed hereon. VI. Waiver. The waiver by Lender hereof of any breach of or default under any term, covenant or condition contained herein or in any of the agreements referred to above shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of or default under the same or any other such term, covenant or condition. VII. No Usury. It is the intent of Borrowers and Lender that the rate of interest on the indebtedness evidenced hereby shall not exceed the maximum rate permitted by applicable law and accordingly, if the rate of interest specified herein, or any other payments specified herein or otherwise required to be made by Borrowers or received by Lender in connection with the indebtedness evidenced hereby and deemed to be interest, shall exceed the maximum rate of interest permitted by applicable law then such payments, to the extent they exceed such maximum rate, shall be deemed to have been made and received inadvertently, and shall for all purposes be deemed to be a payment of and on account of the principal balance of the indebtedness evidenced hereby and shall be applied accordingly or, at Lender's option, returned to Borrowers. VIII. General Provisions. This Note shall be governed by and construed in accordance with the laws of the State of California. The makers, guarantors and endorsers of this Note hereby severally waive presentment for payment, protest and demand, notice of protest, demand and dishonor and nonpayment of this Note, and consent that Lender may extend the time for payment or otherwise modify the terms of payment of any part or the whole of the debt evidenced by this Note, at the request of any person liable hereon, and such consent shall not alter nor diminish the liability of any -2- person. Borrowers hereby waive the defense of the statute of limitations in any action on this Note to the extent permitted by law. Borrowers: - -------------------------------------- Thomas E. Moore - -------------------------------------- Diane G. Moore -3- EX-10.29 4 PROMISSORY NOTE SECURED BY DEED OF TRUST EXHIBIT 10.29 PROMISSORY NOTE SECURED BY DEED OF TRUST $600,000 San Mateo, California As of December 26, 1995 In installments as stated in this Note, for value received, Thomas E. Moore and Diane G. Moore, husband and wife, (together, "Borrowers"), hereby promise to pay to SciClone Pharmaceuticals, Inc., a California corporation ("Lender") on order, at its offices at 901 Mariners Island Boulevard, San Mateo, California, or at such other place as Lender may from time to time designate in writing, the principal sum of Six Hundred Thousand Dollars ($600,000), with interest on the unpaid balance of principal from the date of this Note until paid at the rate of 7.50% per annum (the "Note Rate"), on the following terms: I. Payment. The principal and interest due pursuant to this Note shall be paid as follows: A. The entire principal balance with all accrued interest shall be due and payable on December 26, 1997, unless the term hereof is renewed as set forth herein. At the election of the Lender, the Lender may extend the term of this Note, which extension shall be deemed effective upon written notice from Lender to Borrowers delivered at any time before the initial maturity date hereof, which notice shall state the extended maturity date selected by Lender. As of the effective date of such notice, this Note shall be extended on all the same terms and conditions as are set forth herein, except for the extended maturity date. B. Principal and interest shall be payable in lawful money of the United States. Interest shall be calculated on the basis of a 360-day year consisting of 12 thirty-day months. Each payment shall be applied first to interest then due and the balance of said installment shall be applied to the principal sum. C. This Note may be prepaid at any time, without penalty. II. Security. This Note is secured by a deed of trust of even date herewith made by Borrowers, as trustor, to Western Title Company, Inc., as trustee, for Lender, as beneficiary (the "Deed of Trust"), encumbering certain real property commonly known as 771 Burgundy Road, Incline Village, Nevada (the "Property"). III. Default and Acceleration. A. Unless otherwise prohibited by law, upon the occurrence of any of the following events, the Lender of this Note shall have the option, without demand or notice, to declare the entire balance of principal of this Note together with all accrued interest to be immediately due and payable: 1. Borrowers default in the payment of principal or interest when due pursuant to the terms hereof or default in the performance of any obligaton of Borrowers in the Deed of Trust or any other deed of trust, security agreement or other agreement (including any amendment, modification or extension thereof) which may hereafter be executed by Borrowers for the purpose of securing this Note; or 2. Borrowers voluntarily or by operation of law sell, convey, assign, further encumber or otherwise transfer or agree to sell, convey or otherwise transfer, all or substantially all, or any portion of, or Borrowers' interest in the Property. IV. Default Interest Rate. If Borrowers fail to make payment within fifteen (15) days after payment becomes due and payable, Borrowers are to pay interest on the late payment, including that portion of the late payment which consists of past-due interest, at an annual rate (the "Default Rate") of three percent (3.0%) in excess of the Note Rate, from the date the payment was due until Borrowers pay in full all sums due under this Note. V. Attorneys' Fees. In the event of any default hereunder, Borrowers hereby promise to pay all costs of collection, including reasonable attorneys' fees incurred by Lender hereof on account of such collection, whether or not suit is filed hereon. VI. Waiver. The waiver by Lender hereof of any breach of or default under any term, covenant or condition contained herein or in any of the agreements referred to above shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of or default under the same or any other such term, covenant or condition. VII. No Usury. It is the intent of Borrowers and Lender that the rate of interest on the indebtedness evidenced hereby shall not exceed the maximum rate permitted by applicable law and accordingly, if the rate of interest specified herein, or any other payments specified herein or otherwise required to be made by Borrowers or received by Lender in connection with the indebtedness evidenced hereby and deemed to be interest, shall exceed the maximum rate of interest permitted by applicable law then such payments, to the extent they exceed such maximum rate, shall be deemed to have been made and received inadvertently, and shall for all purposes be deemed to be a payment of and on account of the principal balance of the indebtedness evidenced hereby and shall be applied accordingly or, at Lender's option, returned to Borrowers. VIII. General Provisions. This Note shall be governed by and construed in accordance with the laws of the State of California. The makers, guarantors and endorsers of this Note hereby severally waive presentment for payment, protest and demand, notice of protest, demand and dishonor and nonpayment of this Note, and consent that Lender may extend the time for payment or otherwise modify the terms of payment of any part or the whole of the debt evidenced by this Note, at the request of any person liable hereon, and such consent shall not alter nor diminish the liability of any -2- person. Borrowers hereby waive the defense of the statute of limitations in any action on this Note to the extent permitted by law. Borrowers: - -------------------------------------- Thomas E. Moore - -------------------------------------- Diane G. Moore -3- EX-23.1 5 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF ERNST & YOUNG, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-3 No. 33-60526 pertaining to Redeemable Warrants and shares of Common Stock issued on exercise thereof and the Registration Statements on Form S-8 No. 33-66832 pertaining to the 1991 Stock Plan, No. 33-52820 pertaining to the 1991 Stock Plan and 1992 Stock Plan, No. 33-80911 pertaining to the 1995 Equity Incentive Plan, 1995 Nonemployee Director Stock Option Plan, and No. 333-12169 pertaining to the 1996 Employee Stock Purchase Plan of SciClone Pharmaceuticals, Inc. of our report dated January 23, 1997, with respect to the consolidated financial statements of SciClone Pharmaceuticals, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Palo Alto, California March 31, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 4,642,590 30,463,118 2,893,370 0 2,608,877 14,485,852 899,078 (599,673) 42,727,687 5,262,059 0 108,988,019 0 0 (71,522,391) 42,727,687 703,082 703,082 740,494 740,494 17,326,716 0 0 (14,735,938) (9,809) (14,745,747) 0 0 0 (14,745,747) (0.85) 0.00
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